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August 23, 2024
Building resilience and closing the protection gap requires the insurance industry to collaborate with other organizations to address the true nature and scale of risks involved. Public-private partnership (PPP) is an important mechanism for this, enabling insurers to partner with governments, international organizations and other stakeholders and leverage their risk management expertise, data analytics capabilities and financial tools to help develop robust resilience strategies.
These partnerships are often essential as they bring together a diverse range of capabilities to create solutions private or public sector actors may struggle to deliver on their own.
Why are PPPs so important?
The scale of the protection gap is enormous, amounting to hundreds of billions of US dollars. There is no way public funds alone can support the bulk of the financing needs.
To support these needs, you must align interests between public policy and investments into climate adaptation and resilience to protect the poor and the most vulnerable, SMEs, industries and the economy as a whole. You must also align interests with private sector markets because you need their capital and expertise. You also need incentives and insurance subsidies. In other words, you need PPP, which is the only way to achieve scale in a sustainable manner.
There are many examples of successful schemes. One exemplary PPP is the African Risk Capacity (ARC) program, which covers more than 15 African countries. This initiative aligns public sector clients with private insurance and reinsurance markets to benefit food insecurity-affected populations. By offering cost-efficient risk transfer solutions, the ARC program demonstrates the tangible benefits and replicable lessons of effective PPPs.
Structuring effective PPPs
There are various steps involved to build the foundations of a PPP and that contribute to making them sustainable and relevant and scalable over time.
Building effective PPPs requires strong governance with clear responsibilities between public and private partners. Ensuring that PPP structures align with national strategies and policies around resilience, climate adaptation and insurance sector development is crucial. These different dimensions cut across physical resilience, financial resilience and social resilience.
The next step is to match demand and supply – making sure the PPP products reflect demand from the target beneficiaries and government authorities, while also aligning with insurance markets’ profitability objectives. As an example, it could be a national insurance programme that covers households against the risk of flood, or an emergency response cost financing instrument which would provide quick liquidity to the government in the aftermath of a disaster.
It’s critical beneficiaries, policyholders or governments can afford the premium over time. This often calls for a form of subsidisation or a very well-targeted product that doesn’t attach too low for very frequent events (which would be costly), for instance, targeting mid- to high-severity emergencies that occur once every five to 10 years or more.
Successful PPPs also require a framework for capacity development and knowledge-sharing, ensuring all stakeholders understand the risk transfer mechanisms. Continuous performance monitoring and evaluation are essential to adapt to changing demands and evolving risk environments. Transparency, regulation, value for money, and clear communication are key to ensuring insurance payouts reach beneficiaries as expected. Governments and regulators are also essential in designing policies, setting and monitoring rates and limits, and ensuring the programme is impactful, profitable and sustainable for all parties.
SEADRIF, the Southeast Asia Disaster Risk Insurance Facility, is a regional ASEAN+3 initiative supported by the World Bank. This is firstly a forum for countries significantly affected by various catastrophe events, including floods. Member countries can share experience, knowledge, expertise on the management of flood-related losses and emergencies.
The facility also offers a risk transfer product and acts as a regional risk pool. Member countries can also buy an insurance protection product which will finance their government’s response in the aftermath of an eligible event. Pooling these risks between countries reduces the cost of a standalone insurance policy by more than 30%, which is another big incentive for countries to join the pool.
SEADRIF is a political-technical initiative addressing resilience through national policymakers, regulators, as well as insurance and reinsurance markets. This includes global reinsurance markets, which are needed to provide the bulk of capacity for these highly volatile and unpredictable risks.
Aligning PPP with underwriting
The primary objective for capacity providers of participating in PPPs is sustainable profitability. That’s only achievable if the pricing is right and if there are the right incentives for the government to engage (e.g. subsidies or control over the type of insurance product) and also the beneficiaries – the policyholders – who need to ‘own’ or manage their share of the risk. This may be achieved using a combination of government reserves or policyholder retentions, together with the cost-efficient use of insurance for higher severity events.
The lack of scale of some PPPs in developing countries may not make them relevant for large global organizations which are typically dealing with programmes of hundreds of millions of dollars of limits. Getting the attention and interest of these organisations is a challenge and requires an emphasis on the development impact of these schemes.
Another challenge is data adequacy or availability, which might not always be up to market standards. As well as continuing to advocate for cost-efficiency and financial sustainability, leveraging advanced data analytics, including satellite imagery, can enhance the efficiency and scalability of these schemes.
In the face of compounding risks like climate change and political instability, underwriting and product development must become less siloed to address the scale of the issue at stake. PPP schemes that consider resilience holistically, addressing both direct economic damage and indirect losses, are essential for closing the protection gap, ensuring effective financial responses.