Understanding the Cost-Effectiveness of Climate Risk Insurance

Building on a Multi Criteria Cost Effectiveness Analysis (MCCEA), this paper aims to develop an assessment framework that facilitates the comprehensive understanding of cost-effective climate risk insurance (CRI) approaches for vulnerable populations. MCCEA helps compare and select risk financing instruments based on their costs and overall effectiveness: Instead of taking a one-dimensional approach that only compares costs per unit of effectiveness, MCCEA conceptualizes cost-effectiveness more holistically. In this context, this paper defines cost-effectiveness as the product of the three overarching determinants of:

  • Effectiveness: The degree to which the need of the final consumer is met in an adequate, reliable and consistent way

  • Cost-efficiency: The costs incurred in producing and attaining the benefits of insurance

  • Speed of disbursement: The time taken for processing claims and payout turnaround time

For these three key determinants, this paper identifies their respective drivers as well as the corresponding key performance indicators (KPIs) that discern and measure their strength and impact. Ultimately, this exercise results in a comprehensive assessment framework based on which information on the cost-effectiveness of CRI for the vulnerable can be inferred. The framework is then applied illustratively to analyze four different insurance schemes: The African Risk Capacity (ARC), CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility), the Pacific Risk Assessment and Financing Initiative (PCRAFI), and the R4 Rural Resilience Initiative (R4).

Based on this, this paper finds that the cost- effectiveness performance of the analyzed CRI schemes is largely within reasonable bounds. Even though the schemes may not have proven to be constantly cost effective – especially during their initial years when they were still building financial and operational capacity – the schemes seem to become increasingly stable when maturing over time. While this shows the principal viability of CRI as a risk financing solution, additional efforts need to be brought underway to make insurance protection more accessible and more valuable to vulnerable people and countries.

Going forward, public institutions, businesses and civil society organizations should therefore work to further improve the cost-effectiveness of CRI by:

  1. Addressing remaining stumbling blocks to increase the cost-effectiveness of CRI through integrative disaster risk management and insurance solutions, holistic coverage for micro schemes, income-friendly product pricing, regulatory frameworks and technology advancements.

  2. Strengthening product innovation through innovative risk models (including residual risk layering and risk pooling), inter-regional risk pooling (including the harmonization of financial services regulations across borders) and peer-to-peer insurance.

  3. Promoting research that drives discussions forward to enhance cost-effectiveness, including the evaluation and integration of intangible, non-monetary benefits, the measurement of basis risk, the development of tracking tools for payout utilization, additional financial performance integrators, as well as integration and expansion of existing assessment frameworks to allow for the comparison across different combinations of CDRF instruments and insurance.




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