Livelihood Protection: Climate Insurance Solutions in the Caribbean

The Caribbean region is highly susceptible to a number of natural hazards including droughts, floods and hurricanes. Increasing in frequency and ferocity as a result of changing climate systems, these disasters are placing increased stress on inhabitants and severely impairing economic growth as they batter climate vulnerable sectors like tourism and agriculture upon which the region is financially reliant.

In order to avoid risks and damage and to strengthen human resilience to natural disasters, governments need to be prepared. However, in developing countries, the ability of governments to help is often very limited. The impacts of loss and damage associated with natural disasters can set back development by increasing the incidence and severity of poverty. Poverty and vulnerability are fundamentally intertwined: the poor have fewer resources to cope with climate risk and thus their resource base is further diminished with every extreme weather event, deepening their poverty.

So, what are low-income islanders to do in the face of this challenge? Research is showing that climate risk insurance has a key role to play in reducing social vulnerability and poverty in populations affected by climate change. Transferring risk to insurance markets can be a cost-effective alternative for developing economies that can’t afford huge investments in risk prevention. Insurance also reduces strain on public budgets when disasters occur. And crucially, as a new report by the Munich Climate Insurance Initiative (MCII) explains, extending the financial safety net to poor communities via climate risk insurance can help families focus on what matters most to them (e.g., farming, education, food) rather than worrying about how to recover when hit by severe weather.

The report springs from the MCII’s “Climate Risk Adaptation and Insurance in the Caribbean” project. Hosted at the United Nations University Institute for Environment and Human Security (UNU-EHS) in Bonn, Germany, MCII was started in 2005 by Munich Re (one of the world’s largest reinsurance companies) and comprises insurers, climate change and adaptation experts, NGOs, and policy researchers who work together on solutions to the risks posed by climate change. The project developed parametric weather index-based insurance solutions for vulnerable, low-income communities. Unlike with traditional insurance, the payouts are not based on actual damages, but on when rainfall or wind speeds exceed a certain threshold. This means that policyholders get payouts faster, since there is no need to take time for damage assessment. Consequently, their resiliency is kickstarted and they can rebuild and recover faster from a disaster.

Designed as a handbook for policy and development practitioners, the new report covers a lot of ground. Entitled “Climate Risk Adaptation and Insurance: Reducing Vulnerability and Sustaining the Livelihoods of Low-income Communities in the Caribbean”, it does not focus solely on insurance, and could deftly serve as an illustration of how important insurance is in adapting to the risks brought by climate change for anyone wishing to deepen their understanding of adaptation.

Risky region

The handbook’s first module offers a comprehensive review of the factors that make countries in the region vulnerable, employing real-life examples such as Hurricane Ivan’s impact. This 2004 hurricane had a measurable impact on eight countries. The loss to Grenada alone, the report notes, was calculated at US$800 million, about twice the country’s gross domestic product (GDP). Beyond the direct costs associated with physical damage, this module explains that other consequences of disaster recovery are typically associated with: (i) a worsening of the fiscal position as governments pay for reconstruction and sources of revenue are disrupted; (ii) a worsening of the trade balance as exporting capacity is hampered and imports for reconstruction surge; (iii) downward pressure on the exchange rate due to the worsening trade balance and concerns about the repayment capacity of the government among international investors; and (iv) inflationary pressures.

Module 1 continues by summarizing the groundbreaking “Economics of Climate Adaptation in the Caribbean” (ECA) study by the Caribbean Catastrophe Risk Insurance Facility. The ECA sought to provide a baseline risk assessment focused on current and future expected losses from climate risks for three climate scenarios and an assessment of possible adaptation measures including an analysis of the expected costs and benefits of risk mitigation and transfer measures.

“There were several key regional findings which came out of the CCRIF ECA project,” the handbook states. “One of these included the fact that the damage potential under current climatic and economic conditions is already high, with annual expected losses totalling up to six percent of GDP in some countries in the Caribbean. This economic damage is comparable in scale to the impact of a serious economic recession, but on an ongoing basis.”

Lastly, the module walks readers through the progression of loss and damage related discussions in the United Nations Framework Convention on Climate Change process over the last several years.

Managing risks

The second module begins by discussing climate resilient development. “As the expenses associated with large-scale disasters increase, national development goals are threatened. Furthermore, an increased frequency and severity of disasters can also result in decreased food-, water- and human security, which, if left unchecked, can lead into a downward spiral into poverty (Anderson 2011). Climate resilient development, therefore, requires an integrated planning process. Applying risk management strategies to understand and manage the risks associated with current and future climate hazards represents a practical and tangible step towards adaptation to climate change.”

Next, the module highlights key concepts and components of risk management. It includes an overview of the approach recommended by the Global Facility for Disaster Reduction and Recovery to building resilience and adapting to climate change. It covers everything from risk identification and assessment to improving post-disaster financial response.

Module 3 begins to focus on insurance, explaining risk transfer, its uses and limitations. The module covers several different types of instruments which could possibly play a role in enhanced climate resilience (i.e., address weather risk) that are classified into four broad groups: sovereign disaster risk transfer, agricultural insurance, property catastrophe risk insurance and disaster microinsurance. Discussion in this module may be broad but it is far from narrow, and includes sections to provide valuable context, such as “insurance within the framework for agricultural risk management” and  “some key considerations in assessing the role of traditional property catastrophe insurance in climate adaptation”.

Insurance in the toolkit

The fourth and last module gives background on the “Climate Risk Adaptation and Insurance in the Caribbean” project. This module explains how the need for insurance in the region began to crystallize, and summarizes the research and surveys that led the project to develop two parametric weather-index based risk insurance products, one aimed at individuals and the other at lending institutions.

The livelihood protection policy (LPP) supports vulnerable, low-income households with the recovery from heavy rainfall and/or strong winds. The LPP provides cash payouts immediately following extreme weather events, enabling them to rebuild quickly. The loan portfolio cover (LPC) is a product for rural development banks, credit unions, and other lending institutions that protects their loan portfolios against climatic shocks. With LPC, bank clients will be protected and the bank will not face loan default in case of weather hazards. LPC lets financial institutions remain stable during and after extreme weather events, without having to build financial reserves in their institutions.

It is easy to see how these instruments, and the handbook itself for that matter, fit with the project’s overarching objective “to help target countries increase social resilience and incentivise sustainable adaptation measures by incorporating climate risk insurance within a broader framework of disaster risk reduction strategies”.

The handbook closes with a section entitled “Mapping a Course for Future Action”. And while the task seems daunting and the report acknowledges that the Caribbean faces a number of other challenges (financial crisis, demographic shift, changing economic and social structures) that affect policy needs and priorities, it urges decision makers not to be “tempted to postpone considering approaches to address climate risks”. An essential next step, the book prompts, is for the region’s decision makers to harness the many tools developed by international and national policy fora, as well as communities of policy, science and practice to help them begin to address climate risks. That said, this handbook will hopefully find its way onto many reading lists there and in any similarly vulnerable region.


The full report can be downloaded from the UNU-EHS website.

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Livelihood Protection: Climate Insurance Solutions in the Caribbean by Carol Smith is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.


Carol is a journalist with a green heart who believes that presenting information in a positive and accessible manner is essential to activating more people to join the search for equitable and sustainable solutions to global problems. A native of Montreal, Canada, she joined the UNU communications team in 2008 while living in Tokyo and, after relocating to Vancouver, continued to telecommute to Our World as writer/editor through 2015.