Parametric insurance 'the strategic thing to do' amid aid spending squeeze: UK's FCDO

By Henry Gale

July 1 - (The Insurer) - Parametric risk transfer instruments can help maximise the impact of international development spending as budgets tighten, according to discussions held at the Natural Disaster Fund (NDF) event during London Climate Action Week.

The growing impact of climate change and natural disasters on local and national economies in the Global South is "systemic and fundamental," Melinda Bohannon, director general, humanitarian and development at the UK's Foreign, Commonwealth and Development Office (FCDO) said at the event on June 27.

"So when we think about using tools such as this, parametric insurance and reinsurance, to work through local providers, it isn't only the smart thing to do financially, but it's also deeply the strategic thing to do in terms of how we want to work with partner countries to stabilise their economies, stabilise their societies," Bohannon continued.

Bohannon said official development assistance (ODA) spending would always be "a drop in the ocean" compared to the challenges of delivering sustainable development goals and tackling climate change.

"Now, ODA is only going to become more and more scarce," she added.

Some of the top contributors to foreign aid have recently cut back on development spending. The Trump administration said in March it had cancelled more than 80% of all programs at the U.S. Agency for International Development following a six-week review. In February, the UK government announced a 40% cut to its aid budget by 2027, while France, Germany, Canada and Switzerland have also made plans to reduce development spending.

"The licence to send free money overseas on the part of our electorates is decreasing rapidly, and so we need to really think about how we use every single pound," Bohannon said. "The best way to use that marginal pound is to think about the leverage, think about the system effect, and think about ways in which we can work, particularly through private investors, private capital mobilisation, the insurance sector, to solve problems which, frankly, could never be solved through a traditional development approach alone."

"And so we want and need organisations," she said, naming the NDF as an example, "to expand markets, to think about the future of climate impacts and disaster risk and bring more partners along in this space, to pursue that objective of leverage and coverage and maximise the impact of every pound spent."

Traditionally associated with debt, financial leverage refers to arrangements where an organisation can use a relatively small amount of their own resources to access a larger pool of funds. In this case, aid agencies pay parametric insurance premiums to increase the funding they have available to respond to certain disasters.

Geraldine O'Callaghan, director of the World Food Programme (WFP) Global Office London, also mentioned the importance of private capital in building leverage amid funding challenges.

"We are facing a 40% reduction in public funding, which leads to these really interesting discussions... about how do we work more creatively in terms of leveraging in the private sector and philanthropists," O'Callaghan said.

"We as an organisation and the humanitarian system in general are very keen to move out of a doom cycle of reactive, expensive and actually increasingly dangerous responses and move much more upstream, and we can do that in relation to climate shocks," she said.

"If you act early, it's much more cost-effective and impactful than acting after a hurricane or a cyclone. So I think there's a huge amount of passion and energy within our organisation to make that shift."

WFP is one of the largest purchasers of microinsurance, O'Callaghan said, and it has purchased parametric insurance on a macro basis since 2019. According to its recent disaster risk financing report, WFP enabled $361 million of coverage in 2024, much of which is parametric macro- and microinsurance.