Page - 495 - in Loss and Damage from Climate Change - Concepts, Methods and Policy Options

21 InsuranceasaResponse toLossandDamage? 495 21.4.1 TheExperienceofMicro-insurance inPromoting RiskReduction Themessagethatinsurancepracticeswillrequirereformiftheyaretobetterpromote risk reductionholdsnotonly for indemnity-basedsystems inwealthycountries,but alsoforparametricmicro-insurancesystemsthatareincreasinglytargetingresource- poorclients in thedevelopingworld (for reviews, seeLinnerooth-Bayeret al. 2012; Mechleretal.2006;SchäferandWaters2016).Alreadyin2010,therewereareported 36parametricweatherinsuranceprograms,including28addressingindividualfarm- ers/herders,residentsofinformalsettlements,villageorcooperativerisk(Hazelletal. 2010),withmanyother programshaving appeared since then (Schäfer andWaters 2016). Parametric systems are notable for the absence of moral hazard. The insured remainmotivated to reduce their losses and damages because insurance disburse- ments, if they are triggered, are not based on actual losses. For example, a farmer with a parametric insurance contract, which pays out if rainfall falls below a pre- defined level, can gain doubly byplanting drought-resistant crops since the farmer willhavelesslossesandstill receiveapay-out.Beyondtheeliminationofmoralhaz- ard, the literature on parametricmicro-insurancemakes little reference to specific risk-reduction requirements, for example, in the formof conditions orwarranties, andtherearefewaccountsofmicro-insurersinformingclientsofhazardsoradvising themonrisk-reductionactivities. One notable positive exception is the R4 Rural Resilience Initiative (R4) that offersmicro-insurance for drought risk to food-insecure communities in Ethiopia, Senegal,MalawiandZambia(seeBox21.1).R4currentlyreachesover40,000farms throughacombinationofitsfourrisk-managementstrategies:Thefirst,R1,promotes improved resourcemanagement (risk reduction);R2 supportsmicrocredit (prudent risk taking;);R3 is insurance (risk transfer); andR4 is savings (risk reserves). The mostuniqueandinterestingfeatureof this initiative is itsdirect link to thereduction of crop loss fromdrought. In lieu of paying aapremium, cash-constrained farmers can opt to participate in an insurance-for-assets (IFA) plan, whereby they pay the premium through their labour on projects that reduce risk in the community, such as field irrigation projects and tree planting (World Food Programme andOxfam America 2016). It should be noted, however, that the R4 Program operates with generously subsidised premiums, even to those not participating in insurance-for- assets, andcannotbecompared toamarket-based insuranceprogram. R4 is exemplary by providing a proven insurance system design that promotes DRR, especially since the riskmanagement experiences of most micro-insurance programssuggest that theycouldbecomeamorepowerfulDRRtoolwithcarefully designed interventions by governments or donors. Importantly, the ability of those mostvulnerable to reduce theirownriskand tochange theirbehaviourmaybevery limitedornot feasibleunless supportedbydonors.