In this episode, David Mikhail talks with Krishnan Narasimhan, Programme Manager at UNCDF, about parametric insurance. Krishnan explains how UNCDF employs a market development strategy to inspire private companies to offer cutting-edge insurance innovations to emerging markets in the Pacific.

David:
Hello. Welcome to Capital Musings, the official podcast of the United Nations Capital Development Fund. UNCDF. I am filling in for our regular host, Eduardo. My name is David McKay. I am here specifically to interview an important practice leader in the organization. Before I introduce Krishnan, just to provide a bit of context, we are recording this interview, a little less than a week away from Cop 27. The climate conference that's taking place in Sharm El-Sheikh, Egypt. And while this is a convening that is seen as focusing on climate change, which of course it is, the fact of the matter is confronting climate change is just as much about financial solutions as it is about climate solutions.

And UNCDF has really looked to create a broad portfolio of finance solutions as it relates to climate change. Whether it's climate adaptation financing, whether it's clean energy, or what we're gonna talk about today, which is climate disaster risk. And I have literally the perfect person here in UNCDF to speak with about that.

Krishnan is the program manager for the Climate Disaster Risk Insurance with the United Nations Capital Development Fund. He is with me in person in New York, and a few days time from this recording he will be going to charm. We will be talking with him about his program and also the importance of insurance to the effort to address climate change.

Krishnan, thank you so much for setting aside the time to speak with us.

Krishnan:
Thanks, David.

David:
Before we get to the specific program, I'd love for you to just to speak for a couple minutes about insurance because so much of the climate change debate and the discussion, you're not hearing a lot about insurance as being relevant in that discussion, even though it clearly is and it's driving your work.

You deal with a specific kind of insurance, that’s called parametric insurance. So if you could take a couple of minutes to discuss those concepts, that would be great.

Krishnan:
I think that's a very relevant question leading up to not only COP, but the overall dialogue on reducing the protection gap or bridging the protection gap, as we say.

So climate related natural perils are on the increase, and there are other natural hazards like earthquakes that are not directly related to climate change but do occur. And it's the smaller economies that are disproportionately affected. Within the smaller economies, it's the segments that are vulnerable, like women, people with disabilities, and people with low
income who don't have appropriate financing mechanisms to cope.

Overall when we look at this program that we have been implementing since 2021 in the Pacific, and that has global ramifications in terms of being replicated in other markets, especially in the underdeveloped markets, which I'm trying to do now.

Broadly it looks at climate disaster as financing and insurance. Which means insurance is a component of the work that we are doing, and parametric insurance is the most important component of the I in the CDRFI, which stands for Climate Disaster is Financing and Insurance. The context of the underdeveloped markets, especially the SIDs, the smaller and developing states are that they have the discal capacity to cope with extreme weather events.

They also have very limited supply side capacity to deliver on such solutions. You can't compare that with first world countries that have advanced insurance markets, advanced insurance solutions, or advanced risk transfer solutions. So when we look at the broader spectrum of addressing disaster risks, it's either you absorb the risk or you transfer the risk. Of course some, risk can be retained.

You can say that I'm happy to retain the risk. So you can either avoid the risk or you can retain the risk, or you can transfer the risk. So insurance is a risk transfer mechanism, right where you pass on the risk to an insurance player or an insurance company, or a reinsurance company, or it could be in the form of some other securitization that can take. Which means that you're transferring the risk to the financial market for which the individual or the government or the entity pays a premium.

So coming to the specific question on parametric insurance, what is parametric insurance? So we all know the regular indemnity type of insurance, and many of us probably have some form of insurance, like for the car, for the house, or for our health and disabilities.

So indemnity insurance is based on the value of a property and indemnifies the loss on the occurrence of an event. So if the house is on fire, the insurance company will pay the extent of the actual damage suffered because of that particular event.If there's an accident on a car, the insurance company will pay to the extent of the repair of the car, or if it's a total loss, they will replace the car.

Which means that it's based on the actual loss assessment that is done right in a parametric insurance. It's a predefined trigger. It is not based on post-event assessments. Normally in an indemnity type of insurance, these assessments could take months, if not weeks. You need a loss assessor, you need a loss assessment to be done.

You need somebody to come and verify the loss, and you need documentation. In this type of insurance, which is also called index insurance, the event is predefined. It could be used on a wind speed that is reached. It could be based on the level of rainfall that is reached. It could be on a lack of rainfall for a drought product, it could be on an earthquake product, which could be based in the Richter scale, a particular seismic level that has been achieved. So the indices are predefined. The customer knows that if it’s a category five cyclone, this much is payable, it it’s a rainfall exceeding 250 millimeters, I will get this payout. So there is no need for a post-event loss assessment, which means that once an event is triggered and that is verified by independent sources, the insurance company directly pays the claim even without the claim being lodged.

The customer may not lodge a claim, the insurance company knows that this customer was on the track of the cyclone, he or she was living within 25 kilometers or 50 kilometers from the path of the cyclone or was in this particular area which got flooded, and therefore the claim is directly paid into the bank account or the mobile wallet without lengthy, assessments being done.

David:
Thank you for distinguishing between what we would identify as conventional insurance, which is focusing on a damage assessment post event and parametric insurance, which is based on what you call a predetermined trigger. I'm just curious, how do you index for a pre defined trigger for coverage under a parametric insurance model?

Krishnan:
Yeah, so once the pedal is identified as the one that is causing the most frequent or the most damage or the most financial damage, for a particular country, or for a particular market segment. Then there are modeling agencies which use data over the last 30, 40 years which is predominantly weather or climate data.

Thankfully over the last 10, 15 years, there's been quite a lot of work done in terms of using both remotely sensed data as well as correlating it with locally sensed data. Of course, the challenges would still be data in markets that don't have enough weather stations.

Markets that don't have historic data developing such models are indeed difficult, but having said that, using advanced statistical and sarcastic models many risk modelers have come with solutions, which can even have five, seven years of data to forecast forward.

So what's going to happen in the next 10 years? What's going to happen in the next 20 years? How frequently are extreme weather events, one in 10 years, one in 20 years, and then based on that the technical premium for a particular product is fixed. And then based on the market conditions there's a catastrophic loading on the premium, then there are profit margins, so the final premium is arrived at based on this model.

David:
When we talk about your program, we're talking about a program that is already involved in parametric insurance.

On the ground, we’re talking about PCAP, as I mentioned PCAP stands for Pacific Insurance Climate Adaptation Program. Why don’t you talk to us a little about PCAP and its origin and what are the ambitions for PCAP as it was created.

Krishnan:
So the Pacific Insurance and Climate Adaption Program is one of the flagship programs within UNCDF for climate disaster risk financing and insurance.

So before we started the program in the Pacific there was no practice within UNCDF that was dealing with the climate disaster risk insurance at all. The inclusive digital economy practice has been doing a lot of work on digital financial services. Similarly in the Pacific, we had the Pacific Financial Inclusion Program that was doing a lot of work on mobile money remittances, micro insurance payments, etc.

Given the vulnerabilities of the Pacific Small Island Developing States towards climate change and impact of natural hazards, and given that they were very limited technical and financial resources predominantly, they didn't have any solutions at the micro and the meso level. Which means that after an extreme weather event, they had to wait for external assistance from donors or the government had to scramble and repurpose its existing budget, which means money, which was allocated for infrastructure had to be given for disaster relief which can set back the economy by several years.

We thought that it was a development challenge that UNCDF has to rise up to the occasion to address, and after the initial coping that we did in 2019, 2020, across six or seven markets in the Pacific, there was a consesus emerging among stakeholders, among government, among the insurance regulators and the private sector, as well as the civil society that a program such as PCAP could address the problem. That UNCDF has this market development approach. We are not directly insurance solutions providers, but we can catalyze the private sector to offer such innovative frontier solutions, and in underdeveloped markets, it also means that some of our approaches the instruments that we use in the form of technical advisory and the blended financing, both in terms of de-risking capital, the grant and the loans and the guarantees, plus the digital delivery models that we have done over the lastfew years can all be put together as part of the ecosystem development, which can move markets that are underdeveloped to offering such solutions and also becoming financially robust markets.

David:
Including of course, insurance solutions as the ones you're talking about. And so just to tie these things together, when you talk about our market development approach, UNCDF, core to our character as a hybrid development organization is we are able to facilitate the market development that hopefully and as we have seen, incentivize the private sector to come in and provide the necessary capital in order to create inclusive economies on the ground, whether on the digital side or whether it's creating fiscal space for local governments or what have you. In the case that you're talking about, it's creating these ecosystems where both on the private sector catalyzation side, but also on the digital delivery side we are able to deliver this insurance solution to geographies that we've always identified as last mile geographies.

Krishnan:
Absolutely.

So when we designed the program, we began with a hypothesis that while there are a few other markets in, especially in South Asia and Africa, And also in Latin America that do have parametric insurance solutions, but they're either donors supported heavily, including in the form of premium payment or by the government. For example from even the country where I come from India there are large crop insurance programs of the parametric type or the index type. Where 80% of the premium is paid by the government and only 20% is paid by the farmers. It's highly subsidized. And that's why, you have insurance companies paying, but when we are talking about small island, developing states and underdeveloped markets The private sector needs the support of the market, but the governments don't have the fiscal space to pay the premiums.

Then the donors also would probably support for the first couple of years and then thereafter, what is the element of sustainability? So we felt that while the really low income segments, like people who are in the social production would need the support through national budgets, there exists populations that can pay for themselves, provided the products are designed or co-created with them.

They are given the financial skills to understand the importance of insurance and understand the importance of savings and the delivery models are designed in such a way that the last mile is reached. So for example, in Fiji, where we have started and we are expanded now to Tonga and Vanuatu in the Pacific. PICAP had a two year inception phase that is ending December this year, and based on the lessons learned, we are going in for an expansion phase from next year. The first ever parametric insurance product in the Pacific was launched last year in Fiji, and despite the Covid challenges, 1,388 households were covered.

David:
And this was launched by the government, if I'm not mistaken, with support from UNCDF.

Krishnan:
Yes, the whole product was developed with technical assistance by UNCDF. It was a market led product. Which means that the private sector was involved in launching the product. But the government played a very important role in creating the enabling environment. In making sure that there was strong support for the product from the government as well. So in terms of aggregation model that we have developed, there are agriculture cooperatives, there are fisheries cooperatives, there are market vendor associations. They offer this product to their members and they are actual distributers, so they have established linkages between them and the insurance companies. Which means that insurance companies underwrite the product, but the actual distribution is done by the cooperatives that have the last mile reach.

We have also helped to develop the FinTech or the InsureTech, which is a CRM tool which can run on mobile phones or tablets which can help onboard the customer and directly transfer the data to the insurance company. Plus we have also linked them up with mobile money operators so that both insurance premium can be paid through the mobile money. If there is a claim, the claim can directly be paid to the beneficiary, through mobile money, our internet banking.

David:
This is a remarkable explication to your point, market development, both in terms of, you mentioned the ex-ante and in terms of the challenge, that there's a lack of private capital and a lack of fiscal space just to start.

And so in the process, there's a market development approach to address those challenges, but also to your point, there needs to be a digital delivery and then ex post, you're talking about ensuring that, to your point, you just mentioned CRM so that there's clear identification of client and/or customer and that the tools can reach the end user.

This is more than just the deployment of a tool. It's a market development in order to facilitate the solutions. That’s tremendous. I want to shift to COP27. So you're, as of this recording, you're gonna be going there in a few days. Just talk a little bit about the engagement that you are anticipating participating in COP 27 and why that engagement is specifically important for the program.

Krishnan:
PICAP’s engagement with COP actually started last year at Glasgow. So last year, due to covid restrictions and travel restrictions I did not travel, but I participated in three very useful discussions that laid the foundations for PICAP.
At the time we were just at the start of the program, we were just two months old, but the contours of the program was even then becoming clearer that it was a big market led intervention. And there is a growing dialogue around risk transfer solutions and loss and damages, which is very important at the COP. The reason being some of these small small island developing states and other markets are the net sufferers of climate change or the global warming. They're not the cost for this situation. And these are all markets that are not polluters, but they disproportionately suffer the effect of climate change. So when we talk about insurance solutions, the big question arises as to who pays the premium?Why should a country that has not cost the situation pay premium for itself, or get its people to pay premium for itself, when there are other countries that have cost the situation that should be actually paying.

David:
The major carbon emitters.

Krishnan:
Absolutely.

From the COP 27 perspective, I am part of five different panels or side events. Two of them are being organized by UNCDF. While these are specific to the work that we are doing in the Pacific, we are also involving other UN agencies that are doing similar work in other markets. For example, there's a specific panel that is going to involve thehead of delegation of the Fiji government, the head climate risk insurance from the World Food Program, and it is going to be moderated by the Munich Climate Insurance Initiative, as well as a high level of representative from the Australian government from Canberra.

I am gonna be part of the panel. That panel is going to look at how to link insurance with social production mechanisms, a very important theme.

There's another panel where I am participating in, which is hosted by the V 20, which is also important because it's on MSME insurance.

So the small and medium enterprises or the micro, small and medium enterprises are seen as engines of economic growth in many markets, especially the developing markets. But most often they lack the appropriate insurance mechanisms. So much so that whenever there are extreme weather events, or even take the example of the pandemic - so many of the businesses have shut down shop. Why?

Because they don't have any financial fallback mechanisms. So the same thing happens in this climate, vulnerable markets. There's an extreme event when there's a drought or when there's a flooding or when there is an extreme typhoon, these businesses simply go bankrupt and they just don't reestablish themselves.

It means that laws of livelihoods, economy and local economy are affected. So how can insurance solutions help such small and medium enterprises? So there's going to be a separate conversation on that, and we are actually working with the V 20 to develop sustainable SME insurance solutions to the Asia Pacific Climate Finance Fund, where BMZ is the donor. BMZ referring to the German Fund.

The Germans themselves are big supporters of insurance as a re transfer tool and also to close the production gap, they're likely to announce the Global Shield as part of their G7 presidency. That's much anticipated. And we expect that one of the small island developing states in the Pacific would be part of the pathfinder countries as, so called, and that UNCDF can play a role in actually implementing the Global Shield solutions.

David:
So, I have a few more questions and I want to go in a slightly different direction.

So if we're thinking of PCAP as a product, let's think of it more as a product than a solution for a second. Discuss what would be the private sector incentive for just being involved in this market at all. and then particularly from the standpoint of, say someone looking to invest in a solution of this nature.

What's the private sector motivation for this particular solution?

Krishnan:
Initially I would say that maybe five years back if we were talking to the private sector, reluctantly they would agree to do this sort of solution with us, saying that it could be part of our CSR - corporate social responsibility. So we could write this off as one of our foundation activities, but since the whole dialogue on closing the production gap has taken a different dimension now, especially related to climate events, I think more and more private sector is realizing the importance of seeing this as a viable market. Basically because the understanding of the financial impact, or economic impact of climate risks is being elevated thanks to events like COP. So national governments are talking about it, subnational governments are talking about, development partners are talking about it, UN agencies are talking about it. And it is linked to several things like social production, humanitarian action, anticipated reaction. So a whole gamut of discussion is happening around insurance as a solution for extreme events, not only climate, but also other natural perils.

The frequency and the intensity of these events are seen to be increasing. Unseasonal. Even yesterday at night, I was watching the news here, and they said that Central Park at 10:00 PM last night was 60 degrees, whereas the average is about 55 for this time of the year.

It's warm today. It's really warm today

David:
November. It's warm as a warm November day in New York, yeah.

Krishnan:
So what do you attribute this to? So it, it'll definitely have some side effects somewhere.

I think that realization is happening in quite a lot of people. Especially in terms of businesses and the private sector, insurance companies are also seeing this, because it might affect their other businesses. For example if there's an extreme event, and especially in the context of a country like Fiji, where tourism is a big business and you have these nice big resorts. If there was a category five cyclone that wipes out some of these resorts, they're not going to rebuild it in one year's time. Just look at the tourism revenue that is lost. And the tourism revenue also means impact on the insurance company because downstream, all the tourist operators are gone, all the taxi operators are gone, all the small businesses are gone. It is going to affect their premium flow. So if they're able to offer solutions where the building back is faster and better, then the industry is not going to suffer as much. The private sector is now seeing this as a business opportunity, but what is the critical role that UNCDF is playing?

Making sure that the proof of concept is established because the insurance companies in those markets don't have the technical capacity to understand what parametric insurance is. How can they make a business case out of it? So we are helping them to move from point A to point B where they would've moved from a baseline of zero, to a level where there are a few products that they can offer in the market and establish a business case.

Before we get into any project with the private sector there are three things that we look at. Is there a demand for the product or solution? Is there a financial feasibility for the customer who is expected to pay the premium, or customer is expected to buy the product?

Third, is it viable for the service provider who's offering this product? If there is no viability now, what will be the use case that will make it viable? All these things go through our project proposal, and only then we place it before our investment committee for approval.

David:
So just curious because so much of what you've been talking about, particularly in this last answer, is around the demonstration of viability.

And it was one of the points you made before, was the fact that, in fact there are end users who in the right developed market could pay for these services. So I'm just curious, as you're making this pitch, what is the aspect of viability that requires the biggest convincing?Or what's the aspect of this insurance field where there is the highest level of skepticism from the standpoint of the private sector?

Krishnan:
See from the customer standpoint, because from the private sector, you definitely need a critical mass of customers that needs to be in their books, which will continue to pay the premiums. What is a stickiness factor? You could be having maybe 5,000 customers this year. How do you grow the market to 25,000 customers? They need to be looking at particular market segments that can be onboarded or can be brought into their books in a quick manner.

So that's why these delivery channels are important. We are now in discussions with the government - we had an earlier experience of an indemnity type of insurance being offered to the social production beneficiaries in Fiji, and we are arguing with the government or we are lobbying with the government to extend it also to the climate risk insurance. Such solutions can immediately move from pilot to scale. So you can get 50, 60,000 customers, and that'll ensure a steady stream of premium to the private sector, and they're good to go.

Then the second thing is we are also talking to some of the super innovation funds that have a large customer base to give this to their members as a value added benefit.That will, again, move from pilot to scale. so last year we were in the pilot mode in Fiji. This year we are already in the scale mode.

Last year there were 1,300 people who were covered. This year is going to exceed 5,000 people. So that in itself is a limited scaling up in just one year's time. From the customer point of view a lot of education is required, because unless there is an extreme event that happens, which results in a claim payment, how will they see the benefit? While we don't wish for a cyclone to happen, a happening of an event means that there is a payout that happens and they feel the benefit immediately. But that can be a big gap between the reality and what we are projecting. And that still remains an unknown factor. It's like taking a health insurance.

David:
I was gonna say, it's like any insurance conundrum. You run into the same challenges.

Krishnan:
Yeah. You buy health insurance, you don't wish to fall, you don’t wish to fall sick, but it's a fallback mechanism.

David:
And when it happens you're appreciative that you have the coverage. This has been great. I have three more questions. And thank you. This has been really outstanding and super clear. You have been using two terms. On the one hand you've been talking about disaster risk financing. And you've been talking about insurance. So for those particularly like myself, who wouldn't be terribly familiar with that distinction, can you just unpack the difference between those two?

Krishnan:
Sure. So, what insurance is part of overall disaster risk financing? Disaster risk financing has to be seen from a layered approach.

There can be macro solutions, there can be miso or middle level solutions, and there can be micro solutions. So what can be at the macro level? For the government, for the sovereign, they can buy insurance or they can buy catastrophic bonds, like some of the countries near a home in Mexico have a catastrophic bond, so whenever they're hit by a typhoon, they get a payout directly from the reinsurance market that will help them to fasten their Relief efforts. And then, it also gives them liquidity. Now at the middle level or the meso level let's say, a bank or a lending institution can also go for certain type of instruments.

It can go to the capital market and securitize some of its loan books and say that we will pay a premium in the case of a catastrophic event. The insurance company or the capital market will pay back this amount so that the loan book is not wiped out. At the micro level, at the community level, even at the household level, we are not saying that insurance is the only solution.

Even some form of saving that they don't touch. Even putting away $2 a week. As long as the money is only meant for a particular extreme event. It could even be a funeral in the family, it could be somebody, breaking their leg. So that's also micro level disaster is financing.

There are several instruments some offered by the World Bank, some offered by the African Development Bank, Asian development bank, and then, the type of solutions that we are developing is something which is not going to be on our balance sheet, but we are helping the private sector to offer these solutions and these can be bundled together. You can bundle insurance with savings, you can bundle insurance with loans. So you can have a product that increases the value of loan just because the person has insurance. It can also be triggered loans, which means that on the happening of an extreme event, you get an additional loan of $500 in addition to the $500 and you already.

These are all, various forms of disaster risk financing.

David:
Got it. Thank you. So just a bit of a digression for a moment. Why don't you talk with us about the professional journey that ultimately brought you to UNCDF. Just how you started, how you got here, just to give us some context in terms of how you're now involved in this important initiative.

Krishnan:
I have been with UNCDF almost now for a decade, and before that I used to work for insurance companies, both in India and a few markets in Southeast Asia. And that is what brought me to UNCDF because I happened to work for an insurance company in Fiji many years ago.

At that time we were heavily involved with the formation of the first national financial inclusion task force in that country led by the Reserve Bank of Fiji, and they made me the chair of the financial literacy working group there. That was when I started working with the colleagues in the development space. I found that my private sector experience could come in handy in terms of, development and personally, you know when you work for a private sector beyond a point, I was the country head for that particular insurance company, you have hit the ceiling and then where do you go?

So then I said, let's take the leap of faith. Then this opportunity came and nd of course, I did not know I was going to get this opportunity, and then when this thing was offered to me I thought I will jump. So I joined the Pacific Financial Inclusion Program.

I had a good feel of the Pacific at that time. Of course, the Pacific Insurance and Climate Adaptation Program is something which I am trying to build from scratch. Before the program was started there was very little insurance capacity within the program. I was the only technical resource that had insurance capacity, but now I'm happy to say that there is a very good second tier team, they are managing the Pacific portfolio while I'm now looking at expanding this beyond the Pacific. I'm engaging in conversations with donors outside the Pacific, with with stakeholders outside the Pacific. I'm very optimistic that the solutions that we have developed in the Pacific are replicable in other small developing states and other underdeveloped markets.

David:
That actually leads to the final question, which is and you're dovetailing right into it, which is, what does success for PCAP look five years from now, per se?

Krishnan:
Yeah, it’s a very pertinent question many people ask, including the donors that support us. I’m thankful that under the Pacific Insurance and Private Operation Program, pcap, we have support from the government of New Zealand, the government of Australia, the India UN Development Partnership, and even Luxembourg.

We have been able to crowd in several donors who are supporting the program, and I'm really thankful to all of them. We are already looking at an exit strategy or a sustainability plan. What does that look like? At least in markets that we have already started, Fiji, Vanuatu, and Tonga in the next three to five years, we are looking at the private sector taking over the delivery of these solutions that we are developing. Strong ownership by the government in terms of policy level changes that need to be made, not many, but need to be made to keep the market afloat or the market sustainable. Plus enough technical capacity being built in all the partners, meaning the insurance partners, the delivery partners, and even the central, for offering these solutions on a long term basis. Perhaps we might need to continue some of the technical assistance that we are providing, but I don't think we need to be as hands on as we are now in three to five years time. Then we can replicate this model and look at newer markets at that point in time.

Even now, from early next year onwards, we are going to be scoping in three other markets in the Pacific, while looking at other markets elsewhere. We have interest in the Caribbean. We are also talking to our colleagues in both Asia and Africa. I hope that by 2025 we should be having this implementation going within 10 markets within UNCDF’s domain.

David:
That is fantastic. Really again it's a topic that I personally think does not get enough light when we talk about the global conversation around combating climate change, but obviously it's critically important. Krishnan Narasimhan, program manager with climate disaster risk insurance with UNCDF.

Again, an incredibly insightful conversation. Thanks so much for your time.

Krishnan:
Thank you, David.