The World Bank’s Global Index Insurance Facility (GIIF) and African Reinsurance Corporation (Africa Re) have teamed up to provide a facility that will help to cap insurers loss ratios on weather index-insurance schemes in Africa. Index-insurance, or index based insurance, typically involves protecting policyholders from weather and climate impacts, using indices based on observed and recorded weather data to provide the payout trigger and parameters. These parametric insurance schemes have proliferated around Africa and Asia, as a way to bring microinsurance coverage to poorer communities. However the insurers selling these products have struggled with controlling their loss ratios, as triggers are set at levels to provide the most benefit to the covered communities. The World Bank Group’s GIIF and Africa Re have signed an agreement that will see them work together to establish a risk-sharing facility, which it says will take the form of an experience account, designed to “decrease premium levels for insured farmers and encourage local companies to create affordable insurance products.” It seems that the GIIF will share a portion of losses with Africa Re, providing the reinsurance capacity, with the loss experience account informing future premium needs as well as providing a mechanism to cap the loss ratio on the subject index-insurance business. The World Bank explains that the facility established with Africa Re’s reinsurance assistance will reimburse insurers who’s loss ratio is above 75 percent across an annual period, reducing the cost borne by primary insurers. The World Bank hopes that by having a cap to their loss ratios insurers operating index-insurance schemes will be better incentivised to invest more in the projects, increasing the capacity they set aside for them and ultimately helping to increase the number of agricultural policyholders covered. Meanwhile insured farmers will benefit from a reduction in premium prices and also receive their payouts faster because of a pre-agreed pricing rule, which will result in quicker claims settlement. “Agriculture provides up to 60 percent of all jobs on the continent, but African farmers need greater access to insurance mechanisms to develop resilience to external shocks and protect their livelihoods,” commented Makhtar Diop, World Bank Vice President for Africa. Alejandro Alvarez de la Campa, Practice Manager, Finance and Markets Global Practice, the World Bank Group, added; “It is the poor and vulnerable who are the most affected by climate change and natural disasters, and insurance is a critical tool to help protect their livelihoods. The large and complex nature of climate change requires us to work closely with our partners, such as Africa Re, to provide access to finance to those communities that need it the most.” “We are excited about the prospect of this innovative solution to give more confidence to African insurers who wish to underwrite the agriculture class of business. It would enhance the development of agriculture and reach out to farmers, who represent over 60 percent of the labor force in sub-Saharan Africa, within the next decade,” Africa Re General Managing Director and CEO Corneille Karekezi said. The main goal from this initiative is to ensure the “continuation and expansion of index insurance as a risk management tool,” the World Bank said. Index insurance, particularly weather index based, is seen as an essential way to support agriculture in emerging or developing regions of the world, as well as to offset the impacts of climate factors such as drought. For farmers the importance of being able to re-plant crops after weather impacts their growing cycle cannot be understated and insurance provides a mechanism through which continuity can be encouraged, ultimately providing the kind of financial safety net that can improve and even save lives. By encouraging risk sharing in order to cap loss ratios, rather like an excess of loss reinsurance agreement might transfer losses above a pre-defined point, the insurers operating weather index insurance schemes can provide greater certainty in terms of policy pricing as well, which is important to ensure policyholders remain policyholders even after a claim. The real goal here will be to encourage even greater scale in the roll-out of parametric and weather index insurance, as it is only through scale that economies will be found, as insurers gain benefits from greater diversification and larger pools of risk, while the reinsurance and capital markets gain a greater appetite to share in the risk coming from these schemes. With the G-7 Climate Risk Insurance Initiative (InsuResilience) having a stated goal of getting 400 million poor and vulnerable people insured against climate risk (directly and indirectly) by 2020, the roll-out of weather index and parametric insurance schemes will need to accelerate and facilities such as this can only help. Source - http://www.artemis.bm