Two years ago, index insurance products were non-existent across markets in Pacific Small Island Developing States.

Why does this matter? Because, in a region with chronically low rates of insurance coverage, index insurance, has immense potential to change the calculus.

The gap in coverage meant that some of the most vulnerable, small income earners in the community – such as farmers, micro businesses, female entrepreneurs – were not covered by any form of insurance.

Today, there are multiple index insurance products available in three Pacific markets – Fiji, Tonga, and Vanuatu - covering pressing risks such as excessive rainfall and tropical cyclones, with more to follow in the coming years due to the initial products’ utility.

The defining feature of index, or parametric, insurance is that payouts are triggered by predetermined indices, such as weather patterns, crop yields, or livestock mortality rates, not actual physical loss.

There is no need for loss assessments, and once the threshold for a disaster, such as rainfall or wind speed, is met, the payments are disbursed with relative quickness.

This innovative and inclusive approach to insurance has helped insure the traditionally uninsured in other developing nations of the world, but nothing was available in the Pacific for some time.

In countries like India and Nepal, weather and crop-based index insurance has been developed for farmers to better cope with the financial impacts of extreme weather events.

One would think, from the evidence available elsewhere, that the Pacific would be an ideal place for index insurance to thrive, given the region’s susceptibility to extreme weather events.

However, this was not the case until the UN Capital Development Fund’s (UNCDF) flagship Pacific Insurance and Climate Insurance Programme (PICAP) developed and launched the region’s first one on August 25, 2021, with two local insurers.

For the first time, in a country where only 15% of adults have access to insurance, climate-vulnerable farmers, fishers, market vendors and MSMEs had an additional financial coping tool against tropical cyclones and heavy rainfall, whereas previously any losses were simply irrecoverable.

Today’s insurance offerings are the outcomes of continuous review and improvements. These include two years of rigorous programming, cultivating partnerships, community outreach and visibility, capacity building and innovation.

Beneficiary feedback has been a crucial element of product development and enhancement. The feedback suggests that despite some teething issues, the products have been received well and there is demand for more.

As with any market, product improvement is an ongoing process, but the market for index insurance products has been catalyzed, with multiple possibilities for diversification and expansion.

To capture the key lessons from the inception phase of PICAP, the implementation team has put together the following report, titled ‘Strengthening Financial Resilience in the Pacific: 16 Lessons Learned from the Pacific Insurance and Climate Adaptation Programme.’

The Programme is jointly implemented by UNCDF, the UN University Institute for Environment and Human Security and UN Development Programme. The Programme is supported by the Governments of New Zealand, Australia, and Luxembourg.

The Fiji component is additionally supported by the India-UN Development Partnership Fund administered by the UN Office for South-South Cooperation.

Why this ‘lessons learned’ document?

The report provides a comprehensive and illuminating account of the key lessons learned from PICAP during its two-year inception phase 2021-2022.

The 16 key lessons provide a solid foundation for product improvement and development in the region and beyond.

As much as the report is a compilation of the Programme’s achievements, it also provides a meticulous account of where improvements are needed, confirming that there are challenges to be addressed in the expansion phase.

The ‘lessons learned’ report is in line with one of the key goals of the project since inception — identify and address any problems as early as possible.

This report sheds light on the significant body of work that has gone into building a sustainable framework for this innovative and crucial approach to addressing the unique challenges faced by the Pacific region including how climate risk insurance can be positioned as a tool to address and recover ‘loss and damage.’

What are three major findings of the report?

Partnerships: For index insurance to reach its full potential in the Pacific, partnerships between the development, private and public sectors will need to be strengthened. Given that the products are market-based, it is recommended that private insurers take greater ownership of its role as underwriters now that a strong foundation has been laid.

Innovation: There is considerable room for creativity with index insurance that traditional products just do not offer. The report recommends harnessing this competitive advantage to develop new products, such as drought or crop index insurance, based on evidence and demand.

Sustainability: The report recommends all stakeholders, including private insurers, government, and aggregator partners, take ownership of their respective roles in the interest of sustainability. Clear and well-defined roles will also reduce confusion among customers and lead to greater awareness and literacy of insurance products.

Who is the key audience?
The report is primarily aimed at policymakers, central banks, and development agencies in the region, besides the programme partners.

UNCDF is strategically expanding its climate and disaster risk financing and insurance portfolio in select African and Asian countries, and there is important information in the report to inform stakeholders in these markets as well.

There are important nuggets of information for academics and educators, journalists, researchers, the private and NGO sector, entrepreneurs, foreign investors, the general public and more.