Why focus on climate risk insurance? What is it and why it is important? Fabiola Espinoza Córdova on her MESPOM internship

October 24, 2018

"My advice to future students? Use the time of the internship between the two academic years to focus on your field of interest, experience something you have not done before (for me, it was working in a think tank), and choose something, which will be useful when the time to decide what you will do after your studies."

For most of my professional career, I have been interested in understanding how social factors influence environmental policies and management program´s effectiveness. I believe this comes from my time working together with decision makers in a natural protected area in Peru several years ago. Even though, we had the funds, well-structured plans, and a group of professionals with a high level of technical expertise, when the time came to implement conservation projects in the field, the majority of them did not go forward successfully or, at least, not at the pace expected. This was not only a result of the well-known bureaucracy implanted in most of the governmental institutions worldwide but a matter of slow uptake from the local community. Investing more time to talk with the local fisherman was needed, not only to explain them the conceptual backgrounds of what "biodiversity" or "ecosystem" means, but rather taking the time to acknowledge the social structure within the local associations. Who were the community leaders? What were their major constraints to take on a project? What were their strengths? It seemed to be the key aspect to help us boost sustainable projects.

This is the reason why, when the time came to perform a short-term internship as part of the MESPOM program, it was clear to me that I wanted to support an organization where I would be able to explore more about this relationship. After coordinating with several professors from the department and applying to a few internship vacancies, I received the news that I have been accepted to support the activities of the work package: Research for a Climate-smart and Just Transformation of the Klimalog Project operated by the German Development Institute/DeutschesInstitutfürEntwicklungspolitik- DIE (Bonn, Germany), one of the leading think tanks for global development and international cooperation. This internship was going to be an opportunity to acquire not only the experience of collaborating, for the first time in my professional career, in a think tank and getting involved in a field of interested but additionally to get a sense of how is it like to work in a European institution. So, on July 8th I packedall my things (for the third time in less than a year) and moved to Bonn to begin this new MESPOM adventure.

After discussing with my supervisor, Dr. Denise Margaret Matias, Environmental and Scientist Specialist part of the KLIMALOG team, and a CEU alumna herself, we decided that I was going to support the project by exploring the social factors that influence climate risk insurance projects within developing countries. This was going to be accomplished by performing a literature search, a screeningand coding process and developing a climate project insurance database. So, why focus on climate risk insurance? What is it and why is important?

What Climate Risk Insurance is?

It is a well-known fact that number of occurrences of disasters and weather-related events have been dramatically increasing over the last years, mainly due to climate change. The economic cost in 2016 reached almost 175 million dollars, impacting lives, livelihoods, and assets of the people that suffered it, forcing almost 26 million people into poverty each year (Insuresilience, Munich Re,2017). In this scenario, Disaster and Climate Risk Management have been long recognized as an effective strategy not only to respond quickly after a weather-related disaster hits, enabling to save lives and assets, but a strategy that aims to prevent and prepare the population for the inevitable risk (La Quesne et al, 2017). Within this approach, Climate Risk Insurance schemes have become an interesting instrument to deal with the residual risk (the risk that occurs after prevention and preparedness strategies has been implemented) and to encourage people to adapt and reduce their own risk. This scheme is known as a "risk transfer" mechanism, in which a third party (insurance or reinsurance company) assumes the potential risk of the occurrence of a disaster event in order to reduce it from an individual, an enterprise or even governments, providing security against loss of assets and livelihoods.

Climate Risk Insurance schemes have been taking a prominent role over the past years on the agenda of climate international agreements and governments´ disaster risk strategies. Last year the Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions was launched at the UN Climate Conference COP23 as a strategy to stimulate the creation of climate risk and insurance solutions within the most vulnerable countries as well as several Multi-Country Risk Pool facilities, which aims to protect governments from financial impact of disaster events, have been implemented.At the moment, millions of dollars are being invested in more than 20 Climate Funds which have been set up with the intention to implement/support climate risks reduction programs within developing and least developing countries.

Climate Risk Insurance for the Poorest

When a weather disaster event hits, the poor are the ones most deeply affected. Currently, in developing and less-developed countries, the large majority of those people are small-scale farmers whose livelihood depends on rain-fed agriculture. Up until now, even though agriculture is considered one of the most high-risk economies, is still is considered as the backbone of most of the developing poor countries 'economy which sustains the livelihood of the majority of its population (e.g. in West Africa, 60% of their population depends on agriculture (Fonta et al, 2018) and in Vietnam 70% of their population (Ahsan et al, 2010)). For centuries, these farmers have been dealing with changes in the rain patterns by using coping strategies such as crop diversification or changing harvest dates, nevertheless in the current climate change scenario that we live in, where the frequency and intensity of weather disaster events have been increasing, these strategies are just not enough to overcome these increasing risks. This changing weather patterns are pushing the poorest people over the edge, threatening their livelihoods, health and lives.

Within the wide range of climate risk insurance mechanisms, for the previous two decades, the strategy that has been highly promoted within low and middle-income countries is the scheme known as "Weather Index-based Insurance". This strategy differs from traditional agricultural insurance that the final payout does not rely on assessments of individual losses, but rather indemnifications are triggered by a pre-determined verifiable index. If, for example, the rain fall level in a region pass an already determined level (information based on climate-data) the insurance company provide a fixed payout to all the farmers insured, without any previous losses assessments. This relatively new form of insurance reduces the high administrative and operational cost of assessing actual yield losses and the probability of farmers of increasing their exposure to risk (taking less care of their field) as they feel more secure due to the insurance, a problem known as a "moral hazard".

In theory, weather index-insurance seems to be a good option to promote agricultural development and resilience among low-income farmers (it is less expensive to the insurance company, thus there are more opportunities to commercialize it). Several partnerships and millions of dollars are being invested in designing and implementing this scheme in developing and least developed countries. Nevertheless, as it usually happens, when these programs are implemented within local communities they have not been proven to be very successful and are generally considered to be insufficient and volatile (Fonta et al, 2018). So, the question returns; what factors determine the effectiveness of these index-based insurance projects in the field? Considering the large amount of resources being invested in promoting this scheme, this is a crucial question practitioners/researchers should examine, in order to ensure the most affected people are in fact the ones that benefit from these international initiatives.

Where to look at? The importance of social factors

Several researchers indicate that, besides the complication of designing weather crop insurance packages, social factors are a key aspect which can help explain the insufficientadoption of these programs among farmers. Nevertheless, so far very little effort has been made to investigate which factors influence farmer´s willingness to pay for weather insurance scheme (Abugri et al., 2017). Some studies indicate that limited trust towards the insurance companies or government implementing the program, the issue of basis risk (the payout does not correspond to their actual losses), perception of risk among farmers, and a lack of knowledge on insurance schemes are the most important factors that discourage participation of households when index-insurance products are advertised (Bogale et al., 2015; Bishu 2014; Heenkenda 2018). In addition, trust between members of a specific community is an important aspect to consider while selecting which network will be used to manage the insurance product (using already existing farmer´s cooperation to manage the payouts, creating a new one, or making it individually) (Trærup et al., 2010). However, more efforts should be made to increase research on the factors which influence farmers' involvement in weather-related insurance programs. Paying attention to the existing dynamics and structure among social groups within communities will provide extremely useful information for insurance companies, policymakers and non- governmental organizations in order to design attractive insurance products, determinate the channels and the best way to target it.

Author's Reflection

Overall, this internship has introduced me to a new research opportunity on a current issue that I could not have been exposed to otherwise. Climate Risk Insurance and in particular index-insurance schemes have the potential to be a successful strategy to increase resilience among the most vulnerable people and help them rise from disaster and poverty. Nonetheless, as I learned during this time, there is much to be done in order to find the most suitable way to enhance these programs among the ultimate beneficiaries, and support to align the international funds into successful sustainable projects is needed.

The MESPOM magic also was with me during the time of the internship. Even though I spent a short time in Germany, I was able to immerse a bit in the culture, break down some stereotypes I have built about Germans (Yes, techno is a big thing. No, they are not too serious all the time), meet great people and develop close friendships. This is what MESPOM is all about. Yes, it's hard to stay in a new country for few months because you meet incredible people, get used to a certain way of living, and then you must say goodbye and start all over. However, the opportunity to be able to get involved in a particular culture and understanding the perspective of their people is invaluable and will stay with me forever.

As a MESPOM student, according to our new program structure, we must complete a compulsory internship. This gives us the opportunity not to only be involved in an atmosphere of studying, but to experience what it like is to support an actual on-going project related to personal interests. Each internship experience is individual, and you can better adjust it to your plans. It can be a home-based internship or a virtual remote one, take more than 3 weeks or just the 100-120 mandatory hours.

My peers performed their internship in a wide range of places, such as South Africa, Estonia, Greece and Israel, and supported research institutes, NGOs, Intergovernmental organization, among others, in a variety of areas related to energy, water management, sustainable tourism, sustainability, organic farming and more. So, as you see, the possibilities are broad. My advice to future students? Use the time of the internship between the two academic years to focus on your field of interest, experience something you have not done before (for me, it was working in a think tank), and choose something which will be useful when the time to decide what you will do afteryour studies. Plan ahead - it's important. Personally, I started to research potential internship hosts three months in advance. This gave me the opportunity to have a bit more time, when administrative related issues arrived, to find solutions an even to have plan b on the table. Be aware of potential visa constraints, find out potential scholarship options to help you finance your stay and finally, enjoy it!!!!


Abugri, S.A., J. Amikuzuno, and E.B. Daadi. 2017. Looking out for a better mitigation strategy: smallholder farmers' willingness to pay for drought-index crop insurance premium in the Northern Region of Ghana. Agriculture & Food Security. 6(1): p. 71.

Ahsan, S.M., 2010. Microinsurance, Poverty & Vulnerability: A Concept Paper. Institute of Microfinance.

Bishu, K. G. 2014. Risk management and the potential of cattle insurance in Tigray, Northern Ethiopia. PhD Thesis, University College Cork.

Bogale, A 2015. Weather-indexed insurance: an elusive or achievable adaptation strategy to climate .variability and change for smallholder farmers in Ethiopia. Climate and Development. 7(3): p. 246-256.

Fonta, W. M., Sanfo, S., Kedir, A. M., &Thiam, D. R. 2018. Estimating farmers' willingness to pay for weather index-based crop insurance uptake in West Africa: Insight from a pilot initiative in Southwestern Burkina Faso. Agricultural and Food Economics, 6(1), 11.

Heenkenda, S. 2018. Index-Based Microinsurance for Paddy Sector in Sri Lanka: An Evaluation of Demand Behavior.

Insuresilience. About the Insuresilience Global Partnership. Retrieved from https://www.insuresilience.org/about/ 

Le Quesne, et al. 2017. The role of insurance in integrated disaster & climate risk management: Evidence and lessons learned. Report. UNU-EHS.

Munich Re. Natural catastrophe losses at their highest for four years, 2017. Press release. Available from https:// www.munichre.com/en/media-relations/publications/press-releases/2017/201...

Trærup, S.L.M., O. Mertz, and K. Halsnæs. 2010. Ensuring sustainable development within a changing climate.