A super-nerdy insurance plan could save poor countries from damage caused by climate change

Hurricane Tomas left many in St. Lucia under water, literally and figuratively.
Hurricane Tomas left many in St. Lucia under water, literally and figuratively.
Image: Reuters/ Eduardo Munoz
We may earn a commission from links on this page.

On October 29, 2010, a tropical storm off the coast of the island nation of St. Lucia quickly gained force and mutated into a Category-2 cyclone. There was no time to prepare for a hurricane of these proportions, no time to evacuate.

Avalanches of thick mud and debris coursed through towns, caking the roads in impenetrable sludge, miring cars, settling into houses. Trees tangled and downed power lines. Roads cracked, rising and falling in asphalt waves, and bridges disappeared in the flood. People were swept away; some were never found. After the storm, communities on the island were cut off from food and water for days.

In the Caribbean, Hurricane Tomas wreaked $588 million in damage, mostly in St. Lucia. It was one of the most devastating storms the island had ever seen.

Afterwards, St. Lucia called upon the Caribbean Catastrophe Risk Insurance Facility (CCRIF), eventually receiving a payout of $3.24 million. The first time St. Lucia filed a natural-disaster claim was when a 7.4-magnitude earthquake shook the Caribbean in 2007—the same year CCRIF was formed.

CCRIF was, according to its CEO Isaac Anthony, the world’s first “multinational parametric insurance company.” In layman’s terms: it’s insurance for acts of God, designed to help countries rebound quickly after disaster.

Parametric insurance makes payments not based on assessed loss, but on the intensity of an event. With a hurricane like Tomas, for instance, CCRIF measures the volume of rainfall and wind speeds. They then compare these factors to models of how much damage the disaster was likely to inflict, taking into account the regions and cities affected. Member countries take out policies with different levels of protection, and within two weeks of a disaster, CCRIF determines what, if any, payment they will make.

Compare that to traditional indemnity insurance where settlements require a post-disaster, on-the-ground assessment of loss, which takes up valuable time countries could be using to rebuild. “What we offer our clients is speed,” says Anthony. This quick payout is crucial for governments with low cash flows to respond to crises immediately. It was designed to be similar to business interruption insurance, which doesn’t just cover property loss but also helps supplement income loss and the time spent recovering. Some governments use part of the payout to cover the salaries of emergency response workers and other critical federal employees, in addition to rebuilding infrastructure and repairing damage.

To date, CCRIF has made 21 payouts, totaling $68 million, to ten countries. With 17 member governments in the Caribbean and Central America, the organization seeks to change the face of insurance.

CCRIF began as a project with the World Bank and other international donors to help governments in the Caribbean rebuild quickly after natural disasters. Aided by these funders, Caribbean governments pooled their individual disaster relief funds in the form of membership fees. Since 2007, CCRIF has also received donations from Canada, the European Union, the UK government, and others.

Already, other governments in regions outside of the Caribbean are adopting this model. Fifteen countries in the Pacific, with the help of the World Bank, Asian Development Bank, and other funders created the Pacific Catastrophe Risk Assessment and Financing Initiative. Another 16 countries in Africa have worked with the African Development Fund, the Inter-African Markets of Assurance (CIMA), and the German Corporation for International Cooperation to establish the African Risk Capacity program.

All three catastrophe insurance programs got a big boost last December from the U.S. government, which pledged $30 million in assistance, and the G7 quickly followed suit with a €30 million ($32.5 million) pledge.

It’s a system any region facing extreme weather can implement.

As climate change compounds extreme weather events, those who live along shorelines can expect to see a rise in both quantity and intensity of tropical cyclones, excess rainfall, and flooding. But the effects of climate change will be felt—and are being felt—beyond the seashore. Landlocked regions might consider insurance against, for instance, the effects of drought, which are not usually included in disaster calculations but will become pressing issues in the future.

Currently, CCRIF offers help recovering from hurricanes, earthquakes, and floods; the African Risk Capacity, on the other hand, focuses more on the effects of drought, erratic rainfall and high temperatures. Each region can choose which disasters would be covered depending on its likely risks.

Like any insurance policy, members pay an annual premium, as well as a one-time participation fee upon joining. The amount of the premium is based on the individual risk profile of the country, as well as its chosen level of coverage—but it’s much less than each country would face if it tried to buy a traditional insurance policy on its own. Pooling together into one fund decreases premiums—by Anthony’s estimation, by as much as 50%.

In addition, a regional insurance plan focused on the effects of climate change is likely to cover areas and situations that traditional providers wouldn’t. Last year, Elizabeth Kolbert wrote for The New Yorker about areas in Florida that insurance providers might decline to cover at all in the future due to a surge in extreme weather events.

James Fletcher, the former minister of sustainable development and science in St. Lucia, points out that climate insurance doesn’t just help countries rebuild after a disaster. It can also help them rebuild smarter—adopting more climate-friendly infrastructure to weather future storms better. “We have to look at retrofitting our public infrastructure,” he says. “Our roads and our bridges were built not for the current climate regime that we’re experiencing. They were built for one-in-100-[year] storm events that now happen every 10 years.”

Insurance that pays out based on models and indexes, rather than assessed loss by traditional insurance companies, may benefit smallholder farmers and other businesspeople whose losses would otherwise be considered too small or too remote to assess, according to a report released by the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS).

At the COP22 climate talks in Marrakech this month, climate insurance once again arose as an adaptation solution for vulnerable communities. A side event, hosted in part by CCAFS, focused on index-based insurance plans for individual farmers.

“For many farmers, climate change means more bad years. Adaptation means you have to be producing more in your adequate years. You have to get more out of your good years,” says Dan Osgood, a scientist at Columbia University’s International Research Institute for Climate and Society, which works with CCAFS.

Loans for fertilizer, seed, and livestock can help farmers produce more during good years—but in the bad years, when crops fail and animals die, repaying a loan is difficult and stressful. “This is a very typical challenge for farmers across the developing world,” Osgood says. “The role of insurance and risk management is to reduce the risk enough so that you can take that chance.”

Insurance that takes into account the challenges of a changing climate—and helps address disasters quickly, with an eye toward building more resilient infrastructure and better adaptation practices—can be a boon to those already experiencing extreme weather. The next challenge will be scaling those programs up while ensuring they still meet the needs of those on the front lines of climate change.