Humanitarian Insurance: Ethical tightropes, trade-offs and unintended consequences
by Lydia Poole, Associate Director - Evidence
Insurance can be a useful tool for managing the unpredictable costs of disasters. This seems a good fit for a sector whose core business is responding to the human impacts of disasters, and often struggles to find the resources to meet unexpected peaks in demand. But humanitarians have a number of particularities linked to their principled approach, their funding and operating models and scope of expertise and influence that require them to give serious consideration to not only whether the cost of premiums justifies the operational benefit – but whether it is ethically and practically, the right thing to do.
In this blog, we outline some of these dilemmas and expand the list of questions humanitarians ought to consider beyond ‘could you?’s to a considerable list of ‘should you?’s.
Does it make sense for humanitarians to put themselves on the hook for particular risks?
Humanitarians are in and of themselves not holders of particular financial risks in particular places in any formal sense. If a humanitarian organisation doesn’t have the money or capabilities to respond to a disaster, it can simply choose not to. Humanitarians might choose to put themselves on the hook, but there are trade-offs and potential unintended consequences of doing so that they should consider and manage carefully if they decide to proceed.
First, insurance must be paid for whether a shock happens or not. Locking in commitments to respond to particular risks in particular places may reduce the financial capacity an organisation has to respond elsewhere. For actors committed to respond based on humanitarian needs, rather than possible future needs, this poses a difficult ethical trade-off. It could potentially generate reputational risk both at country level and with donors and supporters, if locking in funding to an insurance contract meant an organisation could not then respond to urgent needs elsewhere, particularly if the event covered by insurance didn’t materialise. This ethical dilemma may operate on a sliding scale depending on how much money is available, but it is an important one for humanitarian actors that are both principled and frequently cash strapped.
Second, one of the benefits of insurance is that it creates certainty, which allows those exposed to risk to plan and invest safe in the knowledge they can rely on a pay-out if a shock happens. Humanitarian response is notoriously uncertain, so you can’t plan as if you will definitely need assistance, because you have no real assurance that you will, or if you do, that it will be what you need when you need it. In contrast, insurance could provide greater certainty, in principle. However, in practice, the short-term and unpredictable nature of humanitarian funding means that humanitarian organisations might struggle to pay premiums consistently. Providing stop-start support or struggling to commit year-on-year would serve to quickly erode the benefits of increased certainty. If humanitarians and their donors seek to enter into a formal commitment to cover the risks of particular communities through insurance, they should expect to commit for the long haul and therefore ought to give serious thought to how long they can realistically commit, and to a responsible transition or exit strategy from the outset. World Food Programme and Oxfam America’s R4 Rural Resilience Initiative programme in Senegal for example includes a graduation strategy that saw 62% of participants paying part of their premium in cash in 2021. However, this was achieved after years of painstaking research, design (including developing a new index insurance product), testing, scale-up and learning starting back in 2012 and the programme includes a bundle of complementary resilience building activities that support demand and ability to pay.
Third, insurance clarifies risk ownership, provides greater understanding of the nature of risk and exposure, and can create incentives for risk owners to invest in risk reduction. But if someone else is paying your premium, incentives to reduce your risk might be diminished. Perhaps even more worrying, criticism is sometimes levelled at humanitarian aid that it creates disincentives for governments and people at risk to take responsibility for making financial provision for their own risk. This is difficult to prove and is largely conjecture, but the added certainty of a contractual commitment to cover a risk-holder’s financial liability formalises this potential ‘moral hazard’. Humanitarians should therefore give consideration as to whether they might inadvertently be creating perverse incentives by formalising a commitment to own someone else’s risk.
Finally, there are ethical ‘duty of care’ considerations in promoting and building expectations around insurance. In order to function efficiently and in the interests of consumers, insurance relies on a range of enabling conditions, including regulated and competitive markets, financial literacy and demand, and data to feed modelling that allows insurers to assign a price to risk. These conditions are often not present in many of the places humanitarian actors operate and are outside the scope of influence and competence of humanitarian actors to address. Novel products often do not perform as expected, which can lead to disillusionment and mistrust of insurance. And it is morally questionable whether it is right to experiment and test insurance products on vulnerable people where innovation and learning is the objective or where there is no realistic commitment to move beyond pilots.
Should humanitarians insure themselves?
Whereas humanitarians aren’t formally on the hook for particular risks in particular places, one could argue that at a global level, there are customary expectations that they will step in to protect the most vulnerable people from the worst impacts of disasters when others cannot, or will not. For example, the mandates of UN agencies formalise these expectations to varying degrees. Assessed and core funding contributions to these agencies also represent an expression of intent to maintain global-level capabilities to respond to crises.
Humanitarians are very poorly equipped financially to meet these customary expectations, however. Whereas governments, businesses and private individuals might have some scope to increase the supply of money by, for example, raising taxes, borrowing, selling assets, or forgoing planned expenditure, humanitarians have far fewer options that allow them to accommodate peaks in demand. They rely heavily on discretionary grant funding and private donations, their control over the supply is very limited, funds are often heavily earmarked and hard to reallocate, and few organisations would risk borrowing given the uncertainty of future funding.
Funding shortages often force humanitarian actors into ‘impossible choices’. Cutting rations, scaling back or closing programmes prematurely are all too common. If insurance could allow them to maintain greater business continuity and avoid some of the impossible choices forced by peaks in demand, it might prove an extremely useful addition to the limited humanitarian financing toolbox.
Insurance might enable humanitarians to be smarter with their funding. For example, the Centre has worked with the International Federation of Red Cross and Red Crescent Societies (IFRC) to consider how they might manage the funds they retain to fund Early Action Protocols (EAP) more effectively. The variation in risks covered by the EAPs means the pool is well diversified and the likelihood of all or many of the shocks occurring in the same year is low. Therefore, IFRC doesn’t need to retain enough money to cover all the plans. It could for example spend more in year and buy insurance to cover the unlikely event of many or all of the EAPs triggering in one year. Similarly, the START Ready fund, launched at COP 26, currently comprises a risk pool and may re-insure the risk pool to ensure it can cover costs of infrequent extreme events. The application of insurance at organisation, fund or system-level is a relatively new proposition for humanitarian actors. Whether the costs outweigh the benefits, whether markets are willing to take on these risks, and what trade-offs and unintended consequences might need to be managed will all need to be carefully considered. If insuring humanitarian cash flows and instruments allowed humanitarians to accommodate peaks in demand while avoiding impossible choices and ultimately to meet more needs, there would be a strong argument not only that they could, but that they should.
Read part 1 now: Humanitarian Insurance: Risk Transfer 101
Read part 3 now: Humanitarian Insurance: Weighing the Options