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Climate change and insurance

Climate change is one of the greatest challenges of this century and it disproportionately affects poor rural populations. Insurance for climate risks can strengthen the resilience of households and businesses and helps them protect their livelihoods.

8 May 2023

One of biggest challenges for rural populations is the high frequency of risks. Risks can affect individual households; or many households at once, as in the case of climate-related events, like drought, flood and pests. The long-term shifts in temperatures and weather patterns associated with climate change are exacerbating these risks. In fact, climate change is considered one of the greatest global challenges of the 21stcentury.

Climate risk insurance can help build resilience against these risks as part of a “holistic development approach” that allows households to bounce back quicker from shocks. It protects against the livelihood loss and financial impacts of climate-related events, such as natural disasters, crop failure and loss of property or its value.

It also helps to protect micro, small and medium-sized enterprises by transferring unpredictable risks that cannot be managed otherwise. By raising awareness and building capacity to use insurance against climate-related disasters and natural catastrophes, financial service providers can not only grow their portfolios but also help their clients protect their businesses.

Insurance can be an important tool for livelihood protection, guarding against business interruption and helping businesses and farm owners manage the risks associated with extreme weather events. In addition to financial losses, small business owners can protect the livelihoods of their workers, by ensuring resources are available to continue their business. It further helps businesses maintain relationships with customers, suppliers and other stakeholders. The effectiveness of insurance for businesses can be enhanced by including it into a broader overall risk management strategy. Further, instilling risk-reducing behaviour in the communities and linking insurance with disaster risk management measures can help increasing resilience to climate hazards.

While natural catastrophes disrupt the livelihoods of all people, they disproportionately affect women. They face more difficulty in repaying their loans, but they also need to manage household expenses that can lead to negative coping mechanisms, such as selling their business assets. Hence their needs need to be kept in mind while designing insurance for climate risks.

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