From ‘no-go’ to ‘must have’: where next for premium support?
Authors: Veronika Bertram, Jak Chowdhary
Photo: Shutterstock / Naganath R
In an early read-out from their practitioner-focused study on what is needed to upscale protection via premium support, Veronika Bertram, Lead Risk Finance Adviser, and Jak Chowdhary, Risk Analyst, discuss the importance of country ownership, cultivating international responsibility and creating a global ‘risk deal’ to upscale protection in climate-vulnerable countries.
Insurance enables countries to understand risks better, manage them, and build financial protection before a disaster hits. In the past decade, development donors and international organisations have created a wide range of products and risk pools that help vulnerable countries to insure against climate-related disasters like droughts and floods. While many vulnerable countries have bought insurance as a protection tool, uptake and coverage are still limited and behind initial expectations. With the current energy and food crisis and many countries struggling to balance their books with rising debt, the question is now less why or whether insurance and more: ‘who will pay for it’?
In the past three years, premium support – contributions to help pay for insurance premiums – has graduated from a ‘no go’ to a ‘must have’ among international donors supporting disaster risk finance solutions. Donors and international organisations realised that capital and technical support was not enough to help vulnerable countries buy coverage. Premium support has therefore increasingly been put in place to incentivise countries to buy insurance and create protection.
The InsuResilience Global Partnership ‘SMART Principles’ provide initial guidance on creating premium support offers for vulnerable countries to build country ownership for managing and financing climate-related disaster risks. However, evidence is lacking on how to design premium subsidies that really lead to sustainable protection, and increasingly in our conversations with donors and disaster risk finance practitioners, we hear questions and concerns about how to use premium support effectively.
Earlier this year, the Centre conducted interviews with more than 40 representatives from leading international organisations and funds providing premium support, followed by a private workshop co-facilitated with the InsuResilience Global Partnership Secretariat amidst the fervour of Bonn Climate Week in June. Providers of premium support explained to us that they seek clarity on how to phase out subsidies successfully. They also seek guidance on identifying minimum criteria for allocation, and red lines, while also expressing concerns over their competitors’ premium support offers which might undermine their own. And everyone acknowledges that providing premium support is ultimately not just a technical exercise, it’s a political decision. In addition to these concerns and observations, we found a number of important areas of emerging consensus, which we describe below.
Building ownership of vulnerable countries has been the challenge
The biggest challenge with premium support turns out to be building ownership of disaster risks - and particularly, around willingness and ability to pay. The number one question of implementers has been how to get countries to pay, and thereby exit premium support. Premium support has been framed as a developmental tool to incentivise countries to take out and pay for insurance. This theory assumes that governments can pay for insurance, and international subsidies help them to integrate insurance premiums into national budgets. However, these two assumptions often do not hold, particularly in the most vulnerable countries.
Vulnerable countries struggle to manage and finance growing climate and disaster risks. After a few years of international premium support, low-income countries and small island developing states have rarely increased their financial contribution towards premium payments. At the same time, donors experimented with using premium support to create quick protection during the pandemic but did not intend to extend long-term support to vulnerable countries to integrate premium payments into national budgets. Since last year, the fiscal situation of many vulnerable countries has worsened with skyrocketing food and energy prices, growing debt vulnerabilities, and the planet heating up. Many premium support providers face the decision between continuing international premium support or collapsing much-needed protection.
From incentivising countries towards creating direct protection
In our discussions premium support providers were surprisingly open to acknowledging the need for longer-term support for the poorest and most vulnerable. One donor shared “It is the new reality that premium subsidies should be expected as part of the longer-term solution rather than being offered as an interim to get disaster risk finance up and running”.
Many we consulted with also signalled acceptance – at least at this level of technical experts and civil servants – that longer-term premium support to create protection as an end in itself, is probably an international responsibility. This mindset shift towards a higher level of international responsibility seems driven both by the pragmatic recognition of decreasing fiscal spaces in many disaster-prone countries, but also the loss and damage breakthrough at the latest international climate conference. Premium support could be a route by which international actors meet their responsibilities to pay for the costs of addressing losses and damages. This is a big shift in the discourse, if not yet at the level of political commitments and action.
Where next for premium support? A new ‘risk deal’ based on a joint commitment
Independent of whether donors offer premium support as an incentive to countries or to create direct protection, a joint commitment from the recipient country and the development partner is needed. A new ‘risk deal’ is required that can withstand political cycles and economic turmoil that may come. Our research found four critical factors to support this approach:
Honest stocktake. A durable deal needs trust and honest discussions. Participants shared that we need to create a trusting environment to understand what commitments can be made over which timelines. Recipient countries must be frank about their willingness and ability to manage disaster risks and to pay for insurance. Development partners and donors must be honest about what levels of support they can commit to, and the strings attached relating to achieving developmental goals. Managing expectations from both sides early on helps to align goals and to identify what can and cannot be achieved.
Joint commitment. We need a credible commitment from the recipient country and the development partner based on aligned goals and expectations. The country needs to show ownership for the insurance solution and – to the extent possible – for the premium costs. Finding a champion and buy-in of critical actors within a country is critical, including the ministry of finance, disaster risk management agencies, and all those involved in preparing and responding when a disaster hits.
The more a country struggles with managing and financing their risks, the higher the responsibility of the development partner. In particular low-income and fragile countries face severe limitations in financing their disaster risks and rely on the support of development partners. In these cases, donors need to step up with reliable funding and durations that reflect the pace of a country’s development path. There needs to be more funding and a shift from ad hoc premium support towards multi-year commitments. Providing country governments with reliable financing tailored to a country’s needs allows them to build the premiums into their national budgets and increases the chance of the countries seeing the benefits of the insurance.
And if joint ownership and a robust step-by-step strategy are lacking – both vulnerable countries and donors must dare to say ‘no’ and explore alternative ways to create resilience.
Integration into systems. Participants shared that we need to integrate insurance and its costs into recipient and donor systems to weather the political cycles of both recipient and donor countries. Our interviewees advocated for strategic approaches like disaster risk strategies embedded into government policy frameworks. When a country is not ready to develop a comprehensive disaster risk financing strategy, sectoral strategies like adaptive social safety net strategies may prove effective. Building a systemic funding channel between donor and recipient countries also helps to build reliable funding streams, for example, by leveraging existing financial institutions, such as the African Development Bank’s ADRiFi programme.
Knowledge creation and sharing. Finally, we must create evidence, integrate learning loops and share knowledge beyond institutional borders when providing premium support. So far, decisions on international premium support are often made in the dark, lacking evidence on what works and what doesn’t, e.g., how to phase out international premium support successfully. This is a considerable risk for the premium support’s success and the insurance product’s survival. Creating a joint commitment towards learning, enhancement, and transparency is essential to avoid duplication and improve effectiveness. It will also be critical to attracting premium support in the future.
Attitudes towards premium support have rapidly and dramatically evolved, shifting from reticence to acceptance. And, if premium support becomes recognised as a tool to create protection as an end in itself, rather than just a short-term incentive within a developmental model that expects full country ownership, it could close urgent protection gaps. It is important, therefore, to understand how to use this tool judiciously if that is the direction in which we are moving. The Centre’s forthcoming guidance and policy work on this theme aims to provide some answers to practitioners on these increasingly urgent questions.