EU to support Global Index Insurance Facility

The European Commission has provided funding to support the Global Index Insurance Facility. The facility aims to help countries mitigate catastrophe and weather risks through the use of index-based insurance solutions. The GIIF is a WorldBank initiative implemented by the International Finance Corporation.

This is further evidence of alternative risk techniques becoming mainstream as they prove their use in microfinance for developing nations.

Full press release below:

EU supports global insurance fund to help ACP countries ‘weather future storms’ from climate change

The European Commission (EC) has provided €24.5 million in funding as the first donor for the Global Index Insurance Facility (GIIF). The GIIF aims to mitigate weather and catastrophic risks in African, Caribbean and Pacific countries through the application of index insurance. Index insurance solutions guarantee beneficiaries, including smallholders, rapid payments following natural disasters once a pre-determined index (e.g. centimetres of rainfall, variation of temperature, wind-speed and seismic activity on Richter scale) has been triggered. Their application will allow ACP countries to mitigate the increasing risks from natural hazards due to climate change and to reduce the vulnerability of their populations. The GIIF will be implemented by the International Finance Corporation (IFC), a member of the World Bank Group.

Louis Michel, Commissioner for Development and Humanitarian Aid, emphasised the benefits this new insurance facility will bring to ACP countries: “In times of climate change when developing countries are ever more exposed to weather-related threats the Global Index Insurance Facility will help the population in ACP countries to reduce their vulnerability to external shocks and natural disasters and thereby support their livelihoods,” he said. He added that the support to the GIIF fits in the increasing emphasis given to disaster preparedness in the EU’s development policy.

Lars Thunell, CEO and Executive Vice President of IFC, said: “The Global Index Insurance Facility will promote the development of innovative insurance solutions to address weather and catastrophic risks that disproportionately affect people in low-income and rural households in developing countries. We welcome the European Commission’s support for this important initiative.”

Economic growth prospects of developing countries are seriously hindered by natural disasters and other exogenous shocks, which create both short and longer-term physical and financial distress. Insurance applications are increasingly recognised as effective instruments in reducing risks related to natural disasters like droughts, floods, cyclones and earthquakes.

The GIIF will help to develop indexed insurance solutions, allowing fast and objective pay-out for a range of clients, including smallholders, and support capacity building on index insurance in ACP countries.

In developing countries, traditional insurance solutions have met with little success to cover risks from natural disasters. As compared to conventional schemes, index insurance has the advantage of not being based on direct damage assessment. Instead compensations are paid out for losses that result from the variation of pre-defined indices. Once a pre-defined threshold is reached, payments will be made. As this is easily verifiable, disputes will normally not occur. This helps to lower transaction costs and to speed up pay-outs to the affected populations.

By covering part of the financial risks related to disasters, insurance can assist in covering part of the financial needs, thereby preserving livelihoods and preventing a plunge into poverty after a catastrophe has struck.

The signing of the agreement providing €24.5 million to the GIIF Trust Fund managed by the IFC, followed the conclusion of a Financing Agreement between the EC and the ACP Group of States on 21 December 2007. The project will be implemented over 60 months.