Perhaps the number one issue with any sovereign nation seeking a parametric insurance product to be folded into their integrated approach of disaster risk financing is the affordability of the premiums. With a clear understanding of this challenge, the Pacific Catastrophe Risk Insurance Company (PCRIC) team recently participated in an interview conducted by the Centre for Disaster Protection (the Centre) for a project aimed at establishing a sustainable and impactful future of premium financing support.
The subsidisation of insurance premiums has emerged as a significant tool in supporting Disaster Risk Financing (DRF) and has played a key role in considerable DRF funding initiatives. The Centre recognises that independent review and improved learning are essential to enhance the quality of DRF, particularly premium financing, which has the potential to enhance protection and help nations develop resilience against natural disasters.
However, it is vital for decision-makers to have a clear understanding of the potential compromises when designing, funding, and using premium subsidies. Despite the advantages of premium subsidisation, the Centre has reiterated the need for heightened accountability as its significance grows.
Premium subsidisation carries multiple risks that could likely undermine its goal to trigger and upscale of protection in the future. These includes diverging expectations between funders and recipients, as well as creating disincentives for risk management and adaptation. These risks can be mitigated through better informed decisions and clarity on the potential of premium support on the global policy stage.
Nevertheless, it is imperative to recognise the significant benefits of premium financing as a strategic tool to foster country ownership. PCRIC’s current approach involves a “hands-off” intervention, whereby an inception subsidy is provided with the expectation that in a few years, countries will have the ability to take ownership of their DRF tactics in the future.
Following the interview, the Centre will evaluate the present situation of premium financing support by engaging with other key decision-makers. Later this year, stakeholders will participate in closed-door discussion formats to explore a collaborative approach to this important route to create protection. The interviews and the discussions will feed into guidance materials for decision-makers and a policy note for the wider public.