Mutual understanding key to insurer–development bank collaboration on climate risk: report

By Henry Gale

June 17 - (The Insurer) - More insurance industry engagement in development finance lending could strengthen climate resilience, but better mutual understanding is required, according to a report from the Insurance Development Forum (IDF), French Development Agency and Marsh McLennan.

"Insurers and lenders must collaborate more; the path is proven, the lessons are clear, and the opportunity is now," IDF secretary general Ekhosuehi Iyahen said.

The report describes several examples of insurance being used to support large-scale financing programs in the Global South.

These include parametric insurance-backed loans for a $350 million West African Development Bank loan portfolio; a parametric earthquake cover for the construction of a hydropower project in Nepal to meet lenders' insurance requirements; and a World Bank-funded project to provide East African farmers with savings, credit and parametric drought insurance.

Challenges hindering the adoption of innovative risk financing instruments include risks being underestimated or not fully controlled, lack of funding for premiums, a mismatch between project timelines and insurance sales cycles, and a lack of common language for complex products, the report said.

"The insurance industry and lenders should work closely to increase their understanding of each other's products and terminology," it recommended, noting that terms such as "capacity" mean different things depending on context and suggesting that insurers avoid saying "parametric insurance" in favour of lending-focused terms like "liquidity instrument".

"It is critical that the insurance industry, lenders and recipients look to educate each other throughout the project cycle," it added.

The report also recommended that lenders involve the insurance industry early within loan processes to incorporate risk management measures and start work on tailoring solutions, while insurers needed to embrace a longer sales cycle than normal.

Insurance solutions should be perceived as enablers of growth, giving policyholders greater understanding of their exposure and lenders comfort that climate risks will not affect their return on investment, the report said.

Céline Boulay, climate risk and insurance expert at the French Development Agency, said: "To unlock climate resilience at scale, we must see risk transfer not as a cost, but as smart investment protection."