By Dr Deepa Pullanikkatil, Commonwealth national climate finance adviser; Krishan Pratap, Drua Incubator Partnership & Project Coordinator; Akil Crichlow, Assistant research officer, Climate Change, Commonwealth Secretariat; and Mxolisi Sibanda, Adviser, Climate Change, Commonwealth Secretariat
The staggering economic costs associated with increasing climate-related disasters have propelled small island states like Fiji to use innovative tools like parametric climate insurance, which is sometimes referred to as index-based insurance. Parametric insurance offers subscribers agreed payments once an event reaches or exceeds certain thresholds on an index of values.
Parametric climate insurance is ideal for delivering immediate financial relief to vulnerable communities like smallholder farmers, fishers and market vendors following climate-related disasters. Events like tropical cyclones are especially devastating for these communities and payouts within two weeks after a disaster event enables quicker recovery, allowing people to get back to some normalcy.
Progress made by Fiji and the Commonwealth Secretariat
Parametric climate insurance has been piloted in several countries across the Pacific Islands, Africa, and the Caribbean. In Fiji, the Pacific Insurance and Climate Adaptation Programme (PICAP) - which is a joint initiative of the United Nations Capital Development Fund (UNCDF), the United Nations Development Programme (UNDP), and other partners - has been at the forefront of implementing parametric insurance. The programme aims to improve the financial preparedness and resilience of Pacific Islanders towards climate change and natural hazards through market-based insurance schemes.
Fiji, Vanuatu, Tonga, Samoa, and the Solomon Islands – all Commonwealth nations - are covered by this programme, which aims to reach vulnerable populations, women, young people, and small businesses in critical sectors like agriculture, fisheries, retail, and tourism. Governments and relevant stakeholders are engaged by PICAP to develop customised climate and disaster risk-financing insurance policies.
The Commonwealth Secretariat investigates feasibility
In response to a request from the Government of Fiji, the Commonwealth Secretariat Climate Change Programme, and Fiji’s Commonwealth national climate finance adviser supported a technical feasibility study on Parametric Insurance and Blockchain Technology in 2022. A major finding was that there is a high demand for climate catastrophe insurance, especially from the agricultural and tourism sectors, both vulnerable to extreme weather events.
Mechanisms to enhance the PICAP were concluded and after insurance payouts in 2023, the experience provided valuable lessons for rolling out this type of insurance in other countries. A total of 1,013 farmers have benefited from this insurance, with a total payout of FJD 201,000 (USD 88,000). The parametric micro-insurance claims were processed by FijiCare Insurance Limited following days of excessive rainfall. The payouts were conveniently made into farmers’ bank accounts or e-wallets (74% of all impacted were farmers) within two weeks after receipt of verified data by the insurers, quickly reaching women (40% of all impacted were women) and people with disabilities (24% of all impacted were people with disabilities).
Scaling up efforts across the Commonwealth Pacific
Since the successful piloting of parametric insurance in Fiji, private insurance companies are expanding their reach to other Pacific countries. The Fijian government appreciates how parametric insurance builds community resilience. In an interview in May 2024, Filimone Ralogaivau, Fiji’s Acting Director for Climate Change, said:
“The parametric insurance modality provides an avenue for farmers to be safeguarded during times of crisis where traditional insurance often falls short. Parametric insurance endeavours can enable farmers to recover losses through timely payouts triggered by predefined parameters such as wind speed, rainfall intensity, and other parameters. Such a financing mechanism looks at innovation in building Fiji’s resilience to the impacts of climate change.”
In addition to the high-level support, Fiji’s parametric insurance roll-out has provided valuable lessons. Mr. Krishnan Narasimhan, Lead Specialist, Climate Disaster Risk Financing and Insurance at UNCDF, said:
“The parametric microinsurance implementation in Fiji over the last three years has clearly validated our hypotheses that immediate liquidity provided to affected communities helps them to restart their livelihoods faster, build resilience and preparedness.
“Challenges around ensuring continued interest of policyholders during ‘no event years’ still exist, but a comprehensive financial literacy and investing in awareness through partners are possible solutions.”
Parametric insurance as a tool for climate resilience
Addressing climate change requires innovation of which parametric climate insurance is one. Fiji’s experience is an example that can be replicated in other member states under the flagship mandates of the Commonwealth Climate Finance Access Hub (CCFAH) and the Commonwealth Living Lands Charter. Parametric insurance may also be useful in the Loss and Damage modalities that will be address at the upcoming COP29 in Azerbaijan in November.
Parametric insurance needs to be designed for different country contexts. We envisage raising awareness for its potential and its use in the development of projects and pilots for other disaster events like droughts. The Commonwealth national and regional climate finance advisers embedded within several governments provide a springboard for these actions.
These discussions are timely during a CHOGM year when 56 Commonwealth leaders will gather in October 2024 in Samoa. Solutions such as parametric insurance are desperately needed at scale in Samoa and elsewhere in the Commonwealth.
Media contact
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Suné Kitshoff Senior Communications Officer, Communications Division, Commonwealth Secretariat
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