Fiji faces a constant climate disaster risk

The high level of precipitation caused by Tropical Cyclone (TC) Cody between 8th to 15th January 2022 caused severe water-logging and flooding in the western and central divisions of Fiji. The cyclone caused widespread infrastructural damage, especially on the main island of Viti Levu, forcing about 4,000 people to flee their homes and seek shelter at 148 evacuation centers. The economic losses from TC Cody, a “Category 1” cyclone with 10-minute estimated sustained wind speeds of 39–54 mph (63–87 km/h) are estimated at F$100 million (USD 50 million). Fiji has experienced tropical cyclones up to category 5 where wind speeds can reach 124 mph (200 km/h).

In the past 25 years, numerous significant cyclones have affected Fiji. The most severe event was TC Winston (Category 5) in 2016 which caused damages amounting to F$2 billion (USD 1 billion) or 20 percent of the country’s GDP. Fiji Meteorological Services’ modeling results suggest that the proportion of Category 4 and 5 tropical cyclones in the region is likely to increase by 2080–2100.

Certain sections of society are disproportionately affected by climate disaster risks

In 2019 – 20, the median urban household income of FJ$25,502 (US$12,750) is 42% higher than that of the median rural household income FJ$17,256 ($US8,600). The rural areas also account for 62% of the poor population of the country, who tend to be more exposed to climate disasters. The impact of climate change on livelihoods and health is significant for the population that lives off natural resource-based employment like agriculture and farming. Agriculture accounts for 36% (modeled ILO estimate) of total employment in Fiji. 50% of all rural households are involved in subsistence fishing activity. Women make up more than 80% of those 30,000 fishers.

Changes in rainfall patterns, frequent extreme weather events, rising average temperatures, sea-level rise, and ocean acidification have challenged the agriculture practices, fisheries stock, and livestock health – particularly affecting subsistence farmers in remote locations. Because of limited access to the early warning systems, and constrained financial resources, low and medium income households, especially women and girls, are disproportionately vulnerable to climate disasters. The danger is coupled with sub-standardized construction quality, limited savings, and poor access to affordable credit.

While low-income households try to informally manage risks via community-based insurance or reciprocal lending within social networks, such strategies are not adequate to deal with systemic risks such as climate disasters. Use of modern agricultural techniques, including improved seeds and inputs have the potential to increase the income and improve rural livelihoods. Globally, well-established insurance systems play an important role in securing the value chain of agriculture and allied sectors. The output of agriculture and fishing varies with the vagaries of the weather, and potential yield benefits associated with modern inputs are not guaranteed. Indeed, adopting smallholders may lose their “investment” which may pose a real threat to the livelihoods of subsistence farmers and the fishing community.

The importance of insurance in building climate-resilient communities

Well-designed insurance solutions play an important role in developing financial resilience for all the players across the value chain. Given Fiji and the Pacific’s vulnerability to cyclones, tsunamis, floods, droughts etc., there is an urgent need for insurance solutions for individuals, communities, small businesses, cooperatives, and other livelihood groups. Through the UN Capital Development Fund’s (UNCDF) Pacific Insurance and Climate Adaption Programme (PICAP), innovative parametric insurance products are being developed for pilot testing among groups and individuals. Financial awareness and competency are key aspects of the Programme that help with the adoption and the usage of financial services, particularly insurance.

Affordable risk transfer mechanisms like insurance help secure incomes, investments, and livelihoods and ultimately strengthens the entire value chain by making agriculture and small businesses more resilient to risks by:

• Compensating the vulnerable communities against losses suffered from unforeseen events
• Providing confidence to the banks and suppliers to lend capital to small farmers and business owners

In recent times, the availability of suitable data and flexibility regarding insurable interest has given impetus to Index insurance products (IIPs) or parametric insurance. In absence of well-developed agriculture or disaster risk insurance, parametric insurance provides a meaningful alternative to vulnerable communities from shocks without placing insurance providers at an informational disadvantage. The customer benefits from standardized and transparent contracts and timely payouts. For insurance providers, parametric insurance does not carry the risk of moral hazard, adverse selection, or huge administrative costs.

Figure 1

Owing to its versatility to suit the demands of the stakeholders across the value chain, parametric insurance products have gained popularity as preferred bundled insurance products with most goods and services targeted at vulnerable segments. The insurance can be bundled at multiple stages (see figure 2) of the agriculture and small business value chain – availing credit, purchasing inputs, and selling output (contract buying).

Figure 2

New insurance product to aid fight against climate disaster risks in the Pacific

On 25 August 2021, PICAP launched a pilot of the region’s first climate risk parametric micro-insurance product. It was therefore crucial for the team creating the climate and disaster risk insurance products to identify and develop the capacities of women within UNCDF’s partner organizations.

PICAP conducted extensive demand side studies to understand the climate related perils that impact the vulnerable sections, including affordability and accessibility challenges faced sensitive groups. Gender disaggregated studies were conducted to capture specific gender issues. The product delivery was refined considering the impact of Covid -19 on accessibility and use of digital modes of transaction.

The product offers covers for cyclonic storm (high windspeed and rainfall) and a pure high windspeed cover, with both carrying a maximum coverage of FJ$1,000 (US$500), which will be paid out within 14 - 21 days following a tropical cyclone. The parametric product is priced at FJ$100 (US$50), which makes it less than FJ$2 (US$1) per week. PICAP partnered with local insurers, Sun Insurance and FijiCare, for underwriting, and leading growers’ associations like Fiji Rice Limited, Fiji Coconut Millers Limited, and Sugarcane Growers Council (SCGC) among others for the distribution of the product.

The product in its pilot stage is a group cover. Hence, PICAP has adopted the aggregator model approach for onboarding clients. This has proven to be effective for mass-onboarding of the most vulnerable segments (including the traditionally “uninsurable” market segments) through UNCDF’s deployment of the bundled indemnity micro-insurance product, developed and launched in Fiji in 2017, which currently covers over 100,000 Fijians, including all social welfare beneficiaries in the country.

PICAP has partnered with the Consumer Council of Fiji (CCF), the Financial Management Counsellors Association of Fiji (FMCAF) and aggregator partners to create awareness about parametric insurance among the vulnerable segments. Additionally, by empowering women, and with UNCDF’s support through grants, funding, and technical assistance, the Programme enables its partners to deliver concrete gender inclusive outputs.

Throughout 2021 and in early 2022, PICAP, FMCAF, CCF along with other project partners conducted 408 parametric insurance-focused literacy and financial competency campaigns across various locations in Fiji, reaching more than 11,000 individuals across the country. The staff from aggregator organizations were also trained on the parametric products. The aggregators also incentivized the customers to get the benefit of insurance by providing lucrative subsidies and flexible payment options. In the first few months of the pilot launch, the parametric insurance was subscribed by over 1,380 people, well over the 1,000 target set for 2021.

As evident from the feedback of the literacy drives, the consumers realize the importance of suitable insurance products, and if presented properly the parametric product has tremendous potential to impact the lives of Fiji’s vulnerable segments. To further improve the penetration of parametric insurance among its targeted beneficiaries, PICAP appointed MSC (Microsave Consulting) to review the existing financial literacy material and work closely with two insurance providers and four aggregators involved in the underwriting and distribution of the newly launched product.

As part of the assignment, MSC helped PICAP and CCF analyze the financial literacy material for content, format, delivery mechanism, and feedback on four parameters – Accessibility, Relatability, Usability, and Compatibility. PICAP and MSC also engaged with underwriting and distribution partners to understand their vision for the product and capabilities to sustain and expand parametric insurance beyond the pilot stage. The underwriting strategy was reviewed through SOSTAC (Situation, Objectives, Strategy, Tactics, Action, and Control) and RACE (Reach, Act, Convert, and Engage). MSC, along with PICAP partners, formulated broad guidelines (figure 3) to streamline the efforts of the partners and align their larger goals with PICAP’s vision.

Figure 3

Way Forward

PICAP plans to launch multiple need-based parametric insurance products in Fiji, Vanuatu, and Tonga in 2022. The insurance products will benefit thousands of farmers, homeowners, MSMEs, and other small businesses from the Pacific Islands to secure their investments and sources of revenue against climate-induced disasters. Products and services that target vulnerable segments such as women, people with disabilities, and youths are key priorities for the Programme.

Packaging parametric insurance innovatively, even with indemnity-based products, has the potential to increase the demand for both the product and reduce the challenge of basis risk. Nevertheless, mandatory bundling without understanding the customers’ perspective will lead to 'mis-selling' and drop-outs during the subsequent renewals. The value chain players should understand the grass root realities to create a meaningful product, simplify terms and processes, incorporate the use of technology, and provide value-added services to instill confidence in insurance.