New report on climate insurance in developing countries

Vista Analyse and CICERO Center for International Climate Research has been commissioned by Norad to answer overarching questions about insurance schemes specifically aimed at the effects of climate change in Sub-Saharan Africa. In the report, we discuss among other subjects whether there is an economic basis for such weather-related insurance arrangements, challenges regarding moral hazard, and which models that are best suited for subsidizing climate insurance in developing countries. We also describe central actors in the climate insurance markets, such as the African Risk Capacity (ARC).

We find that disaster risk is best managed by a combination of different financial and non-financial instruments and cannot rely on insurance alone. Insurance has low penetration in developing countries and is only one part of a larger system of financial products that should be used in combination in a risk-layering approach. When subsidizing insurance arrangements, donors should be aware of the risk-layered context in which the insurance arrangement is used by policyholders. Furthermore, climate insurance arrangements in developing countries are usually not profitable for the private sector, and rely on concessional financing. Even established insurance companies in advanced economies worry that their profits will fall in the face of climate change, because of a decreased ability to confidently predict weather patterns.

Providing insurance to developing countries can potentially reduce the risk of moral hazard by offering an alternative to relying solely on post-disaster humanitarian aid. The ARC, for example, emphasizes promoting domestic risk ownership, which enables governments to take responsibility for addressing disaster risks within their countries. This approach aims to reduce dependence on donor support over time, allowing countries to independently finance and manage emergency drought responses.

The project has been carried out by Andreas Hoel-Holt and Haakon Vennemo at Vista Analyse, and Sofie Skjeflo at CICERO.