The introduction of parametric insurance in Tonga last year is already having a positive impact on the mindset of beneficiaries, as well as the country’s overall financial services ecosystem.

Some of the impacts were intended, while others have come as somewhat of a surprise. One intended consequence has come in the form of customers using parametric insurance to improve their creditworthiness and access loan products.

These developments confirm the potential of parametric insurance to both support disaster risk reduction efforts in the country and catalyse innovation within the industry.

The launch of the novel product added to the disaster risk financing and response toolkit of Tonga’s grassroots communities, especially those that are highly exposed to climate shocks and have little financial means to cope.

The Tonga Development Bank (TDB) is spearheading efforts in the country to onboard and educate famers, fishers and MSME owners who stand to benefit from increased financial protection against climate shocks.

According to TBD CEO, Emeline Tuita, parametric insurance is helping spread the organisation’s credit risk, while the regular servicing of premiums is helping customers qualify for loan products for business growth and development.

“This type of parametric insurance is quite affordable and fits the needs of people because the trigger of this product is something that everyone is familiar with,” Ms Tuita said.

As the Pacific’s November-to-April cyclone season approaches, efforts are being redoubled in Tonga to increase the number of beneficiaries to close the protection gap in the country.

The Product

Through its Pacific Insurance and Climate Adaptation Programme (PICAP), the UN Capital Development Fund (UNCDF) partnered with TDB and regional insurer, Tower Insurance, to introduce the product in the tropical cyclone-prone country.

The aim was to protect the livelihoods of climate-vulnerable communities by reducing the financial risks associated with weather uncertainty by making available funds for recovery shortly after extreme weather events

The parametric microinsurance provides cover against tropical cyclones, Category 1 to 5 with pay-outs linked to pre-defined windspeed triggers. Administrative costs are reduced as loss assessments are dispensed with and insurers can pay directly into the bank account of customers.

“Tonga Development Bank has been our trusted partner since 2017 when we worked together to launch the 'Ave Paanga Pau' remittance product, since then our partnership has blossomed to cover other innovative projects including alternative credit scoring for borrowers, parametric microinsurance and women MSME credit guarantee as well as Covid-19 response and the volcanic eruption responses support projects and our confidence in TDB has been fully justified with the results," said Krishnan Narasimhan, UNCDF's Lead Specialist and Programme Manager for Climate Disaster Risk Financing and Insurance.

For the first time, climate-vulnerable communities in one of the most disaster-prone countries in the world had access to pre-arranged financing in the form of insurance coverage against tropical cyclones.

Often on the proverbial frontlines of climate change, a quick injection of funds to these communities through insurance following a climate shock could revitalise recovery and build long-term financial resilience.

One year after the product’s introduction, Ms Tuita said parametric insurance has instilled “a sense of confidence and security” and is changing financial behaviors for the better in existing and new customers alike.

“The way it [parametric insurance] works is ideal for the Kingdom because we have accepted the fact that every now and then there will be cyclones,” she added.

“What the product does is supports people’s comfort and allows them to consider using the banks credit facility because there is something else that can support recovery if something happens.”

Confidence Booster

Despite only 13% of Tongans having access to any form of insurance, the uptake of what is the country’s first parametric product has been encouraging for TDB.

The CEO pointed to affordability, the quick payout of claims without the need to verify losses and easy registration process as key factors that have had a confidence-boosting effect on the beneficiaries.

“Parametric insurance is growing in terms of the sense of security, or a sense of care, that people suddenly feel about something that they know happens frequently [tropical cyclones], particularly with the vulnerability that we have to natural disasters,” Ms Tuita said.

And with the cyclone season approaching in November, and Tower Insurance coming on board as the insurance provider, TDB is optimistic that those numbers will increase even further.

‘Dual hatting’

As the Tongan Government’s principal development finance arm since 1977, TDB’s core business involves providing banking services, including credit, to MSMEs.

The bank’s prioritizes projects that advance economic and social progress in sectors such as agriculture, fisheries, and tourism and, increasingly, health, education, and energy.

According to Ms Tuita, the bank had a “dual hatting” development and commercial function and must balance its development objectives with profit imperatives.

UNCDF partnered with TDB to deliver parametric insurance to a wide number of climate-vulnerable people, given the institution’s influence and reach in the community.

Increasingly, however, many parametric insurance customers are using the product as a springboard to access TDB’s other range of services.

While the insurance product has not been integrated with TDB’s lending schemes, such as in Senegal or Bangladesh, the regular servicing of premiums by the policy holders is increasing their creditworthiness.

In this way, “parametric insurance allows us to augment current operations” and “spread the risk even more,” the CEO said.

“We are developing the beneficiaries from the basic platform [parametric insurance] and the intention is to grow them, not to keep them there,” Ms Tuita added.

TDB-UNCDF Partnership

The CEO hailed the partnership with UNCDF as ‘essential’ for the bank to enter the insurance industry and enhance its own product offerings.

“The UNCDF programme allows us to create a bridge for them [beneficiaries], and I cannot overemphasize their significance to the economy because they're at the backbone of development,” she added.

Parametric insurance’s potential as a financial tool that can mitigate the financial losses incurred from climate shocks has been established in Tonga.

It speeds up claim payments, dispenses with loss assessments and eliminates the need to visit an insurance branch to collect the payouts.

With the market catalysed, UNCDF and TDB aim to build on the existing partnership to scale the product and ensure Tonga’s most vulnerable are well-equipped to cope with and recover from the climate shocks.