Climate insurance in developing countries

Rapport 2023/38

Andreas Stranden Hoel-Holt, Haakon Vennemo og Sofie Waage Skjeflo

Climate insurance in developing countries

Kategori	Rapporter
Underkategori(er)	Klima og det grønne skiftet Utviklingssamarbeid
År	2023
Rapportnummer	38
Forfatter(e)	Andreas Stranden Hoel-Holt Haakon Vennemo Sofie Waage Skjeflo
Last ned	file_download (3.3 MB)
Les i nettleser	find_in_page

Report 2023/38 | For Norad 
 
 
Climate insurance in developing countries 
 
Andreas Hoel - Holt, Sofie Waage Skj eflo, Haakon Vennemo

Climate insurance in developing countries 
 
Vista Analyse | 2023/38 2 
 D ocument details 
Title Climate insurance in developing countries 
Report Number 2023/38 
Author Andreas Hoel - Holt , Sofie Waage Skje flo, Haakon Vennemo 
ISBN 978 - 82 - 8126 - 649 - 
Project Number 23 - HVE - 10 
Project Leader Vista Haakon Vennemo 
Quality control Asbjørn Torvanger (Cicero) 
Commissioned by Norad 
Date of completion 12.9.2023 
Source front page photo W i k i m e d i a C o m m o n s : Kate Holt/AusAID 
Availability Public 
Keywords Climate policy, development , insurance, moral hazard

Climate insurance in developing countries 
 
Vista Analyse | 2023/38 3 
 Foreword 
Vista Analyse and C ICERO Center for International Climate Research were commissioned by 
Norad to answer overarching questions about insurance schemes specifically aimed at the effects 
of climate change in Sub - Saharan Africa . We prim arily looked at insurance schemes aimed at 
larger actors such as sovereign nations but also those aimed at individuals , especially food pro-
ducers. 
The contact at Norad was Lauren Gisnås her and Norad for constructive discussions 
and an interestin g project . We thank Sofie Waage Skjeflo and Asbjørn Torvanger at CICERO for a 
good collaboration. The report is co - published by Vista Analyse and CICERO and written in 
CICERO’s template. 
12 September 2023 
Haakon Vennemo 
Partner 
Vista Analyse AS

CICERO 
Andeas Hoel-Holt
Sofie Waage Skjeflo	 	
Haakon Vennemo	 	
Report 2023:05
Climate risk insurance in 
developing countries

TitleClimate insurance in developing countries 	
Authors
 	Andeas Hoel-Holt, Sofie Waage Skjeflo, Haakon Vennemo 
Abstract CICERO Center for International Climate Research and Vista Analyse have been 
commissioned by Norad to undertake a mapping of relevant literature to gather 
knowledge about insurance arrangements aimed at climate change. The focus has 
primarily been on sovereign level insurance arrangements, but also arrangements 
aimed at small-scale food producers, and mainly in Sub-Saharan Africa. The project 
has been carried out by Andreas Hoel-Holt and Haakon Vennemo at Vista Analyse, 
and Sofie Skjeflo at CICERO Center for International Climate Research. Quality 
Assurance has been carried out by Asbjørn Torvanger at CICERO. We would like to 
thank Norad for an interesting assignment. Lauren Naville Gisnås has been our con -
tact person at Norad. We are grateful for useful input from Norad to an earlier draft 
of this report. 
Quality manager Asbjørn Torvanger	
Publisher 	CICERO	
Place and date Oslo, 12.09.23
Financed by	
Norad	
Client	Norad	
Project	Climate insurance in developing countries	 Project
 leader	
Sofie Waage Skjeflo	
Cover picture
iStock - Nikada

CICERO	 1 
 	
Partners 	
About Vista Analyse 
Vista Analyse is a social science consultancy with its main emphasis on 
economic research, policy analysis and advice, and evaluations. We 
carry out projects to the highest professional standards, with 
independence and integrity. Our key thematic areas include climate 
change, energy, transport, urban planning and welfare issues. 
Our employees have high academic credentials and broad experience 
within consulting. When needed we utilise an extensive network of 
companies and resource persons nationally and internationally. The 
company is fully employee -owned.

CICERO	 2 
 	
Contents 	
Partners 1	 	
Summary 3	 	
1. 	Introduction 11	 	
2. 	Concepts in climate risk insurance 12	 	
2.1	 	Risk pooling and insurance 12	 	
2.2	 	Insurance is only a part of a broader risk layering approach 12	 	
2.3	 	Developing countries have low insurance uptake and rarely use risk layering strategies 13	 	
2.4	 	Un-insurability and climate -related disasters 14	 	
2.5	 	Parametric insurance versus traditional insurance 15	 	
2.6	 	The strengths and weaknesses of parametric insurance 16	 	
2.7	 	Sovereign risk pools 20	 	
2.8	 	Catastrophe bonds 22	 	
3. 	Mapping insurance arrangements 23	 	
3.1	 	African Risk Capacity (ARC) 23	 	
3.2	 	Start Ready sovereign risk pool, by Start Network 27	 	
3.3	 	Agricultural index insurance shows promising impacts, but low uptake remains a challenge 30	 	
3.4	 	International initiatives in disaster risk finance 34	 	
4. 	Development assistance and climate insurance 37	 	
4.1	 	Supporting sovereign risk pool insurance arrangements 37	 	
4.2	 	Supporting index-insurance for small -scale farmers 43	 	
4.3	 	Support for insurance policies versus other types of aid 44	 	
References 46	 	
Attachment 1: Description of task 51

CICERO	 3 
 	
Summary 	
As part of its portfolio work on climate adaptation and expansion of the portfolio, 
Norad needs to gather knowledge about insurance arrangements aimed at climate 
change. There is a need to answer overarching questions about insurance 
arrangements based on relevant literature, research, evaluations, etc. In this report, 
we primarily look at insurance arrangements aimed at larger actors such as national 
states, city/state authorities or aid organizations, but also at insurance arrangements 
for individuals, es pecially food producers. 
 
We do not go into details about every insurance scheme, especially the smaller schemes 
aimed at individuals and smallholder farmers. The exception is the sovereign risk pool 
African Risk Capacity, which we discuss in detail. 
 
The report answers seven main questions, based on the questions asked in the Terms of 
Reference: 
1. What is a good/best model for subsidizing insurance arrangements? When is the 
arrangement profitable? 
2. If the need is security for vulnerable populations, are insurance policies the most 
effective (or an effective) use of aid funds? Do insurance arrangements have a 
security effect on individuals and at the national level? 
3. Is there an economic basis for such weather -related insurance arrangements? 
That is, is the risk insurable? If so, is it likely that losses and damages from climate 
change will continue to be insurable in a scenario of accelerating climate change 
and more unpredictable extreme weather events? 
4. Do the arrangements contribute to risk assessment and risk reduction, e.g. by 
offering lower premiums for actors who implement risk -reducing measures such 
as building flood protection, etc.? 
5. What challenges are there regarding moral hazard, and how can these be 
reduced? 
6. Which arrangements in sub-Saharan Africa have had the most promising results 
and what do they cover? Are there arrangements that cover coastal populations 
and workers in the informal sector? 
7. Would it be possible with public, international aid efforts to build a market for 
such insurance arrangements (with private insurance companies) aimed at 
developing countries? 
This summary is organized in paragraphs addressing each question, and the main text 
provides more detailed information and literature supporting the arguments in the 
summary.

CICERO	 4 
 
What is a good/best model for subsidizing insurance arrangements? When is the 
arrangement profitable?
 
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 ris k-layered context in which the insurance 
arrangement is used by policyholders. 
 
Insurance arrangements can either be supported directly or indirectly . Direct 
financial support entails, for example, capital injections, grants for capacity building, or 
premium subsidies to policyholders. Indirect support, on the other hand, consists of 
partnering with international initiatives that aim to improve cooperation, develop risk 
models, secure more financing, perform research, disseminate best practice, and so on. 
 
Which subsidy model is most suited depends on the needs of the insurance 
arrangement in question and the goal(s) of the donor, and there is no single best 
model . For example, new sovereign risk pools should be supported with capital 
injections, while premium subsidies usually have a higher benefit in established pools. A 
growing risk pool may need both. In the context of agricultural index insurance (micro), 
assistance in designing impactful and needs- based products can be more important 
than supporting e.g ., premiums at this stage of development. 
 
Climate insurance arrangements in developing countries are usually not profitable for 
the private sector , and often 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. 
 
In the context of subsidies to disaster risk finance instruments, a common measure of 
profitability is Value for Money (VfM) . This concept is usually operationalized as a 
cost -benefit analysis or a cost -effectiveness analysis. However, VfM is only one part of the 
equation, and other considerations could be made. 
 
Donors should consider methodological guidelines when deciding on premium and 
capital support recipients and allocations. These guidelines explain in detail how to 
assess the VfM and other considerations for concrete projects. One example is to use the 
SMART principles for premium and capital support , developed by InsuResillience 
Global Partnership, that include metrics of sustainability, accessibility, resilience and 
transparency . 
 
For insurance aimed at households , low take-up is a key issue, with affordability, high 
basis risk, lack of information and trust as important barriers. The research literature 
points to several avenues for improving index insurance products to overcome barriers, 
and ways in which donors can support this work: 
 
• Improve the quality of index insurance products through investments in crop 
modeling, remote sensing, and contract enhancements. 
• Support the establishment of reinsurance mechanisms to reduce insurance 
providers' exposure to high -risk events and enhance their capacity to offer 
affordable coverage.

CICERO	 5 
 •
 Establish and support the use of safe minimum standards for index insurance 
products to ensure high quality and promote trust. 
• Explore alternative approaches to direct premium subsidies, such as offering free 
insurance coverage to high -risk farmers for projected low yields or catastrophic 
losses, creating a minimum market size and reducing overall insurance costs . 
 
In line with these recommendations, we recommend supporting index insurance 
aimed at households more broadly (supporting capacity development, regulatory 
support, support for research and product development in line with the 
recommendations summarized above), rather than a narrow focus on subsidizing 
premiums. Our impression is that broad support is the priority of existing donor 
supported initiatives towards micro -scale insurance arrangements . 
If the need is security for vulnerable populations, are insurance policies the most 
effective use of aid funds? Do insurance arrangements have a security effect on 
individuals and at the national level? 
There is only sparse literature comparing insurance policies to other types of aid 
funds . Existing literature, based on limited evidence, finds that supporting insurance 
policies is an effective use of aid funds, but not necessarily the most effective. 
An example from the literature based on data from Kenya, shows that a parametric 
sovereign insurance contract would raise social welfare compared to having a fixed 
budget for supporting vulnerable households. The insurance policy would also reduce 
the nega tive impacts of budget volatility on growth. 
 
Because of the positive impacts on longer term productivity, several studies find that 
supporting insurance for small -scale farmers is a valuable support to vulnerable 
households, although there are ongoing discussions about the benefits of 
subsidizing insurance premiums compared to other mechanisms, such as cash 
transfers . There is evidence that access to insurance may have more positive impacts on 
longer term prospects for poverty reduction through improving investment incentives, 
compared to cash transfers. On the other hand, some research shows that livestock 
insurance may protect households that are better off, while poorer households may 
require other instruments, and may benefit more from cash transfers. 
 
Recent developments in agricultural index insurance may contribute to the value of 
providing insurance to vulnerable households. The evolution towards early trigger 
approaches to protecting assets rather than compensating losses in IBLI’s insurance 
products for pastoralists is one example. To reduce total global losses from climate 
change, there is a need to invest in avoiding and reducing risk. While insurance and risk 
pools split the bill across more actors, they do not necessa rily reduce the bill itself. This is 
emphasized in parts of the literature, where the “anticipatory approach” of some of the 
index -based livestock insurance schemes are viewed as part of an emerging paradigm in 
disaster risk financing.

CICERO	 6 
 
Is there an economic basis for such weather
-related insurance arrangements? That 
is, is the risk insurable? If so, is it likely that losses and damages from climate 
change will continue to be insurable in a scenario of accelerating climate change 
and more unpredictable extreme weather events? 
There is likely low or no economic basis for non -concessional weather-related insurance 
arrangement in Sub- Saharan countries, in the sense of private -market insurance supply 
without any governmental support. The premiums for such arrangements would be too 
high to be financially manageable for low -income countries, and affordability remains a 
barrier for index -based insurance aimed at households. 
 
African Risk Capacity (ARC), the largest sovereign risk pool covering Sub -Saharan African 
countries, relies on ordinary policyholder premium payments, but also on significant 
donor contributions . So far, it has received over $250 million USD in donor support, of 
which $100 million is a 20- year interest-free loan for seed capital. It is expected that 
donor support will continue to be required in the foreseeable future. 
 
Climate change will likely increase both the unpredictability of weather -related disasters, 
and their severity, making such events harder to insure against , which may increase 
needs for concessional financing. 
Do the arrangements contribute to risk assessment and risk reduction, e.g., by 
offering lower premiums for actors who implement risk -reducing measures such as 
building flood protection, etc.? 
Countries that wish to join the ARC risk pool must undergo several risk assessment 
and capacity building processes to be approved , such as customizing the ARC risk 
model , defining a payout contingency plan , establishing a detailed operational plan, and 
establishing risk transfer parameters. While ARC has ambitions to help build holistic 
disaster risk management strategies in a mission to provide ‘harmonized resilience 
solutions’, there are yet no plans on how to achieve these goals. 
 
Increased risk of weather -related disasters due to climate change will create additional 
challenges for the uptake of index insurance for smallholders . The research literature 
points to household’s understanding of risk in addition to increasing costs of insurance. 
For insurance aimed at households, we recommend supporting the development and 
diffusion of insurance products with an anticipatory approach , through e.g., early 
payouts that enable asset protection, or bundling with risk reducing inputs, to promote 
adaptation and investment in resilience . 
What challenges are there regarding moral hazard, and how can these be reduced? 
Moral hazard is a concern in insurance as insured parties may be less motivated to 
reduce risk knowing that insurance will cover their losses. Reduced problems of moral 
hazard and adverse selection are pointed to as important advantages of parametric 
and index insurance compared to traditional indemnity -based insurance, since payout 
is based on an index that cannot be influenced by any individual policyholder. 
 
While the risk of moral hazard is inherently lower in parametric insurance compared to 
most forms of traditional indemnity insurance , there is still a risk that governments 
benefiting from insurance may neglect disaster preparedness activities . However, 
s overeign disaster risk insurance primarily provides short -term liquidity for immediate

CICERO	 7 
 
disaster response and is 
unlikely to significantly alter governments' behavior beyond 
response functions, funding, and plans. In contrast, members of the ARC have improved 
their disaster contingency plans and more African countries have disaster 
contingency plans than before . 
 
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. 
 
Premium subsidies may mask the real cost of risk, leading to diminished risk -awareness 
and consequently, reduced efforts to implement risk mitigation strategies. However, this 
adverse effect can be mitigated by bolstering risk education for recipient countries and 
structuring subsidies to retain transparency about the actual risk costs . To enhance 
this, it is recommended that subsidies be contingent upon rigorous risk assessments, 
risk -reduction activities, and preparedness plans, like in the ARC model. By doing so, 
countries remain engaged in risk management even while benefiting from premium 
subsidies. 
Which arrangements in sub -Saharan Africa have had the most promising results 
and what do they cover? Are there arrangements that cover coastal populations 
and workers in the informal sector? 
The African Risk Capacity (ARC) 
The largest Sub -Saharan sovereign risk pool is the African Risk Capacity (ARC), and it is 
the only one that focuses on Africa. The ARC provides parametric index -based 
insurance coverage for medium -frequency events such as drought, tropical 
cyclones, and river flooding . The ARC continues to expand its offerings and plans to 
introduce new products such as catastrophe bonds, excess rainfall insurance, and 
insurance for other perils like locusts and wildfires. The number of countries in the ARC 
risk pool has varied over the years, with an increase in uptake over the recent years. 
 
The ARC initially faced challenges, including unmet expectations and concerns 
about the affordability of premiums . Some countries opted out due to the lack of 
insurance payouts during droughts, which have reduced trust in the drought modelling 
and increased perceived basis risk . However, there have been improvements within 
the ARC, such as the introduction of the ARC Replica coverage program and efforts to 
address premium affordability through initiatives like the Africa Disaster Risk Financing 
(ADRiFi) pro gram. 
 
ARC has also worked on reducing basis risk by improving the drought model to 
ensure more accurate payouts. The introduction of new insurance products, such as 
coverage for tropical cyclones and river floods, has allowed ARC to tailor risk 
management solutions to specific hazards in different count ries.

CICERO	 8 
 
ARC relies on both policyholder premium payments and donor contributions. Donors 
have provided over $250 million USD in support to ARC. Premium support is available 
through programs like
 ARC Replica, ADRiFi and bilateral support from donors. However, 
there have been concerns about ARC Agency's (the capacity building part of ARC) 
funding plan and transparency, leading donors to shift their support to ARC Ltd (the 
insurance company) . Misaligned incentives in the approval of operational plans are 
also a concer n, highlighting the need for improved alignment and transparency in the 
process. 
 
Despite the challenges with ARC Agency, donors remain interested in ARC's mission 
and continue to support countries through ARC Ltd and its subsidiaries. 
Start Ready, by Start Network 
Start Ready is a recently launched global risk pool. It is only in its second risk pool 
season, and to our knowledge, no evaluations or assessments of results have been 
published at the time of writing this report. Therefore, we cannot say whether they have 
delivered promising results. However, their strength is that their risk pool is in principle 
global, which may give increased risk diversification benefits and reduce overall 
insurance costs (Ciullo et al., 2023). Also, Start Ready may to a certain extent 
complement other insurance facilities, because of their risk -layered approach not relying 
solely on insurance -based financing. 
Smallholder index insurance 
Agricultural index insurance aimed at small scale farmers and pastoralists is by far the 
most common weather -related insurance aimed at households and small -scale food 
producers in Sub- Saharan Africa. Availability and uptake of insurance in fishing and 
aqu aculture is low. Microinsurance aimed at workers in the informal sector mainly 
focuses on health -, life and accidents, while weather related insurance is highly relevant 
for small -scale agribusinesses. 
 
Robust impact assessment studies of agricultural index insurance show promising results 
on welfare (both economic and subjective) through reducing the negative impacts of 
severe shocks, and ex ante, through enabling investments in higher yielding 
activities and increasing productivity , and through offering the insured households 
“peace of mind”. Examples of arrangements that have shown promising results include 
index -based livestock insurance, and insurance offered by ACRE Africa. On the other 
hand, the het erogeneity of the impacts found in the literature and concerns over the 
external validity of results imply that new products and expansion to new settings and 
areas should be accompanied by rigorous testing and evaluation. Our impression is that 
this is al ready an important part of ongoing work on agricultural index insurance in Sub-
Saharan Africa. 
 
Low uptake of unsubsidized insurance remains a key challenge for the expansion 
of these products . Important barriers include affordability, product quality (basis risk) 
and barriers related to information. Rather than pointing at specific products with 
promising results, we therefore point at promising developments to overcome these 
barriers: 	
• 	Improved indices and contracts: Enhancing measurement accuracy and reducing 
basis risk through improved indices and contract designs.

CICERO	 9 
 	
• 	Bundled products: Combining insurance with other services to increase take -up 
and lower costs. 	
• 	Flexible payments mechanisms: Offering flexible timing and modes of payments 
to overcome liquidity constraints and promote uptake. 	
• 	Information and behavioral interventions: Increasing awareness and demand 
through education, information provision, and addressing risk perceptions. 	
• 	Farmer participation: Involving farmers in product design and verification to 
enhance trust and reduce basis risk. 	
• 	Offering insurance to groups: Leveraging existing community groups to build 
trust and reduce costs. 	
• 	Promoting loss prevention: Early payouts and mitigation strategies to prevent 
losses and improve insurance effectiveness. 
Would it be possible with public, international aid efforts to build a market for such 
insurance arrangements (with private insurance companies) aimed at developing 
countries? 
There are already several international initiatives in disaster risk finance in place , 
that play a n important role in improving cooperation, securing financing, conducting 
research, disseminating best practices, and collecting data. Some important examples 
include the InsuResilience Global Partnership, the World Bank Disaster Risk Financing 
and Insurance Program (DRFIP), the World Bank Global Index Insurance Facility (GIIF), 
and the Global Shield against Climate Risk. Several of these initiatives are partnered with 
insurance provide rs and indicate that stakeholders believe a market can be built. 
However, as emphasized previously there is likely low or no economic basis for non-
concessional weather-related insurance arrangement in Sub -Saharan countries. 
 
The G lobal Shield against Climate Risk , launched jointly at COP27 by the V20 Group 
and the G7 countries, aims to enhance pre -arranged financing to address climate -
related risks on a larger scale. It utilizes existing financing structures and instruments to 
effectively respond to climate risks. Its aim is to gather existing disaster risk finance 
and preparedness under ‘one roof’ . 
 
The InsuResilience Global Partnership focuses on increasing the resilience of poor and 
vulnerable people and countries to climate change impacts through insurance and risk 
management. It aims to make insurance coverage more accessible to those most 
affected by climate change. 
 
The DRFIP aims to enhance the financial resilience of countries and communities to 
natural disasters and catastrophic events. It helps countries develop and implement 
disaster risk financing strategies, including financial instruments such as insurance and 
risk tra nsfer, to provide financial protection against disasters. 
 
The GIIF , a World Bank program, facilitates access to finance for smallholder farmers and 
micro -entrepreneurs in developing countries through catastrophic risk transfer solutions 
and index -based insurance. It provides financial education, capacity building, technical 
advice, and policy dialogue to support the implementation of insurance programs.

CICERO	 10 
 
These international initiatives contribute to the advancement of disaster risk finance by 
promoting collaboration, knowledge
-sharing, and the implementation of innovative 
solutions to enhance resilience and financial protection against disasters. 
 
Three relevant recommendations from the literature on agricultural index insurance 
include supporting reinsurance for insurance providers, “smarter subsidies” (for 
instance by subsidizing insurance for the most catastrophic events) to help build 
markets , as well as supporting minimum quality standards .

CICERO	 11 
 	
1. In troduction 	
Insurance instruments are increasingly emphasized as an important part of the solution 
for funding loss and damage from climate change, with the launch of the Global Shield 
against Climate Risks as a recent example (see, e.g., Worley, 2023). 
 
Disaster risk financing changes the way financing is secured during crises. Instead of a 
reactive approach (ex-post financing), which is often unreliable, insufficient, slow, and 
relies on ad -hoc measures (Poole, 2014) , disaster risk financing implies using a proactive 
approach (ex -ante financing). This means preparing and securing financing using a risk-
informed strategy before a crisis happens, rather than just responding after it has 
occurred. 
 
Using a forward -looking strategy may help those exposed manage the financial impact 
of risks , by enabling p eople to avoid taking short -term actions that could hurt their future 
long -term financial (and personal) health. For vulnerable households, t hese actions 
could include taking children out of school, skipping meals, selling off possessions or 
assets, taking on emergency debt and engaging in low -risk, low -yield activities . 
Furthermore, disaster risk financing can make both households, lenders and investors 
feel more secure as they sense their investments are protected. 
The large n umber of disaster risk finance instruments can be sorted into three main 
categories: 
1. Insurance 
2. Catastrophe (‘cat’) bonds 
3. Contingent credit facilities and reserve funds 
 
In this report, we focus mainly on insurance and, in particular, parametric (or index) 
insurance (see section 2.5) at the sovereign level, but also (agricultural) index insurance 
aimed at households. 
 
Since insurance is only a small part of a broader context of financing instruments, we 
briefly explain other instruments and how they should be combined to fit in a holistic 
risk -layered approach. 
 
We begin in Chapter 2 by placing insurance in the broader context of climate and 
disaster risk financing. We also discuss insurability in the face of climate change, pros 
and cons of different types of insurance, and performance indicators of parametric 
in surance. In Chapter 3, we provide results from mapping insurance arrangements in 
Sub- Saharan Africa, before we discuss the role of development assistance in supporting 
climate insurance and the mechanisms through which climate insurance can be 
supported in Chapter 4.

CICERO	 12 
 	
2. Concepts in climate risk insurance 	
In this chapter, we very briefly explain the concept of insurance (section 
2.1 ), how it fits in a broader risk -layering approach to disaster risk 
management and finance (section 2.2 ) and the relatively low use of 
such strategies in developing countries (section 2.3 ). Then, we discuss 
how climate change may affect the insurability of weather -related 
disaster risks ( 2.4). We also compare parametric insurance to traditional 
insurance (section 2.5) and discuss the strengths and weaknesses of 
parametric insurance (section 2.6 ), including its basis risk. We conclude 
the chapter by presenting sovereign risk pools and discussing their 
advantages (section 2.7). 
2.1 Risk pooling and insurance 
Insurance is fundamentally based on the concept of risk pooling. It involves collecting 
small premiums from many policyholders to cover the costs of periodically large claims 
from only a few members . 
 
Risk pooling is a concept that applies to various scales and sectors. It is used by different 
groups, such as smallholder farmers and local governments, as well as sovereign risk 
transfer facilities. Regardless of the context, the objective remains the same: to share the 
financial burden of unexpected events among a larger set of actors . By sharing risks, 
individuals and organizations can better handle the financial impacts of unforeseen 
circumstances, promoting stability and resilience. 
2.2 Insurance is only a part of a broader risk layering approach 
Effective financing of disaster risk management entails combining risk retention 
strategies with risk transfer strategies (Poole, 2014). This concept is called ‘risk layering’. 
Figure 1 illustrates a hypothetical risk layering approach, where risk retention strategies 
are combined with risk transfer strategies in order to cover the spectrum of risk 
characteristics in a cost -effective manner. Risk retention and risk transfer strategies ar e 
explained below.

CICERO	 13 
 	
Figure 
1 Hypothetical risk layering a pproach. Figure based on ADB (2013) and World Bank (2021a) . 
 
G overnments might (and should) set aside emergency funds and create backup budgets 
for common, low -impact risks. For medium -level risks, they might rearrange budgets or 
plan for emergency credit or loans. These two represent a risk retention strategy, where 
the risk is kept by the entity at risk, and not transferred to others. In such low -impact 
cases, markets will likely charge excessive premiums and those exposed are therefore 
economically and practically better off handling their own risk financing (Poole, 2014). 
 
For less frequent but higher-impact risks, however, where it is not practical to keep 
sufficient reserves, governments (and other actors) might decide to pass the risk on to 
insurance companies and/or private capital markets through catastrophe bonds (see 
section 2.8 ) to spread the cost of risk over time. This represents a risk transfer strategy, 
in which risk is shifted from those exposed to risk -takers, for a premium. 
2.3 Developing countries have low insurance uptake and rarely use risk layering 
strategies 
Insurance uptake is generally low in developing countries (Panda, Lambert & Surminski, 
2020). The use of risk layering strategies and disaster risk financing instruments is also 
more common in high -income countries than in low -income countries: According to WRI 
(2019), c ountries using disaster financing tools usually have a higher gross national 
income per capita, less debt compared to the size of their economy, and their 
governments are often more effective than comparable countries. See Figure 2.

CICERO	 14 
 	
Figure 
2 Characteristics of countries using disaster financing tools. Figure reproduced from WRI (2019) 
 
While there are several examples of middle- and high-income countries using systematic 
risk layering strategies, such strategies are little used in the poorest countries and 
affordability remain an important barrier to uptake ( World Bank, 2017; Scott et al., 2022). 
For example, of the countries that have signed first step to purchase insurance from the 
African Risk Capacity (ARC), 75 percent use no disaster risk finance instruments. The few 
countries that do use such instruments mostly rely on a single instrument, and no country 
in the ARC uses all three types of instruments (WRI, 2019). See Figure 3. 
 
Figure 3 Use of d isaster financing tools among ARC countries. Figure reproduced from WRI (2019) 
 
2.4 Un -insurability and climate -related disasters 
An event is typically insurable when it is considered ‘ calculable’, meaning that actuaries 
can assess and quantify the risk based on data and probabilities (Kagan, 2021) . 
 
If an event is highly unpredictable, it becomes challenging to confidently assess and 
quantify the risk, and thus determine appropriate premiums. Decreasing the ability to 
confidently predict losses will increase premiums or even cause insurers to exit (or not 
enter) some high- risk markets, in effect making the event uninsurable (Frank, 2023). 
 
Examples of uninsurable events are catastrophic events that are correlated across many 
policyholders, such as earthquakes, hurricanes, wildfires, and pandemics. Insurability 
thus depends on the ability to assess, manage , and diversify risks effectively 
(Chamberlain, 2022) .

CICERO	 15 
 
 
Climate change will likely increase both the unpredictability of weather
-related disasters, 
and their severity, making such events harder to insure against ( Collier et al., 2009). 
 
If private insurance companies are unwilling or unable to insurance against risks, then 
individuals must bear the risk themselves, or the government must step in to make the 
privately uninsurable insurable by the state, by acting as a ‘residual’ insurer 
(Chamberlain, 2022; Schanz, Schmeiser & Braun, 2020). The role of national 
governments can for instance be to provide tax -financed reinsurance to offload 
intolerable risk from private insurance companies, or by using regulations to reduce risk 
correlation. O ne example can be to use zoning codes to reduce the risk of wildfires 
spreading between houses (Chamberlain, 2022). 
 	
The private insurance industry is small in developing countries, however, and there is low 
insurance uptake. Furthermore, go vernments in developing countries have less 
resources to offload private insurance risk, which could result in severe and long -lasting 
losses following disaster events, without significant humanitarian aid. To overcome this, 
donor countries could provide concessional premium support or offe r capital support or 
partial guarantees to insurers, to help alleviate some of the issues of un -insurability, or at 
least make these insurance mechanisms more accessible (Richmond et al., 2021) . For 
example, ARC have several mechanisms by which donor countries can assist in 
increasing coverage in African countries, such as ARC Replica and AdRiFi (see section 
3.1.3) 
2.5 Parametric insurance versus traditional insurance 
There are two main types of insurance: indemnity insurance and parametric (or index) 
insurance. We mainly consider parametric insurance in this report because it is seen as a 
key tool in closing the protection gap for natural disasters (Dyson, 2020). However, we 
also describe traditional indemnity insurance to highlight their differences.	
1 
 
Indemnity insurance is the “traditional ” form of insurance . It is based on reimbursement : 
A fter a loss occurs, the insurer compensates the insured party for the actual loss 
incurred, up to the limit of the insurance policy. This typically requires an assessment of 
the damage value. The goal is to restore the insured to the financial position they were in 
before the loss. However, indemnity insurance can sometimes be a lengthy and costly 
process due to the need for damage assessment and claim validation. 
 
Parametric insurance is a different and more modern approach, often used in disaster 
risk financing at both micro and macro scales . Instead of reimbursing actual losses, 
payouts under a parametric insurance policy are triggered by predefined parameters 
related to a disaster event , such as inches of rainfall or the wind speed of a hurricane. 
Once these parameters are met or exceeded, the insurance pays out a predetermined 
amount. The amount to be paid out is determined by the insurance premium: As in all 
insurance schemes the insurance premium exceeds expected pay -out by some amount. 
The exceedance is the expected payment to the insurer for transferring risk. 
 	
 	1 The terms parametric insurance and index insurance are used interchangeably. In the literature on sovereign 
insurance, parametric insurance is used more often, and index insurance is commonly used when referring to 
insurance aimed at small -scale food producers and households. We will follow this tradition in this report, 
while leaning to using parametric insurance when referring to the concept in general.

CICERO	 16 
 
The two types of insurance could (and should) be used to complement each other, 
depending on how quickly the beneficiary requires funds and how precise the 
reimbursement should be. One example of this is the Phillippines’ risk layering strategy, 
where a so
vereign (parametric) risk transfer facility is used to finance short -term needs, 
while public asset indemnity insurance is used at longer time scales (World Bank, 2021a). 
2.6 The strengths and weaknesses of parametric insurance 
An important strength of parametric insurance is that t he payout is typically quick and 
does not require a detailed assessment of damage. This makes parametric insurance 
particularly useful in situations where rapid access to funds is needed for recovery and 
reduces costs compared to traditional indemnity -based insurance which pays out based 
on verified losses . 
 
Parametric insurance offer s not only fast payments but also simpler mechanisms 
compared to traditional indemnity insurance contracts. This simplicity makes parametric 
products easier to comprehend for capital market investors and buyers alike, thereby 
attracting financial support and investment from sources beyond the traditional 
insurance and reinsurance sectors (Dyson, 2023) . Furthermore, parametric insurance 
allows coverage that would be previously uninsurable. 
 
An important advantage of parametric insurance products aimed at households and 
small- scale businesses is the avoided cost of monitoring and verifying losses, which may 
be prohibitively high for, e.g., small scale farmers. This is further discussed in section 
2.6.3. 
 
Its other strengths and weaknesses aside, parametric insurance may not cover all losses 
because it does not consider the specific circumstances of each individual case ex post, 
resulting in relatively high basis risk. This is further discussed in the next section. 
2.6.1 Different forms of basis risk 
When comparing insurance policies, one should consider their ‘basis risk ’. Basis risk 
refers to the potential difference between the actual loss suffered and the insurance 
payout received – or the difference between the expected payout and the actual payout. 
 
All types of insurance are exposed to basis risk, but the cause of basis risk varies. In 
indemnity insurance, the basis risk is relatively low. This is because the insurer's payout , 
albeit slower, is directly tied to the actual loss sustained. In other words, the payout is 
designed to closely match the actual damage or loss. 
 
T he basis risk in indemnity insurance emerges when the policy only covers losses up to a 
policy limit, or the claim might be rejected due to policy exclusions , exceptions, legal 
mis -wordings, or other such factors . 
 
In parametric insurance, the basis risk can be higher. Because the payout is determined 
by predefined triggers or parameters, and not losses directly, there is a chance that the 
payout may not match the actual loss. For example, if the event's parameters are met but 
the damage to the insured is minimal, the payout could exceed the actual loss. In this 
case the basis risk is negative (an overpayment). On the other hand, if the event doesn't

CICERO	 17 
 
meet the set parameters but still causes damage, the insured may receive no payout, 
even though they suffered a loss
 – a positive basis risk (a shortfall). 
 
In agricultural index insurance, geographic/spatial basis risk refers to the distance 
between farmer’s plots and measurement points, design basis risk may result from the 
models and variables used to construct the index, and temporal basis risk is related to 
the timeframe over which the index is measured (Nshakira- Rukundu et al., 2021). 
 
While parametric insurance can provide quicker payouts and simpler processes, it tends 
to have a higher basis risk compared to indemnity insurance because payouts are based 
on predetermined parameters and not actual losses. Lack of access to, e.g., weather data 
from measuring stations may particularly be a problem in developing countries, thereby 
increasing the basis risk in parametric insurance products compared to areas with better 
data. On the other hand, a quick and speed y process saves costs for insurers. Parametric 
insurance therefore tends to be cheaper, everything else equal, than a comparable 
indemnity insurance. In the end, choosing between the two often involves balancing the 
need for speed , simplicity , and low cost against the risk of the payout not fully covering 
the loss. 
2.6.2 Managing and reducing parametric insurance basis risk 
Reducing basis risk in parametric insurance can be achieved through several methods 
(Meenan, 2017) . One approach involves adjusting the attachment level	
2. For instance, 
if a policyholder requires a payout after every significant event, the index attachment 
level can be lowered. However, this adjustment usually means higher premiums. An 
alternative, more affordable strategy could be to implement phased payouts . This 
includes a small initial payout at a lower threshold, with the remaining payout more 
closely tied to ex post parameter realizations , helping manage the reputational risk tied 
to parametric insurance and speeding up access to relief . 
 
A more technical method to mitigate basis risk requires in -depth understanding of 
idiosyncratic sources of uncertainty (Meenan, 2017) . These primarily include the distance 
of the insured from the measurement stations, and the parameters’ or index formula's 
capacity to accurately represent the insured's vulnerabilities. Reducing basis risk could 
involve increasing the number of measurement stations and assigning exposure to 
the station that best approximates the hazard at the exposure site. Alternatively, 
en hancing the index formula to capture a range of vulnerabilities more accurately can 
also be beneficial , for instance through combining multiple, satellite -based variables to 
design insurance products with lower basis risk (Enekel et al., 2019). 
 
The increasing availability of low -cost, high -resolution satellite data and improved 
remote sensing of crop yields are pointed to as promising developments to reducing 
basis risk and improving the quality of index insurance products (see for instance Benami 
et al, 2021). 
 
Morsink et al. (2016) propose t wo monitoring indicators to assess the performance of 
parametric insurance. Two types of basis risk are captured by the monitoring indicators: 
The extent to which the insurance contract captures losses caused by the peril covered 	
 	2 The attachment level (or ‘point’), in the context of insurance, refers to the coverage threshold. It is the level at 
which the financial liability shifts from the insured to the insurer.

CICERO	 18 
 
by the contract, and the extent to which the insurance covers losses from agricultural 
production (which may result from other perils that the one covered). For both types of 
basis risk, they propose to monitor the probability of catastrophic basis risk an
d the 
catastrophic performance ratio. Both indicators rely on data from farm level surveys, 
triangulated with other data sources to assess losses, and historical claims data. A related 
approach to assessing the performance of sovereign level insurance is p roposed and 
tested in Carter et al. (2021). 
2.6.3 Agricultural index insurance 
There are several types of weather -related insurance products aimed at households in 
developing countries, covering properties, business interruptions, health impacts, crops 
and livestock. The focus of this section of our mapping is insurance against clima te risk 
for small -scale farmers and pastoralists. Of about 51 million smallholder farmers in Sub -
Saharan Africa, only about 3,5 percent have agricultural insurance, which is significantly 
lower than rates in Asia and Latin- America (Nshakira-Rukundo et al., 2021). 
 
Lack of (affordable) insurance against risk for small -scale farmers and pastoralists can 
have severe consequences in the form of negative health- and life impacts, and longer 
term impacts on the ability to escape poverty ( Maccini and Yang, 2009, Carter and 
Lybbert 2012, Barrett and Santos 2014 ). Not being able to insure risk may bias farmer’s 
decisions in the direction of low risk, low -return technologies (Suri and Udri, 2022). 
 
 
 	
Box 	1 Types of indices in agricultural index insurance 	 	
Source: Index Insurance Forum, 2023 
• Average yield index: Payout if harvested average yield in a given area is lower 
than the insured level of yield (typically 50 -90 percent of average historical 
yields in the area). 
• Weather index: Payout if realized rainfall and/or temperatures at a given 
weather station or for a given satellite grid falls below/above a pre-specified 
level. 
• Normalized difference vegetation index (NDVI): Payout based on an index 
created by time -series of remote sensing imagery to measure the density of 
plant growth (e.g. on pasture) 
 
The accuracy of these measures for predicting individual farmer s losses (and thereby 
the basis risk in the insurance contract) , and the costs associated with verification, 
differ.

CICERO	 19 
 
The idea of index
-based insurance appeared as a potential solution for providing 
affordable insurance for farmers in developing countries in the 1970s (MRR Innovation 
Lab, 2022). Payout based on an index (typically rainfall, vegetation growth or average 
yi eld, see Box 1) decreases the cost of monitoring and verification of losses, and thereby 
decreases the cost of insurance. This also reduces problems of adverse selection and 
moral hazard (see Box 2) since payout is based on an index that cannot be influenc ed by 
any individual farmer. 	
Box 	3 Index	-based f	inancial tools for 	household risk management	 	
Agricultural index insurance for smallholders and pastoralists has been pointed to as 
a promising instrument for providing affordable insurance to agricultural households 
in developing countries. Recently, other financial instruments based on indices have 
been developed to provide blended financial instruments to improve household 
resilience to weather-related disasters (Carter and Chiu, 2022). 
A C ontingent Line of Credit (CLOC) is an indexed loan that is paid out to a 
borrower in the event of a disaster, where the concept of disaster is defined by an 
index (e.g., rainfall or flood level). The advantage of this product compared to 
traditional index insurance is that there is no u p-front cost. A CLOC product in 
Bangladesh has shown promising results on household investments and post -
disaster consumption (Lane et al., 2023). 
A Contingent Savings Account (CSA) is a savings account that only releases savings 
with full interest rate when an index predicts a bad agricultural season. Savings can 
be withdrawn if the index is not triggered, but with a reduced interest rate. 
Offering multiple indexed financial instruments allows farmers different options 
depending on the ability to provide up -front cash payments for purchasing an 
insurance or savings for a CSA, or credit worthiness to access a CLOC instrument. 
Blending instrum ents allows farmers to layer risk and manage risk dynamically over 
time, e.g., by increasing creditworthiness over time through a contingent savings 
account, thereby providing access to credit (CLOC). 
In addition to insurance, CLOC and CSA products, there are also other climate risk 
financial mechanisms aimed at households based on indices, for instance the Hunger 
Safety Net Program (HSNP) in Northern Kenya and parts of the Northern Uganda 
Social Action Fund (NUSAF), which provide emergency cash transfers based on an 
NDVI index. 
Box 	2 Moral hazard and a	dverse selection in 	agricultural insurance	 	
Asymmetric information between the insured and the insurance company can cause 
problems of moral hazard and adverse selection. Moral hazard occurs when 
insurance causes farmers to change their behavior in a way that increases the chance 
of collecting an indemnity payment. Adverse selection occurs when farmers have 
private information about the probability of a loss on their own plot, which me ans that 
higher risk farmer are more likely to purchase coverage. This may be a particularly 
important problem for in surers in developing countries with limited production 
records for individual farmers (Miranda and Farrin, 2012) 
Since they payout from an index insurance contract is based on an objective index 
that cannot be influenced by any individual farmer, index insurance largely eliminates 
problems of moral hazard and adverse selection. Payouts do not depend on the 
personal c haracteristics or actions of those who purchase the insurance.

CICERO	 20 
 
On the other hand, if the index is poorly correlated with actual losses, the basis risk will 
be high. Note that when farmers respond to insurance by investing in higher yielding 
(but higher risk) varieties, this is not an example of moral hazard, since the
se investments 
are on average productivity increasing. Examples of this are discussed in section 4.4. 
 
Over time, indices have evolved from being based on field -sampling to increasingly 
being based on weather data from automated weather stations, higher resolution 
satellite data and remote sensing techniques (Benami et al., 2021). Other index -based 
risk man agement tools have also evolved (see Box 3). 
2.7 Sovereign risk pools 
2.7.1 How do sovereign risk pools work? 
A s overeign risk p ool is a parametric risk management mechanism designed to help 
countries collectively manage some of the risks that they face. The sovereign risk pool is 
typically applied to large -scale risks such as natural disasters, pandemics, or economic 
shocks. 
 
The concept is broadly similar to how insurance works, but on a larger, international 
scale. See Figure 4 for a simplified diagram explaining the stakeholders and payment 
streams in a sovereign risk pool. An insurance company collects premiums from the 
insured member states, who receive a payout in case the insurance triggers. The 
premiums are kept as capital by the insurance company, in addition to its seed capital, 
which is usually based on grants or concessional capital injections, for example in terms 
of an interest free loan. The insurance company offloads parts of its risk exposure to the 
international r einsurance market, for a premium. All stakeholders rely on access to data 
to inform the likelihood of triggering events. This data is used to assess individual risk 
profiles and attachment levels (parameter triggers), which in turn affects the sizes of 
pre miums. 
 	
Figure 4 Illustration of stakeholders and payment streams in a sovereign risk pool. Figure redrawn from 
Poulter et al. (n.y.)

CICERO	 21 
 
We discuss how donors can support different parts of the sovereign risk pool in section
 
4.1 . 
 
Currently, there are four major sovereign regional risk pools , and one recently launched 
but smaller global pool. The regional ones are : African Risk Capacity (ARC), Southeast 
Asia Disaster Risk Insurance Facility (SEADRIF), Caribbean and Central America's 
Caribbean Catastrophe Risk Insurance Facility (CCRIF -SPC), and the Pacific Catastrophe 
Risk Insurance Company (PCRIC). Three of the risk pools have recently signed a 
Memorandum of Understanding (MOU) aimed at strengthening their reach and impact.	
3 
The MOU was signed along with the Global Shield against Climate Risks at COP27. Start 
Ready is a global risk pool that is currently in its second season. 
2.7.2 Advantages of sovereign risk pools 
Sovereign risk pools offer a number of advantages. They can provide fast, reliable 
funding when disasters strike, allowing countries to respond more quickly and 
effectively. They can also help countries manage financial risks in a more predictable 
way, by turning uncertain disaster -related costs into predictable insurance premiums. 
Furthermore, by pooling risks, countries can often secure better terms than they would 
be able to individually and get improved access to international capital and reinsurance 
ma rkets . 
 
Carter et al. (2021) have developed a tool for evaluating the case for sovereign disaster 
risk insurance, and test the tool using data from Kenya. They investigate whether disaster 
risk insurance reduces foregone GDP growth compared to paying the full cost of 
supporting affected households over regular budgets, and whether it generates greater 
social welfare. In the case of Kenya, they find that a disaster risk insurance contract would 
raise social welfare compared to having a fixed budget for supporting vu lnerable 
households. The insurance policy would also reduce the negative impacts of budget 
volatility on growth. The tool provided makes it possible to test disaster risk insurance 
contracts, and improve contract design, by comparing hypothetical payouts t o actual 
disaster impacts based on historical data (although data availability and quality may be 
an issue). 
 
Surminski, Barnes & Vincent (2022) examine how climate risk information generated 
through insurance activities , including parametric sovereign risk pools in Africa (ARC), 
can support climate adaptation. They explore the use of climate risk data in insurance 
processes and the potential of the insurance industry to promote the use of such 
information. Despite barriers like limited trust , unclear risk ownership and potentially 
perverse incentives (see section 4.1.4 for a discussion of some of these) , there is 
potential for collaborative efforts to enhance the utilization of climate risk information in 
insurance -related activities. Sustained cross- sectoral collaboration and capacity building 
are crucial for increasing awareness and utilization of such information. 
 
Th e main existing sovereign risk pools have a regional focus and were not designed to 
maximize risk diversification. Ciullo et al. (2023) find that pooling risk globally instead of 
only regionally will have several benefits: it will increase risk diversification, improve the 
distribution of countries’ risk share within the pool, and increases the number of 	
 	3 Source (press release): 	https://reliefweb.int/report/world/ground -breaking -mou -signed -cop27 -sees -global -	
risk-pools -join -forces -raise -visibility -and -influence

CICERO	 22 
 
countries benefiting from risk sharing. The START Network’s Start Ready risk pool is a 
cross
-regional risk pool that may have such benefits from its global approach. 
2.8 Catastrophe bonds 
Catastrophe bonds, also known as ‘cat’ bonds, are financial instruments designed to 
transfer risk from the bond issuer (for example a government) to risk -taking investors, 
mainly institutional investors. These bonds provide an opportunity to obtain financi al 
protection against potential losses from disaster events. The structure of catastrophe 
bonds makes them similar to parametric insurance instruments. 
 
The issuance of catastrophe bonds involves three parties (see Figure 5 ): the risk -exposed 
(“cedent” or “sponsor”), the investor and an independent broker (a “special purpose 
vehicle”, or SPV). The World Bank is an example of an SPV. Through the issuance of 
bonds, the SPV raises capital from investors, which is invested in sec ure securities held in 
a collateral trust. Sponsors pay a regular premium to the SPV, which is periodically 
transferred to investors as a bond coupon, along with returns on the invested collateral 
assets. The occurrence of a predefined disaster triggers th e liquidation of the collateral, 
which is then paid out to the sponsor. Alternatively, in the absence of such an event, 
investors receive their funds upon the bonds' maturity . 
 	
Figure 5 Illustration of legal structure of catastrophe bonds and parties involved. Figure re drawn from Ando 
et al. (2022). 
 
Catastrophe bonds are mainly used for disaster risk management by high - and middle -
income countries	
4, but there are some early signs of interest by low -income 
governments as well. 
 
The Extreme Climate Facility (XCF) is a multi-year and multi -hazard index -based 
catastrophe bond launched by the African Risk Capacity in 2014, aiming to aid in risk 
transfer from Sub -Saharan countries to international capital markets. The bond had initial 
issuance planned for 2016	
5, but since then issuance has been postponed	1 several times	6 
and its development by ARC is ‘very slow’ (Oxford Policy Management, 2022). The ARC 
Group Strategy 2020 -2024 expects a transition from research and development to 
establishment and operational phase over the ‘medium term’ (ARC, 2020). 
 	
 	4 Ando, S., Roch, F., Wiriadinata, U. (2022) gives a comprehensive overview over the catastrophe bond 
market . 
5 Source: https://www.artemis.bm/news/climate -change -catastrophe -bonds -for -africa -to -be -launched -by -arc/	 	6 Source: https://www.artemis.bm/news/arc -progresses -climate -cat -bond -facility -xcf -signs -up -un -support/

CICERO	 23 
 	
3. Mapping insurance arrangements 	
This chapter presents the results from mapping insurance 
arrangements in Sub- Saharan Africa. The African Risk Capacity is by far 
the largest sovereign level insurance arrangement operating in Sub-
Saharan Africa and is described in detail in section 3.1. In section 3.2, 
we briefly pr esent Start Ready – a recently launched global risk pool 
that also includes some African countries. Based on a review of the 
literature on insurance aimed at households, and in particular small -
scale food producers, we provide a summary of impacts and barr iers 
related to these insurance arrangements in section 3.3. Section 3.4 
provides a brief overview of the large number of international initiatives 
related to disaster risk finance and climate risk insurance. 
3.1 African Risk Capacity (ARC) 
3.1.1 What is the ARC? 
The African Risk Capacity (ARC) is a specialized agency of the African Union (AU) , 
established to help African countries respond to natural disasters and other climate -
related risks , and to promote proactiveness in the face of climate change and natural 
disasters. It was launched in 2012 as an innovative and pan- African approach to 
managing climate and natural disaster risks on the continent .	
7 
 
The ARC Group operates through two main components: the ARC Agency and the ARC 
Insurance Company Limited (ARC Ltd). The ARC Agency is responsible for providing 
technical assistance and capacity building to AU member states in the areas of risk 
assessment, access to early warning systems, contingency planning, and response 
coordination. The ARC Ltd, on the other hand, is a financial affiliate of the ARC that offers 
parametric index -based insurance coverage for sovereign nations in Africa against 
several clim ate-change linked disaster risks . 
 
ARC Ltd is set up to cover a proportion of the expected financial loss from a medium 
frequency event (1 in 5 -10 years), thus being part of a risk -layered approach (ARC, 2021). 
The maximum coverage for a risk pool member is 30 million USD, which is unchange d 
since the inception. Its seed capital was given as a 20 -year interest -free loan by Germany 
and the United Kingdom. The long -term ambition is for ARC Ltd to be fully owned by 
African countries. 	
 	7 See https://www.arc.int/about	 for official information.

CICERO	 24 
 
The ARC currently covers three climate-
change related natural disasters: drought, 
tropical cyclones, and river flooding.	
8 In the coming few years, ARC plans to launch 
several new products, including cat bonds, excess rainfall insurance, contingency credit 
and fund, and insurance products for other perils, such as locust and wildfires (Oxford 
Policy Management, 2022). 
3.1.2 M embers hip process 
Countries must go through several steps to join the risk pool. The first step is to become 
an ARC Member State. Currently, there are 35 member states, all having signed the ARC 
Establishment agreement.	
9 Member must undergo several other processes, such as 
customizing the Africa RiskView software	
10, signing Memorandums of Understanding for 
domestic capacity building, preparing a detailed operational plan	
11, defining a payout 
contingency plan, and establishing risk transfer parameters. After successful ly 
completi ng these steps, countries receive a ‘ Certificate of Good Standing’ and pay a 
parameter- dependent premium to ARC Ltd, subsequently joining the risk pool. 
 
The number of countries in the risk pool has varied since the inception (see Figure 6). 
The inaugural risk pool for the 2014/2015 agricultural season consisted of four countries. 
The year after, the pool had increased in size to seven members, before falling each year 
to a low point in the 2018/2019 season, when only three countries participated. 
Recently, there has been an increase in uptake, with more countries joining and more 
areas within a single country being covered. The most recent season with available data 
shows 12 countries in the risk pool, covering over 18 million people in a total of 20 
geographical areas, for a total value of 182 million USD (some countries only have ARC 
Replica coverage, see the next section.)	
 12 
 	
Figure 6 Coverage of the African Risk Capacity (ARC). Figure based on data from 	https://www.arc.int/risk -	
pools	 	
 	8 The ARC also has an outbreaks and epidemic product, see: https://www.arc.int/outbreaks-and -epidemics	. 	9 For the list of member states, see https://www.arc.int/countries	. 	10 Africa RiskView is satellite weather surveillance and modelling software developed by the UN World Food 
Programme (WFP). It is the ‘technical engine’ of the ARC. This tool enables stakeholders to estimate the level 
of damage caused by a disaster . 
11 The o perational plans (OPs) contain information about the country's natural disaster risk profile, risk transfer 
parameters (RTP), proposed interventions that meet ARC eligibility criteria, implementation plans for each 
intervention, details of implementing partners, fund flow processes, targeting mechanisms, procurement 
requirements, and monitoring and evaluation (M&E) strategies. (Oxford Policy Management, 2022) 
12 For the complete list of risk pool countries and coverage, see https://www.arc.int/risk-pools	. 	
0
2
4
6
8
10
12
14
16
18
20
2014/2015 2015/20162016/20172017/20182018/20192019/20202020/20212021/2022	
Countries	Areas	Replicas

CICERO	 25 
 
3.1.3
 ARC shows signs of improvement after early problems, but some issues still 
remain 
The ARC encountered some early problems (WRI, 2019). One major challenge was 
unmet expectations , which resulted in some countries opting out of the arrangement . 
For example, Kenya opted out in the 2016/2017 season after experiencing droughts in 
two consecutive years without triggering insurance payouts. Malawi experienced similar 
unmet expectations (Reeves, 2017). This raised some questions about basis risk, poor 
reliability and low effectiveness of the contractual agreements established by the ARC. 
Another problem identified by WRI (2019) was poor affordability of premiums. 
 
Despite the early challenges mentioned above , there have been positive signs of 
improvement within the ARC, even if some issues remain. One notable development is 
the introduction of the ARC Replica coverage program, implemented in 2019/2020 .	
13 
See Box 4. 
 
Furthermore, efforts have been made to address premium affordability issues through 
initiatives like the Africa Disaster Risk Financing (ADRiFi) program, the Multi Donor 
Trust Fund (MDTF) and a premium support facility (PSF) . These programs provide 
premium subsidies to make ARC insurance more affordable, thereby improving 
coverage. 
 
The ADRiFi program was initiated by the African Development Bank (AfDB) in 
partnership with the ARC in 2018.	
14 It is set up to subsidize insurance for ARC members, 	
 	13 See https://www.arc.int/arc -replica	 for official information. 	14 Source (press release): 	https://www.afdb.org/en/news -and -events/african -development -bank -rolls -out -	
programme -to -boost -climate -risk -financing -and -insurance -for -african -countries -18618	 	
Box 	4 ARC Replica	 	
The ARC Replica is an insurance product that allows UN agencies (such as the World 
Food Programme) and other humanitarian actors (such as the Start Network) to 
match insurance policies by ARC member countries (WFP, 2018). Doing so, 
humanitarian actors can also secure financial capacity ex -ante, used to complement 
sovereign relief efforts. 
In practice, ARC replica enables international organizations to purchase insurance 
policies from ARC Ltd. These policies can match the terms and conditions in the 
policies already taken out directly by ARC risk pool members (replica policies), but 
replica policies can also be delinked from sovereign policies. 
The international organization pays a (donor -supported) premium for holding the 
policy and will receive an insurance payout from ARC if the pre -determined event 
triggers. The insurance payout is then used to finance humanitarian actors’ work in 
the insured areas and must follow a pre -agreed operation plan. The efforts of 
humanitarian actors are coordinated with government -led relief in disaster -struck 
areas. 
The introduction of ARC Replica has helped increase coordination between 
governments and non -government organizations and has been ‘critical’ in local 
capacity building (Oxford Policy Management, 2022). 
About half of the insurance policies have been “matched” since the inception of ARC 
Replica, and its introduction coincides with increased risk pool uptake (see Figure 7 
above).

CICERO	 26 
 
among other aims	
15, and is the main source of premium subsidies that member states 
can access (ARC, 2021). ADRiFi is funded by concessional financing through the African 
Development Fund (which is also managed by AdFB), the World Bank IDA and the 
aforementioned MDTF, which was established by AfDB with contributions from the UK, 
Switzerland (AfDB, 2021) and later USA.	
16 
 
The ARC countries can also access a separate premium support facility (PSF), supported 
by Germany, but the channel is also open for other countries. 
ARC is wary, however, of maintaining too many separate sources of external funding, to 
avoid increasing administrative burdens for member states and potential moral hazard 
issues. They hope to ensure that PSF operates in collaboration with the ADRiFi/ MDTF 
programs , suggesting that PSF finance may go through the ADRiFi program to the 
member states (ARC, 2021). 
 
ARC has also worked on reducing basis risk through improvements in the drought 
model , trying to ensure that the payouts align more accurately with the actual losses 
suffered. By minimizing basis risk, ARC hopes to enhance its ability to provide timely and 
fair payouts to policyholders, thereby increasing trust and reliability in their insurance 
offerings. However, member states still have worries about basis risk, partially as a result 
of difficulties in customizing their drought risk model (Oxford Policy M anagement, 2022). 
 
The ARC has expanded its range of insurance products since 2014, to include 
coverage for tropical cyclones (2020) and river floods (2022), in addition to the original 
drought coverage . By introducing these new products, the ARC aims to provide risk 
management solutions tailored to the specific hazards prevalent in some countries. 
3.1.4 Donors are still in favor of ARC’s insurance products but are unhappy with 
how the Agency -part is managed 
The ARC relies on ordinary policyholder premium payments, but also donor 
contributions. So far, it has received over $250 million USD in donor support (US$ 100 
million for ARC Agency, US$ 100 million as a 20-year interest -free load for seed capital, 
and US$ 46 million in premium subsidies) . It is likely that the ARC will need significant 
subsidies in the future as well, both in the form of premium support and as grants to 
ARC, especially ARC Agency (Oxford Policy Management, 2022). 
 
D onors that have supported the ARC from the beginning, such as the UK, USAID, KfW, 
and SDC, no longer provide funding to the ARC Agency due to a loss of confidence 
(Oxford Policy Management, 2022) . However, they still support ARC Ltd 's insurance 
products and have shifted their donations to ARC Ltd through capital, premium 
financing, or premium purchases ( through ARC Replica). Donors were unhappy with the 
ARC Agency's lack of a viable funding plan (until recently) , transparency issues, and 
unresponsiveness to donor req uests. 
 
The ARC Agency's current funding relies on recent short -term don ations, creating a 
significant funding gap and posing a threat to its future. Some donors take partial 
responsibility for the fragmented relationship, but they expect ARC to provide better 	
 	15 See the Sharm El Sheikh Guidebook for Just Financing’ s fact sheet on ADRiFi: 
https://guidebookforjustfinancing.com/wp -content/uploads/2022/11/25_ -ADRiFi.docx.pdf	
 	16 Source (press release): 	https://www.afdb.org/en/news -and -events/press -releases/african -development -	
banks-africa -disaster -risk -financing -program -receives -25- million -pledge -united -states- 46718

CICERO	 27 
 
leadership and vision. Donors emphasize the need for a clear business plan and 
improved management of donor relations
 (Oxford Policy Management, 2022). 
Despite dissatisfaction with the ARC Agency, donors remain interested in ARC's mission 
to help countries manage disaster risks (Oxford Policy Management, 2022) . They are 
now supporting countries more directly through ARC Ltd and its subsidiaries, such as 
ADRiFi. 
 
The 2022 independent evaluation of ARC (Oxford Policy Management, 2022) proposes 
several ARC donor recommendations : 
• In order to enhance the effectiveness and sustainability of ARC, donors are advised 
to actively engage in discussions on ARC's core value proposition and determine 
alternative ways to deliver services not covered by ARC (like providing broader 
disaster risk management capacity) . 
• It is important to coordinate funding efforts to avoid conflicting priorities . 
• Donors should closely monitor the performance of the new Board , ensuring 
increased levels of accountability, transparency, and communication. 
• If the ARC presents a credible plan for priority reforms, donors should provide 
sufficient and predictable financing for the next two years, enabling ARC to 
implement the plan and develop a coherent strategy for the future (noting that the 
evaluation was written in 2022) . Long -term funding commitments and streamlined 
channels are essential for ARC's stability. 
• Donors should also facilitate collaboration between the ARC Group and World 
Bank operations to promote synergy in addressing disaster risks in Africa. 
 
Finally, according to ARC (2021), while t he initial $100 million capital from external 
partners, given as an interest -free loan over 20 years in its establishment, has been 
sufficient for its current growth and future stability , the anticipated increase in demand 
for ARC products over the next 5 -10 years will constrain its growth unless additional 
external capital is injected. The independent evaluation of ARC, however, questions the 
unnecessarily high levels of reinsurance used by the ARC, given the amount of cheap 
capital they have access to, and also points out that ARC’s growth targets might be too 
ambitious given their implemented strategies. (See Figure 4 in section 2.7.1 for a general 
picture of the role of reinsurance. Reinsurance is used for risks that the insurance 
company wishes to share with other companies. Typically, these are large risks relative to 
the capital base.) This means that capital support should not be ruled out, but that 
donors should be cognizant of current capital structures and needs before contributing 
additional capital injections. 
3.2 Start Ready sovereign risk pool, by Start Network 
3.2.1 What is Start Network 
Start Network is a coalition of over 80 humanitarian agencies from five continents, 
including international organizations and national NGOs. It is registered as a charity in 
the United Kingdom. Th e Start Network aims to create a proactive, innovative, and 
locally driven humanitarian system that delivers better quality assistance and builds 
resilient communities in the face of increasing climate change and humanitarian 
challenges (Start Network, 2022a) . To achieve this, Start Network has established a 
financ ing facility that houses different crisis financing mechanisms, e nabling faster and 
more efficient global humanitarian action.

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3.2.2
 What is Start Ready? 
Start Ready is a global disaster risk financing initiative launched by Start Network at the 
COP26 in 2021. Start Ready focuses on organizing ex ante funding for crises that exhibit 
recurring patterns such as floods, droughts, and heatwaves. The Start Ready program 
utilizes the concept s of risk retention, risk sharing, and risk transfer (i.e., risk-layering) , 
aligning them with the severity levels of specific risks to deliver optimal financing 
solutions for humanitarian needs in each context (Start Network, 2022b). 
 
The three layers of Start Ready include (Start Network, 2022b): 
1. National reserves: These reserves aim to cover mild severity scenarios, which 
have lower assistance needs and a certain level of predictability due to their 
regular occurrence. 
2. Risk pool: Designed to cover moderate severity scenarios, the risk pool optimizes 
the utilization of available funds by spreading them across multiple country -
specific risks. 
3. Insurance: This layer is intended to cover severe scenarios. I nsurance ensures 
that a substantial amount of funding can be rapidly accessed by members in the 
event of rare r occurrences. 
 
Currently, Start Ready is in its second risk pool, which launched in May 2023 covering the 
2023/24 season. The total funding available is £7.3 million (Klassen, 2023). The countries 
and hazards covered by this second pool are Bangladesh (Cyclones, Riverine/Fluvial 
Flood), the Democratic Republic of the Congo (Riverine/Fluvial Flood), Madagascar 
(Cyclones, Drought), Pakistan (Heatwaves, Riverine/Fluvial Flood, and Drought), the 
Philippines (Cyclones), Senegal (Drought), and Somalia (Drought). 
Start Ready is funded by (Klassen, 2023): UK Foreign, Commonwealth and Development 
Office, Margaret A. Cargill Philanthropies, IKEA Foundation, Irish Aid, French Ministry for 
Europe and Foreign Affairs, Netherlands Ministry of Foreign Affairs, Swiss Re 
Foundation, Howden Group Foundation and Ger man Federal Foreign Office. 
3.2.3 Relations to other risk pools and insurance arrangements 
Start Ready can complement existing programs like ARC Replica by covering risks and 
risk layers that may not be addressed by these programs, providing additional 
protection. Then, those affected by smaller -sized events, w ho do not meet the insurance 
payout threshold, can receive support . 
 
Additionally, Start Ready can match existing ex ante funding in systems like the ARC 
Replica , enabling enhanced protection for a larger population against climate hazards. 
Start Network is partnered with ARC and has purchased several ARC Replica portfolios, 
for example in Senegal, Somalia and Zimbabwe	
17. 
3.2.4 Results 
Start Ready is only in its second risk pool season, and there has not yet been published 
any evaluations of their results, to our knowledge. Therefore, we cannot say whether they 
have delivered promising results. Compared to ARC, their coverage is fairly s mall, 
covering £7.3 million versus $182 million by the ARC	
18. However, their strength is that 	
 	17 See https://startnetwork.org/funds/disaster -risk -financing -support/arc -replica	. 	18 Comparing the most recent years with available data.

CICERO	 29 
 
their risk pool in principle is global, which may give increased risk diversification 
benefits, reducing overall insurance costs (Ciullo et al., 2023).
 
3.2.5 Insurance arrangements aimed at households and small -scale businesses. 
There are several types of insurance products aimed at low -income households in 
developing countries, covering health, life and accident, agriculture, livestock, 
aquaculture, property and income, with life, credit and health as the most prevalent 
(Microins urance network, 2023). 
 
Based on our mapping of arrangements through reviews of research literature and 
reports from international initiatives for disaster risk finance, agricultural index insurance 
aimed at small scale farmers and pastoralists is by far the most common weather-related 
insurance aimed at households and small -scale food producers in Sub- Saharan Africa. 
This finding is supported by a recent mapping of microinsurance (Microinsurance 
network, 2023), as shown in Figure 7. 
 	
Figure 7 Number of products including climate covers in Africa, Asia and Latina America and The Caribbean 
(LATAC) from mapping by the Microinsurance network (2023) 
Availability and uptake of insurance aimed at individuals and small -scale businesses in 
the fisheries and aquaculture sector is low, especially in Africa (FAO, 2022). Insurance in 
this sector typically covers natural disasters, extreme weather events, accidents and 
disease. A recent mapping by FAO shows that there are ongoing efforts to scale up 
insurance through subsidies to premiums, and pilot programs for small -scale producers 
in some Asian countries, such as Vietnam and Indonesia, but no specific initia tives in 
African countries are mentioned (ibid). 
 
There are insurance arrangements aimed at the informal sector, but outside the 
agricultural sector, these insurances are typically not weather -related, and the literature 
mainly focuses on life, accident and health insurance for informal sector workers. Th e 
V20 led Sustainable Insurance Facility is specifically aimed at developing and promoting 
insurance aimed at Micro -, Small - and Medium Sized Enterprises.

CICERO	 30 
 
3.3
 Agricultural index insurance shows promising impacts, but low uptake 
remains a challenge 
Access to agricultural insurance is expected to have impacts both ex ante through 
enabling investments in productivity, such as higher risk and higher yield production 
technologies, and ex post through acting as a safety net, reducing the need to cope with 
shocks through selling productive assets, skipping meals or taking children out of school 
(Jensen and Barrett, 2016). 
 
A few rigorous impact assessments of agricultural index insurance schemes exist, mostly 
based on randomized controlled trials. The findings largely support the hypotheses of 
positive impacts both ex ante and ex post, as summarized in the review by Jensen and 
Barrett (2016). First, agricultural index insurance has been shown to reduce negative 
impacts of severe sho cks and reduce the use of coping strategies that may have long 
term negative impacts on households. Janzen and Carter (2019) find that insurance 
p ayouts from IBLI (see Box 5 ) following a drought caused wealthy households with 
insurance to sell fewer livestock , and poorer households with insurance to reduce their 
food consumption less than those without insurance. Similar results from the same 
insurance scheme are shown by Jensen et al. (2017). 
 
Second, i ndex insurance enables productivity increasing investments. Jensen et al. 
(2017) find that IBLI increases livestock investments. Karlan et al. (2014) find increased 
investments in agriculture, resulting in increased crop revenues and fewer meals skipped 
among Ghanaian farmers with rainfall index insurance . 
Sibiko and Qaim (2020) find positive impacts on fertilizer and improved seed use, and 
thereby increased yields from index insurance from Kilimo Salama, the precursor to 
ACRE Africa (see Box 6). Elabed and Carter (2014) find positive impacts of index 
insurance on investment in cotton production in Mali. Research from the AMA Innovation 
Lab find that insurance coverage at a cost of US $48 generates additional cotton 	
Box 	5 The 	Index	-based Livestock Insurance 	program 	(IBLI) and Kenya Livestock 	
Insurance Company (KLIP) 	
https://www.preventionweb.net/news/climate -cover -140 -million -insurance -scheme- kenya-protect -	
herders -against -frequent -droughts

CICERO	 31 
 
cultivation worth roughly $300 at harvest
, at a cost/benefit ratio of 6.25 in Mali (Russell, 
2018) . Stoeffler et al. (2022), on the other hand, find no impacts of insurance on the 
insured crop for farmers in Burkina Faso (cotton), but significant spillover effects on 
investments in other agricultural activities. 
 
Castaing and Gazeaud (2022) aggregate existing experimental evidence on impacts of 
index insurance and find positive, but highly heterogeneous impacts of index insurance 
on investments. Interventions expanding access to index insurance typically boost 
productive investments by 0.06– 0.11 standard deviation on average . 
 
Tafere et al. (2015) look at impacts of being covered by index insurance for livestock 
herders in Ethiopia, and find increased subjective welfare, and that the welfare gains are 
significantly higher than the buyer’s remorse effect from buying insurance that neve r 
paid out. This means that the peace of mind of having insurance coverage increases 
welfare even in cases when there have been no payments. 
Despite the promising findings from impact assessments, take -up of index insurance 
aimed at small -scale farmers and pastoralists remains low across developing countries, 
and current research and implementation focuses on identifying and alleviating barriers 
to uptake. Barriers to uptake identified in the literature (see for ins tance the review in 
Carter et al., 2017 a) include high basis risk, high prices, liquidity constraints related to 
upfront payments, lack of trust, and behavioral constraints, such as ambiguity aversion, 
preferences for certainty and time consistency problems (related to setting aside cash for 
upfront payments). 
 
Other issues discussed in the literature include potentially negative impacts of (heavily 
subsidized) index insurance on farmer’s adaptation to climate change. Dougherty et al. 
(2020) analyze impacts of climate change (modelled as increasing drought probabilities) 
on the demand for agricultural index insurance in a framed field experiment and find 
decreased demand for insurance compared to a scenario without climate change due to 
a number of behavioral factors. On the one hand, increased uncertainty about f uture 
drought risk increases insurance demand. On the other hand, farmers place too much 
weight on prior beliefs and underestimate the true drought probability and thereby 	
Box 	6 The Agriculture and Climate Risk Enterprise (ACRE)

CICERO	 32 
 
underestimate the value of insurance, which leads to a net decreased in insurance 
demand compared to a situation without these behavioral constraints. An important 
question discussed by the authors is how to channel the increased investments resulting 
from
 access to insurance towards more climate sustainable activities, and whether 
insurance can be seen as a complement or substitute to other adaptation strategies, 
such as climate smart agriculture, migration, or income diversification. 
 
The “anticipatory approach” of some of the index -based livestock insurance schemes, 
where payout is made at the onset of a drought to protect assets, is viewed as part of an 
emerging paradigm in disaster risk financing that emphasizes the need for preventi ve 
measures and investment in resilience as cost effective, and therefore more sustainable, 
approach to disaster risk finance (Fava et al., 2021). 
3.3.1 Promising developments 
We here point to some promising developments in agricultural index insurance 
products, that have potential for alleviating some of the current barriers to uptake. 
Reduced basis risk through improved indices and contracts 
There is continuous work to improve indices using new and improved sources of data, 
improved estimation techniques and new combinations of data (see the review in 
Benami et al., 2021). These developments have the potential to reduce basis risk, but 
also to reduce costs as high -resolution satellite data and remote sensing techniques 
become available at lower cost. 
 
Other developments include designing contracts to minimize exposure to contract 
failures and basis risk events (Carter et al., 2017 a) . In a study by F latnes et al. (2018), 
findings indicate that willingness to pay for an audit -incorporated contract was 64% 
higher compared to a non -audit contract. This suggests that when measurement 
accuracy is improved and basis risk reduced , it increases trust in insurance products and 
leads to higher demand. Other contract design improvements are discussed in Carter et 
al. (2017 a). 
Bundled products 
Promoting insurance through bundling with credit or input has been explored and 
shows promising results in several programs. The rationale for bundling is that providing 
more than one service through the same contract will increase take- up and can also 
low er the unit cost of products through decreasing transaction costs for providers. 
Bundling insurance with credit also removes the need for upfront cash payments. 
Insurance has been combined with agricultural inputs such as drought -tolerant seeds, 
high- yielding seeds, fertilizer, and irrigation as part of bundled risk management 
solutions. Notable examples include the Zambia Farmer Input Support Programme, 
where farmers pay insurance premiums when receiving inputs from a government 
program. In the event of tr iggers, insurance companies, facilitated by the Ministry of 
Agriculture, provide farmers with e -vouchers to access inputs for the next cropping 
season. This program reached over 900,000 farmers in the 2017/18 Zambian financial 
year. ACRE Africa collaborate s with input service providers through One Acre Fund, an 
organization offering farm inputs and credit , to provide bundled insurance and input 
and to access farmers through existing networks and channels .

CICERO	 33 
 
Some disadvantages pointed to in recent research (see the review by Nshakira
-Rukundu 
et al., 2021) include the lack of freedom to choose individual products by farmers, which 
in some cases have been shown to decrease demand, and the complexity of bundled 
p roducts, which may also provide a challenge for choosing optimal packages. 
Flexible payments mechanisms 
Flexible timing of payments (e.g., pay-at -harvest contracts) to reduce liquidity constraints 
have been shown to promote uptake in e.g. Ethiopia (Belissa et al., 2019). Flexible 
modes of payment (e.g., payment through labor) have also shown promising results in 
programs linked with other social protection programs (Tadesse et al., 2017, 
Vasilaky et al. , 2020). Mobile -based insurance policies are a final promising development 
that reduces transaction costs. All insurance policies by ACRE Africa are provided o ver 
mobile -based payment services. 
Information and behavioral interventions 
Insurance uptake has been shown in a large number of studies to be positively 
correlated with education levels, and information provision through brochures, games 
and training sessions have been shown to increase demand (see the literature review in 
Nshaki ra-Rukundu et al., 2021). Risk perceptions and attitudes also influence insurance 
uptake, and research has shown that appropriate framing of contracts can overcome 
some issues of risk attitudes and increase demand (ibid.). Information and interventions, 
fo r instance through well -known channels and community groups, can contribute to 
increasing trust, but trust is also strongly related to basis risk. 
Farmer participation 
Recent research points to farmer -driven product design and other forms of farmer 
participation to increase trust, improve product design and reduce basis risk. An 
example is the evolution of picture- based insurance by ACRE (see Box 7), which involves 
farmer participation in monitoring and loss verification, which both reduces basis risk 
and increases farmer trust through participation (Nshakira- Rukundu et al., 2021). 
Offering insurance to groups 
Offering insurance to groups could increase uptake by building on existing informal 
community groups to increase trust and reduce costs, and there is some evidence to 
support this hypothesis, but also some concerns over crowding out existing informal 
syste ms (see the review in Nshakira -Rukundu et al., 2021). 
Promoting loss prevention 
Providing payouts early at the onset of e.g., a drought event will allow farmers to use 
mitigation strategies to prevent losses, rather than receiving a payout to compensate for 
losses after the event. This approach is used by various index -based livestock insurance 
schemes (see Box 5 on IBLI and KLIP). On the other hand, this could increase the cost of 
insurance, and could also increase basis risk. There are examples of positive impacts 
from earlier payouts based on optimized remote sensing data in the rev iew by Nshakira-
Rukundu et al. (2021). 
 
A review of the research on barriers to insurance uptake suggests that revised contract 
designs, advanced technology for better measurement, improved marketing, and better 
policy support can overcome some of the barriers (Carter et al., 2017 a) . However, the

CICERO	 34 
 
authors also suggest that 
improved index insurance should be combined with stress 
tolerant seed varieties and new risk -oriented savings and credit products that build on 
the complementarities between what can be offered by index insurance and these other 
instruments to cope with shocks and manage risk (ibid.). 
3.4 International initiatives in disaster risk finance 
There is a large number of international initiatives in disaster risk finance that, while not 
always offering insurance directly, are crucial in improving cooperation, securing 
financing, performing research, disseminating best practices, collecting data, improving 
models, and so on. The list below is not complete, but some important examples are: 
• The Global Shield Initiative 
• The InsuResilience Global Partnership 
• The World Bank Disaster Risk Financing and Insurance program (DRFIP) 
• The World Bank Global Index Insurance Facility (GIIF) 
• The World Bank Global Risk Financing Facility (GRiF) 
• The World Bank Global Facility for Disaster Reduction and Recovery (GFDRR) 
• The World Bank Agricultural Insurance Development Program (AIDP) 
• V20 Sustainable Insurance Facility 
• UNICEF Today and Tomorrow 
• UNDP Insurance and Risk Finance Facility (IRFF) 
• Insurance Development Forum 
• Natural Disaster Fund 
• EU’s Africa Disaster Risk Financing (ADRF) 
• World Food Programme R4 Rural Resilience Initiative 
 
In this section, we briefly describe some of these international initiatives. 
3.4.1 The InsuResilience Global Partnership 
The InsuResilience Global Partnership is a global initiative aimed at increasing the 
resilience of poor and vulnerable people and countries to the impacts of climate change 
through the use of insurance and risk management. The partnership was launched in 
2 017 and is supported by the German Federal Ministry for Economic Cooperation and 
Development (BMZ), as well as other public and private sector partners. 
 
The overall goal of the InsuResilience Global Partnership is to increase the availability 
and accessibility of insurance coverage to vulnerable people and countries that are most 
affected by climate change. The partnership aims to achieve this by working with 
governments, insurers, development organizations, and other stakeholders to promote 
the development and implementation of climate risk insurance and other risk 
management tools. 
3.4.2 The World Bank Disaster Risk Financing and Insurance Program (DRFIP) 
 
The Disaster Risk Financing and Insurance Program (DRFIP) is a global initiative aimed at 
increasing the financial resilience of countries and communities to the impacts of natural 
disasters and other catastrophic events. The program is a j oint initiative of the World 
Bank Group’s Finance and Markets Global Practice and the Global Facility for Disaster 
Reduction and Recovery (GFDRR) .

CICERO	 35 
 
The DRFIP focuses on helping countries to develop and implement disaster risk 
financing strategies and mechanisms that can be used to provide financial protection 
against the impacts of disasters. These strategies may include a range of financial 
instrumen
ts such as catastrophe bonds, insurance, contingent credit facilities, and other 
forms of risk transfer. Objectives include building the capacity of governments, financial 
institutions, and other stakeholders to design, implement, and manage effective disa ster 
risk financing programs. Additionally, it aims to support the development of innovative 
financial instruments and tools that can assist countries in better managing and 
transferring risk associated with disasters. 
 
A report from DRFIP engagements in 2022 African countries summarizes experiences 
and provides advice on planning and implementing risk financing projects (World Bank 
Group, 2021). 
3.4.3 The World Bank Global Index Insurance Facility (GIIF) 
The Global Index Insurance Facility (GIIF) is a World Bank program that aims to facilitate 
access to finance for smallholder farmers, micro -entrepreneurs, and microfinance 
institutions through the provisions of catastrophic risk transfer solutions and index -based 
insurance in developing countries. The facility is funded by the European Union/ACP, the 
governments of Germany, Japan, and the Netherlands. GIIF has facilitated more than 4.6 
million contracts, with $730 million in sums insured, covering approxima tely 23 million 
people, primarily in Sub -Saharan Africa, Asia, and Latin America and the Caribbean. 
 
The GIIF provides : 
1) Financial education aimed at farmers, small businesses, MFIs, banks, etc . 
2) Capacity building and subsidies through grants to research institutions, brokers and 
NGOs for support training of local insurers, 
3) Technical Advice on Products and Pricing, 
4) Public policy dialogue and regulatory environment facilitation (specific programs in 
Uganda and Kenya). 
 
Supported programs in Sub- Saharan Africa include Mayfair insurance Zambia, Hollard 
Mozambique Project, ACRE Africa, ILRI Kenya, Guy Carpenter and Company 
Mozambique and MicroInsure Rwanda . 
 	
The Climate Insurance Database is a joint project between the Global Index Insurance 
Facility (GIIF), Munich Climate Insurance Initiative (MCII) and the German Corporation for 
International Cooperation commissioned by the German Ministry for the Environment, 
Nature Conservation, Building and Nuclear Safety. The data base consists of factsheets 
that show the experiences of international organizations with climate risk insurance 
projects to identify lessons- learned, challenges, best practices and innovative solutions. 
There are also reports f ocusing on specific topics within a climate risk insurance project, 
looking at barriers, necessary actions and overall recommendations. Most of the projects 
currently in the database are GIZ -projects, but other organizations are encouraged to 
contribute. T he projects in Sub Saharan Africa in the database are categorized as market 
development (9), enabling policy environment (8), financial literacy (3) and innovation 
and technology (3), as well as one project on public -private partnership.

CICERO	 36 
 
3.4.4
 The Global Shield against Climate Risks 
The Global Shield against Climate Risks (GS) is an initiative that was launched jointly by 
the V20 Group of climate -vulnerable economies and the Group of Seven (G7) countries, 
with Germany taking the lead , at the COP 27. It aims to enhance pre -arranged financing 
to address climate -related risks more effectively and at a larger scale , leveraging existing 
structures and initiatives. 
 
GS gathers climate risk finance and preparedness activities under ‘one roof’	
19. It aims to 
develop quick and effective solutions for providing protection in case of climate -related 
damage. These solutions are connected to contingency plans of developing countries, 
making it easier and faster for people and authorities to access the assistance they need 
during disasters. Additionally, GS will mobilize additional funds to meet the increasing 
demand for financial support. 
 
GS will operate through three funds: the Global Shield Solutions Platform, which builds 
on the InsuResilience Solutions Fund; the Global Shield Financing Facility at the World 
Bank; and the Climate Vulnerable Forum and V20 Joint Multi- Donor Fund. 
The initiative utilizes existing financing structures and instruments, avoiding the need to 
create new infrastructure . 
 	
 	19 See https://www.bmz.de/en/issues/climate -change -and -development/global -shield -against -climate -risks

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4. Development assistance and climate 
insurance 	
In this chapter, we discuss the role of development assistance in 
supporting disaster risk finance, mechanisms through which insurance 
schemes can be supported, and what donors should be aware of when 
considering projects to support. We start by focusing on sovereign 
level arrangements in section 4.1, before looking at support for 
insurance aimed at households in section 4.2. Finally, in section 4.3, we 
briefly compare aid support to insurance policies against other aid 
mechanisms. 
4.1 Supporting sovereign risk pool insurance arrangements 
4.1.1 Possible support paths and examples 
We reprint Figure 4 here to illustrate how and where to subsidize sovereign risk pools. In 
principle, all parts of the structure in this figure can be subsidized or sponsored. 
 
Akin to traditional international aid, donor countries could contribute directly to 
member states , increasing their state budget, which makes premiums easier to afford.

CICERO	 38 
 
The subsidy can also be tied directly to the premium, in effect 
paying a share of the 
premium for the member state	
20. In case of a triggering event, donor countries can also 
match the insurance payout , increasing the coverage for one or more member states 
(the ARC Replica is one such facility	
21). 
 
Another path is to support the insurance company by grant donations . Two recent 
examples of this, for the ARC, are grant donations by the EU Commission	
22 and by 
Canada	
23. 
 
Alternatively, countries can give donations to seed or increase the capital stock . This 
can be done by, for example, providing interest -free loans (as is the case for the ARC) or 
by direct capital grants. Alternatively, the insurance company can get support in 
underwriting clients	
24. 
 
A more indirect approach is for countries to act as reinsurers , for example by purchasing 
insurance company cat bonds at concessional prices or at risk -levels the private capital 
market does not wish to take on. 
 
Finally, countries could contribute to capacity building, research, and data collection 
and other similar improvements . Such contributions can either be financial	
25 or of a 
more practical nature	
26. 
4.1.2 Premium and capital support (PCS), affordability and uptake 
Premium or capital support? 
Whether capital donations or premium subsidies is the appropriate type of support 
depends on which phase the risk pool is in, and the two types of support can 
complement each other ( World Bank, 2017). 
 
In the set -up and initial phases of a new risk pool, capital support is important to build up 
reserves, which makes the pool sustainable without relying too heavily on reinsurance 
markets (which would increase premia). However, when the pool is established , the 	
 	20 For example, Togo gets premium support contributions from the ADRiFi, funded through the French 
Development Fund: 	
https://reliefweb.int/report/togo/arc -group -announces -usd -25- million -insurance -payout -	
togolese -republics -recovery -drought	 	21 Madagascar recently received a payout from an ARC Replica policy, financed by the World Food 
Programme: 	
https://reliefweb.int/report/madagascar/government -republic -madagascar -and -world -food -	
programme -receive -15- million -insurance -payout -tropical -cyclone -freddy -recovery -efforts	 	22 The ARC receive d grant funding of EUR 9 million from the EU Commission : 
https://reliefweb.int/report/world/african -risk -capacity -receives -grant -funding -eur -9 -million -european -union-
commission	 	23 The ARC receive d $17 million in funding from the Canadian Government : 
https://reliefweb.int/report/world/african-risk -capacity -group -arc -receives -17- million -funding -canadian -
government	 	24 The World Bank and the Global Risk Financing Facility multi -donor fund recently provided financial support 
to the ARC to underwrite the insurance policy of Djibouti: 	
https://reliefweb.int/report/djibouti/african- risk-	
capacity -group -and -djibouti -government -sign -first -multi -year -multi -peril -agreement -africa -protect -most -
climate -vulnerable -communities	 	25 For example, the Arab Bank for Economic Development in Africa recently made a donation to the ARC, for 
capacity building purposes: 	
https://reliefweb.int/report/world/arab -bank -economic -development -africa -	
announces -funding -usd -500- 00000- african-risk -capacity	 	26 For example, t he Global Center on Adaption (GCA) have partnered with ARC to improve disaster risk 
financing practice: 	
https://gca.org/news/african- risk-capacity -arc -group -and -global -center -on -adaptation -	
gca-partner -to -promote -climate -resilience -and -disaster -risk -finance/

CICERO	 39 
 
gains from additional capital support diminish, and premium affordability is then 
improved more cost
-effectively by premium support ( World Bank, 2017). 
 
A recent report by Scott et al. (2022) emphasizes the current need for premium subsidies 
(or grant funding for these) rather than capital support. While investment loans for 
capital support are more readily available, the priority now should be to ensure the 
growth and sustainability of the risk pools through premium subsidies. In general, which 
type of support to choose depends on a program -specific combination of factors such 
as, e.g., portfolio size, capital levels and reinsurance costs (Vivid Economics, 2016). 
 
ARC, for example, is an established pool, and would thus be in a phase where premium 
subsidies are more helpful, as well as ARC Replica purchases, and long -term grants to 
help with capacity building, if ARC Agency presents a credible plan for reforms. 
Howe ver, ARC indicate that they will also need capital injections in the coming years to 
continue their growth (ARC, 2021). An independent review questions this view, pointing 
out that ARC Ltd currently has relatively high access to cheap capital (Oxford Polic y 
Management, 2022). See section 3.1.4 for a more in -depth discussion. 
Start Network’s Start Ready is in a phase where they need capital to fund their risk pools. 
They received seed funding in 2021, and are actively seeking other contributors (Start 
Network, 2021). 
 
It is important that potential donors collect up -to -date and detailed information about 
the specific needs of the initiative in question, by getting in touch with the organization 
as well as existing donors and partners. 
Increasing insurance affordability 
Insurance affordability remains a major challenge to uptake , especially in low -income 
countries ( World Bank, 2017; Scott et al., 2022) . 
 
If the aim is to increase immediate insurance affordability, direct premium subsidies have 
the highest impact on reducing the cost of insurance, because they focus on the demand 
side and will reduce payments 1 -to -1 ( Vivideconomics, 2016). However, the long-term 
benefits of capital injections are increased in cases where a lower discount rate is used 
(placing a greater value on the future) and with more expensive reinsurance (more 
capital would increase capacity to retain risk in the pool). 
 
Premium subsidies can help attract new members to the risk pools, but existing 
members should also be considered for support (Scott et al., 2022). One reason is to 
avoid countries reducing coverage or withdrawing from the risk pool if the subsid ies 
were to end. Providing subsidies to loyal risk pool members who have been paying 
premiums from their own budgets can be seen as a reward for their strong risk 
ownership and performance. Moreover, if governments use the subsidy to expand their 
policies rat her than replacing their own costs, it can lead to increased coverage. 
While subsidy design can support donor objectives, there is no consensus on the 
appropriate size and duration of premium subsidies (Scott et al., 2022). 
 
Supply -side measures (such as insurance company grants) may also increase uptake and 
thus decrease long -term premium levels for all, because of increased risk diversification 
and economies of scale. While not as effective in increasing immediate affordabil ity,

CICERO	 40 
 
insurance supply side support can be more effective in other instances, such as setting 
up and supporting risk pools.
 (Vivideconomics, 2016). One initiative that use donor 
contributions to support risk pools is Start Ready, by Start Network, which is currently 
supported by the governments of United Kingdom, Ireland, France, Netherlands and 
Germany, in addition to international philanthropies and organizations	
27. 
4.1.3 Moral hazard 
Will getting insurance increase the risk of moral hazard? 
The issue of moral hazard arises when the insured party's incentive to avoid risk is 
reduced because they know losses will be partially covered by the insurance payout . 
Compared to traditional indemnity insurance, the risk of moral hazard in parametric 
insurance is lower because payouts are not directly tied to the insured's behavior. 
However, some raise a concern that governments benefiting from parametric insurance 
may be less motivated to undertake disaster preparedness activities to reduce 
immediate disaster impacts (Vivideconomics, 2016 ). 
 
Still, sovereign disaster risk insurance typically offers relatively small payouts compared 
to actual total damages. Its primary purpose is to provide short -term liquidity for 
immediate disaster response, so it is unlikely to significantly change governments' 
be havior beyond immediate response functions, fundings and plans (Vivideconomics, 
2016). 
 
In contrast, there are signs that countries with disaster insurance are more prepared for 
disaster relief than before getting insurance. An independent evaluation of the ARC 
(Oxford Policy Management, 2022) finds, that, due to the ARC explicit requirements (see 
below) and influence, more African countries now have disaster contingency plans in 
place, and the plans are of higher quality than before. There are some reports of newly 
implemented contingency plans improving government disaster responsiveness eve n 
without receiving ARC payouts. Recent experience with the ARC in Madagascar shows 
that the related capacity building resulted in facilitating better government 
preparedness ( Surminski, Barnes & Vincent, 2022) . 
 
A reason for this counter -intuitive effect of disaster insurance on disaster preparedness 
can be that the alternative for policyholders is not to bear all losses internally, but to rely 
on other types of external support, like ex post humanitarian aid. Thu s, providing 
insurance may indeed reduce moral hazard, depending on the counterfactual situation 
for the insured countries. 
 
The ARC, for example, places a key emphasis on promoting domestic risk ownership, 
allowing governments to take responsibility for and effectively address disaster risks 
within their countries. This, argues the ARC, will r educe reliance on donor support over 
time, enabling countries to independently finance and manage emergency drought 
responses (Oxford Policy Management, 2022). 
 
Thus, the effect of getting insurance on disaster preparedness will depend on the 
alternatives covering losses the countries would otherwise rely on. 	
 	27 See https://startnetwork.org/funds/start -ready

CICERO	 41 
 
Can premium support increase the risk of moral hazard for insured countries?
 
D isaster risk insurance premium support may contribute to decreasing risk -reduction 
activities compared to a situation where countries get no premium subsidies 
( Vivideconomics, 2016) , depending on how the subsidies are structured. 
 
The main concern is that premium subsidies can ‘mask’ the true premium level to 
policyholders, and thus also reduce their awareness of the cost and severity of the risk 
they face. Reduced risk -awareness will again lead to a reduction in the perceived need to 
implement risk -reduction measures. This is similar to moral hazard, in that policyholders 
reduce their risk -reduction activities, but differs in that the adverse effect is caused by a 
masking of risk costs and not by perverse incentives. 
 
Educating insured countries about risk levels can help mitigate this effect, as countries 
become more aware of risks ‘hidden’ by the subsidy. Furthermore, donor countries 
should make subsidies conditional on the implementation of risk assessments, risk-
reducing actions, and disaster preparedness. Such is the case for the ARC, where 
countries must implement thorough risk assessments and disaster contingency plans to 
join the risk pool , and thus before any potential subsidies are received . Finally, premium 
su bsidies should be structured in a way to not mask the true premium level, and each 
recipient should be made aware of the share of their premium that is subsidized. 
4.1.4 Other potential issues of misaligned incentives 
There is the potential for misaligned incentives concerning the due process when 
approving ARC countries’ operational plans (OPs). A pproval of OPs is crucial for 
obtaining insurance policies, creating pressure on all parties involved (Oxford Policy 
Management, 2022) . The review committee may feel compelled to find positive aspects 
in the OPs, and countries tend to respond in a way that meets the committee’s 
expectations. ARC staff may intervene to ensure OP approval, especially when a donor 
offers premium f inance. This scenario can expedite capacity building but may 
compromise the alignment of incentives (Oxford Policy Management, 2022) . 
 
Another potential issue is that insurance companies have incentives to sell insurance, the 
uptake of which isn’t necessarily welfare -maximizing for all countries. At -risk countries 
benefit from having access to a broader set of independent advice on disast er risk 
management and financing than being provided by the ARC Ltd or other insurance 
companies, which in the end are companies that sell insurance and are specialized in 
that respect (Oxford Policy Management, 2022). 
 
While the ARC has ambitions to help build holistic disaster risk management strategies in 
a mission to provide ‘harmonized resilience solutions’, there are yet no plans on how to 
achieve these ambitions. And even if the ARC manages to act impartially, it currently 
neither has the budget nor the capacity to offer broad and holistic technical advice on all 
aspects of disaster risk management and financing (Oxford Policy Management, 2022). 
Thus, there may be a need for donor support for independent initiatives aimed at such 
ventures, that aren’t necessarily focused on providing insurance, but have a more 
‘neutral’ view on a given country’s situation. 
 
Start Ready, which relies on a somewhat broader risk -layered approach to disaster risk 
finance, may be less at risk of such misaligned incentives.

CICERO	 42 
 
4.1.5
 Technical capacities and other factors impeding uptake 
Affordability is a significant barrier to insurance adoption, but it is not the only factor. 
Other factors include a lack of understanding and technical capacity, availability of 
alternative options, and perceptions of reliability (Scott et al., 2022). The relative 
importance of these factors varies from country to country, impacting the effectiveness of 
subsidies. 
 
WRI (2019) lists several other challenges in the support of climate risk finance instrument 
funding: 
• Donations have been earmarked for particular instruments instead of also 
broadening the scope and looking to help countries develop layered, holistic 
approaches by scaling up concessional financing for several different 
instruments. 
• The support has been of a one -time ad -hoc nature. Continued, long -term 
support is needed. 
• The pool of donors has been too narrow. Germany and the United Kingdom have 
been leading contributors, along with contributions from USA, France and the EU 
Commission. 
 
WRI (2019) proposes three options to increase long -term financing. The first is for IDA to 
play a larger role in ex ante disaster financing. The second is to leverage regional 
multilateral development banks (such as the AfDB) to attract recurring donations to 
dedicated trust funds, which is then used to incentivize adoption of risk -layering 
approaches in countries. The third and final is to create a new risk solutions incentive 
fund to drive collaboration between governments, risk pools and development bank s. 
The Global Shield against Climate Risk is a recent initiative in this spirit. 
4.1.6 Best practices when supporting disaster risk finance initiatives 
The SMART principle for premium and capital support (PCS) is developed by the 
InsuResillience Global Partnership to help scale up disaster risk finance initiatives 
( Töpper & Stadtmüller, 2021). Its aim is to ensure effective and sustainable impact for the 
most vulnerable, maximize value for money, promote accessibility, incentivize resilience -
building, and maintain transparency and consistency. The five principles are (Panwar et 
al., 2022): 	
• 	Sustainable impact: The focus is on using PCS to fund risk transfer mechanisms 
and delivery systems that bring lasting change to the lives of the most vulnerable. 	
• 	Value for Money: I nitiatives should aim to maximize the impact of each dollar of 
premium or capital support . 	
• 	A ccessibility: Smart PCS is designed to be needs- based, risk-adjusted, and 
aligned with measures that enable access while empowering beneficiaries. 	
• 	R esilience -building incentives: Only risks that are too costly to reduce further 
should be covered by risk financing instruments, and insurance should primarily 
transfer risks from low- frequency, high-severity events. Reducing premiums 
through PCS should no t undermine incentives for risk reduction. 	
• 	T ransparency and consistency: PCS should be provided and utilized in a 
transparent and accountable manner, fostering coordination and consistency 
among support providers and promoting the empowerment of recipients and at -
risk communities.

CICERO	 43 
 
ODI has developed methodological and practical guidance reports to use when 
following the SMART principles, to flesh out and operationalize the indicative formulas 
used by Töpper & Stadtmüller
 (2021). The ODI guidelines can be used to determine the 
size of PCS support at a macro level (Panwar et al. 2022), and to assess the value for 
money of PCS towards disaster risk financing (Ward, Weingärtner & Panwar, 2022). 
These detailed guidelines by OD I are aligned with other methodological guidelines for 
effective PCS (such as Panda et al. (2021a; 2021b; 2021c) )	
28. 
 
These specialized guidelines should be used when deciding on PCS recipients and when 
determining support allocations and levels, ideally in combination with more general 
guidelines for just financing, such as the Sharm El Sheikh Guidebook for Just 
Financing .	
29 
4.2 Supporting index -insurance for s mall-scale farmers 
Despite the promising results from providing index based agricultural insurance, take -up 
of unsubsidized insurance remains low. As discussed in Chapter 3, there are significant 
barriers to uptake, with affordability and basis risk as important examples. In addition to 
supporting subsidized insurance schemes, such as the KLIP (see Box 5 ), donors support 
the development and provision of index based agricultural insurance in a number of 
ways. The Global Index Insurance Facility (GIIF) is one example of how act ivities 
specifically aimed at small -scale farmers are supported. 
 
Parts of the research literature include more critical views on the role of index insurance 
for small scale farmers adaptation to increasing risk of negative impacts from climate 
change. For instance, Collier et al. (2009) warn that climate change impacts will increase 
the price of insurance, exacerbating the affordability issues, but caution against general 
subsidies of premiums since this could slow household’s adaptation to climate change 
through other strategies. Castaing and Gazeaud (2022) conclude that the existing 
evidence offers limited insights to predict the impact of index insurance in new settings. 
They recommend governments and development agencies to remain cautious before 
investing in the widespread expansion of index insurance. 
 
Carter et al. (2017 b) provide a list of recommendations for policy makers and donors 
that wish to improve and support agricultural index insurance. Their recommendations 
provide alternatives to directly subsidizing insurance premiums. Firstly, they recommend 
improving the quality of index insurance products through investing in developments 
such as advances in crop modelling and remote sensing, as well as contract 
improvements such as audits and offering index insurance at the meso level, e.g., to farm 
len ding institutions. Donors can also support the establishment of reinsurance 
mechanisms to provide support to insurance providers, reducing their exposure to high -
risk events and enhancing their capacity to offer affordable and sustainable index 
insurance coverage. 
 
A second recommendation is to establish safe minimum standards for index insurance 
products to ensure high quality products and promote trust. A proposed minimum 
quality standard framework is presented in Box 7. 	
 	28 For a comprehensive list o f literature on the topic, see the ODI reports. 29 See https://guidebookforjustfinancing.com/

CICERO	 44 
 
The authors also suggest a
n alternative approach to subsidizing premiums , which could 
cost the same, but could promote market development for insurance (called smarter 
subsidies): Offering free insurance coverage to all farmers for cases where their yields 
are projected to be below 50 percent of their average value or when they experience 
catastrophic losses beyond a certain threshold. Providing payouts to these high -risk 
farmers, who are m ore susceptible to falling into poverty, would have a more significant 
impact compared to those with smaller losses. By offering free insurance at this level of 
risk, not only could the overall cost of insurance for each individual be reduced, but it 
would also create a minimum market size. Individuals and institutions would then have 
the choice to purchase additional insurance to cover smaller losses. 
Additional recommendations include bundling insurance with drought tolerant 
technologies, to provide protection against risk at different risk levels (risk layering), 
Drought tolerant crop varieties typically offer protection against a smaller range of 
wea ther outcomes, and thus provide limited protection against risks. Stress tolerant 
varieties and index insurance can therefore be seen as complements in reducing 
exposure to risk. The authors also recommend combining insurance with other financial 
mechanism s for disaster risk reduction, such as contingent credit schemes. A final 
recommendation is to build on the experience of livestock insurance schemes to explore 
the use of improved technologies to achieve early assessment toward mitigation of 
catastrophic impacts (Fava et al., 2021). 
4.3 Support for insurance policies versus other types of aid 
Price (2018) compares different interventions for disaster risk reduction to find their 
value -for -money, based on a review of existing literature. There is limited evidence for 
the value -for -money of risk insurance instruments, and the study calls for more research. 
The few existing reports on such instruments in the study gives a benefit -cost ratio of 2, 
which is lower than disaster risk management (4 -5), capacity building for 
response/recover (13 -28), and flood defenses (2 -50), but higher than investments in 
resilient infrastructure (<1) and climate smart agriculture (<1). Note , however, that the 
empirical evidence for several of these estimates is moderate or weak, and that most of 
the studies are more than a decade old. Cost -benefit analyse s may be better suited for 	
Box 	7 Minimum Quality Standard for Index Insurance	 	
The University of California, Davis, in collaboration with the Nairobi- based Regional 
Center for Mapping of Resources for Development (RCMRD), and with the support 
of USAID, is partnering to establish Quality Index Insurance Certification (QUIIC) in 
East A frica. QUIIC aims to bring significant improvements to the safety of 
agricultural index insurance through provide transparency, distinguishing between 
index insurance contracts that offer value and those that do not. It also enables 
donors and governments to invest in certified products that have the potential to 
enhance and safeguard economic growth. 
National governments hold substantial influence in requiring QUIIC certification for 
all agricultural index insurance products that they subsidize or directly purchase to 
protect farmers. QUIIC applies to index insurance products of all sizes, ensuring 
tha t national investments in index insurance as a tool to mitigate disaster risks are 
worthwhile and yield the desired outcomes. 
 
Source: 
https://quiic.ucdavis.edu/about -quiic

CICERO	 45 
 
assessing individual schemes rather than comparing them
 (Ward, Weingärtner & 
Panwar, 2022). Close stakeholder engagement and independent expert involvement can 
enhance the analysis. 
 
Considering insurance policies for individual households, the literature review by 
Nshakira -Rukundu et al. (2021) shows mixed evidence on which social protection 
instruments (reducing the cost of credit, subsidizing inputs, cash transfers or subsidizing 
in surance premiums) aimed at farmers that offer the best returns to public funds. 
However, there is evidence that access to insurance may have impacts on longer term 
prospects for poverty reduction through improving investment incentives, compared to 
cash tr ansfers. On the other hand, the review also points to evidence showing that 
livestock insurance may protect households that are better off, while poorer households 
may require other instruments, and may benefit more from cash transfers. 
 
Recent developments in agricultural index insurance may contribute to the relative value 
of providing insurance to vulnerable households compared to other social protection 
mechanisms. The evolution towards early trigger approaches to protecting assets rat her 
than compensating losses in IBLI’s insurance products for pastoralists is one example 
(Fava et al., 2021). While humanitarian responses will continue to be important in 
drought crises, they can be complemented by anticipatory financial instruments.

CICERO	 46 
 	
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pooling -developing -countries -where -do -we -go -here

CICERO	 51 
 	
Attachment 1: Description of task	30	 	
As part of its portfolio work on climate adaptation and expansion of the portfolio, Norad 
needs to gather knowledge about insurance arrangements specifically aimed at climate 
change. There is a need to answer some overarching questions about insurance 
arrangements based on relevant literature, research, evaluations, etc. We primarily want 
to look at insurance arrangements aimed at larger actors such as national states, 
city/state authorities or aid organizations, but we are also interested in insurance 
arra ngements for individuals, especially food producers. Here are some of the questions 
to be answered, ranked in order of priority: 
1. What is a good/best model for subsidizing insurance arrangements? When is the 
arrangement profitable? 
2. If the need is security for vulnerable populations, are insurance policies the most 
effective use of aid funds? Do insurance arrangements have a security effect on 
individuals and at the national level? 
3. Is there an economic basis for such weather -related insurance arrangements? 
That is, is the risk insurable? If so, is it likely that losses and damages from climate 
change will continue to be insurable in a scenario of accelerating climate change 
and more unpredictable extreme weather events? 
4. Do the arrangements contribute to risk assessment and risk reduction, e.g. by 
offering lower premiums for actors who implement risk -reducing measures such 
as building flood protection, etc.? 
5. What challenges are there regarding moral hazard, and how can these be 
reduced? 
6. How to counter corruption in arrangements/payments and how to link such 
arrangements to social safety nets? 
7. How to ensure that insurance arrangements do not lead to an unfair distribution 
within and between local communities? How are recipients of insurance payouts 
selected? 
8. Which arrangements in sub -Saharan Africa have had the most promising results 
and what do they cover? Are there arrangements that cover coastal populations 
and workers in the informal sector? 
9. Would it be possible with public, international aid efforts to build a market for 
such insurance arrangements (with private insurance companies) aimed at 
developing countries? 
Other questions can be added in dialogue with the supplier. The assignment will result 
in the following products: 	
 	30 Translated from Norwegian

CICERO	 52 
 1.
 A note that answers the questions indicated by the customer and provides advice 
on what Norad should look for in insurance arrangements and be aware of when 
an arrangement is being considered for support. 
2. A quick survey of insurance arrangements that may be relevant for Norad to 
support within the portfolio, based on the findings and conclusions in the note. 
The supplier cannot promise to answer questions 6, 7 and 9 within the framework of the 
assignment but may be able to address these questions after the survey. It should be 
noted that the portfolio has a sub- goal of increased financing for prevention and 
ma nagement of losses and damages where insurance arrangements are intended to 
contribute as an innovative financing mechanism. The geographical focus of the 
portfolio is primarily countries in sub- Saharan Africa and Asian countries particularly 
vulnerable to climate change. There will be close dialogue between the supplier and the 
customer during the assignment to ensure that the assignment is as relevant and useful 
as possible for the customer.

CICERO	 is Norway’s foremost institute for interdisciplinary climate research. 	
We help to solve the climate problem and strengthen international climate 
cooperation by predicting and responding to society’s climate challenges 
through research and dissemination of a high international standard. 
CICERO	 has garnered attention for its research on the effects of manmade 	
emissions on the climate, society’s response to climate change, and the for	-	
mulation of international agreements. We have played an active role in the 
IPCC since 1995 and thirteen of our scientists contributed the IPCC’s Sixth 
Assessment Report.
CICERO	 was founded by Prime Minister Syse in 1990 after initiative from his predecessor, Gro Harlem Brundtland. 	
CICERO’s Director is Kristin Halvorsen, former Finance Minister (2005-2009) and Education Minister (2009-2013). Jens