How to avoid the pitfalls of climate insurance?

30 November 2023

Written by: Eliot Pernet, Public Sector Consultant,

Ideas from a new flood insurance and adaptation project in Togo

When heavy rain falls on an African city, the same scenario repeats itself. First, under-sized sewage systems, often clogged with plastic waste, overflow and flood the surrounding areas. Then, water trickles down to the lowest points of the towns, where the poorest people often live in precarious housing, flooding their homes and neighborhoods. Almost every year, during the rainy season(s), hundreds of thousands of people in Dakar, Abidjan, Lomé, Lagos, Accra, Kinshasa, Cairo, Kartoum and Mogadiscio find their feet in water. This list could go on, and also include medium-sized towns that face the same problem in almost total invisibility.

The fight against flooding has no miracle formula. Improving sanitation, raising residents’ awareness of good waste management practices, building protective structures: on paper, anything goes. But it’s important to know where to start, especially in the context of a drastically limited municipal budget. 


Three cities, 700,000 inhabitants and a megaphone


AXA Climate, Howden and the NGO PADIE in Togo, to be co-financed by the InsuResilience Solutions Fund (ISF), have joined forces to launch an innovative flood resilience project for three municipalities in Togo: Kpalimé, a medium-sized town in southern Togo, and Golfe 1 and Golfe 7, which are two major districts of the capital city Lomé. These towns represent over 700,000 inhabitants, including 100,000 for Kpalimé, which is fortunate to have Winny Dogbatse as its mayor.

Mayor Dogbatse, indeed, is the project sponsor and megaphone. In 2022, he took the lead of the Covenant of Mayors of Sub-Saharan Africa (CoM-SSA), a network of more than 360 cities across Sub-Saharan Africa engaged for climate adaptation and resilience. Since then, he represents the voice of African cities, including intermediate cities, at various international climate events, including COPs. After more than one year of work, he brought together the three cities, the Insuresilience Solutions Fund, AXA Climate, Howden and PADIE at COP to sign the project financing agreement at the Togo Pavilion, in the presence of numerous CoM-SSA mayors and Togo’s Minister of the Environment.

Should climate insurance be more subsidized?

Combining insurance and adaptation to help cities cope with floods

The innovation of the project consists in combining insurance and adaptation, with three main aims:

Firstly, the project will improve risk knowledge among local decision-makers and technical staff, by accurately mapping the risk of flooding in the three cities, at the resolution of 5m2, and based on different climate change scenarios.

Secondly, the project will inform on possible adaptation strategies, by co-designing with political leaders in each city the “Top 5” possible adaptation measures, as concrete as possible, and whose benefit/cost ratio will be rigorously tested. A roundtable with development banks and agencies will be organized to see which of these adaptation strategies could be turned into actual investment opportunities.

Finally, to ease flood recovery, a large-scale parametric insurance mechanism will be co-created with the decision-makers and the citizens. Today, it is impossible for Kpalimé, Golfe 1 and Golfe 7 to keep aside enough money to cope with a major flood. Insurance is a way of purchasing a hypothetical financial capacity to mobilize in times of need. The future insurance product, which will likely be at least partly parametric, will allow cities to receive a quick emergency compensation to carry out urgent expenditure in case of a major flood (eg. rehabilitation of public assets, pumping of water, distribution of food kits, etc.). The insurance product will be made public, allowing all (re)insurers to bid – which will create competition and drive premium price down.

Overall, this project aims to help the cities reduce their risk of flood and better cope with the risk that cannot be reduced. That said, insurance is far from being a miracle solution in itself – and it’s an insurer who says it. The launch of this project is a good occasion to do an exercise of self-critique and to brainstorm on possible improvements of such insurance programs. Ready? 

Climate insurance

What are the “traps” of climate insurance?

First of all, let’s face it, climate insurance can be expensive. The total cost of a reasonably protective climate insurance scheme is often well beyond the financial capacity of the beneficiary countries or towns. Purchasing insurance is likely to require delicate trade-offs with other, more directly useful expenditure in a context where every expense is counted. Opting for a small insurance coverage (i.e. for a lower sum insured or an insurance only triggering for the most extreme events) could be an option in theory, but doesn’t make much sense in practice as most of the premium would be used to cover to the high frictional costs required to structure such insurance deals.

What’s more, climate insurance is often not in the “software” of political decision-makers. This is natural: public officials prefer to act through visible measures rather than invisible ones. A typical climate insurance contract (for floods, for example) would trigger a significant payment on average every 15 or 30 years, which doesn’t match a much shorter election cycle. In other words, it is risky and counter-intuitive for a politician to commit to a major expense with a high probability of never reaping any political benefit out of it.

Another problem is that, usually, most of the premium is not collected by local insurers, as only major international reinsurers have the financial capacity to compensate major losses. This creates a financial flow from South to North, which undermines the initial development approach.


Should climate insurance be more subsidized?


Historically, donors have been reluctant to heavily subsidize insurance premiums indefinitely, mostly because they wanted to give countries a sense of responsibility and encourage them to adapt. This approach is evolving with the awareness that the best adaptation efforts are often not enough in the face of increased climate risks and take time to be put in place, and that low-income countries are not responsible for these increased climate risks. One figure: Somalia (heavily flooded this Autumn) has emitted roughly as much carbon dioxide since independence in 1960 as Americans have in the past two and a half days.

Today, we believe that premiums should be heavily subsidized whenever insurance is the most cost efficient and relevant tool to protect low-income countries. Sometimes, it is not: the risk can be too big, too frequent, or too certain. But sometimes it is, especially for hazards requiring high liquidity needs and to which a probability of occurrence can be measured. In these cases, donors should not hesitate to bear most premium costs (up to 70, 80, even 90%). In this respect, the announcement of the Global Shield at COP27 – now endowed with $270 million and with a real intention to subsidize insurance premiums over time for the most vulnerable countries – is a real step forward.

Which commitments do we make at the project level?


Our organizations are well aware of climate insurance pitfalls and want to avoid them. We thus created five golden rules for our new project in Kpalimé, Golfe 1 and Golfe 7:

Golden Rule #1: The cities should not bear most of the premium cost!

This is why Howden will finance $100,000 in insurance premiums for the first year of the program, and possibly beyond. ISF is also expected to fund $150,000 in premiums for the first year of the scheme. We expect that the cities will cover less than a third of total premium costs.

Golden Rule #2: The local market must grow!

As soon as the project begins, local insurers in Togo will be met to gauge their interest in taking part in the program, train them in climate insurance, and think about a suitable way of increasing the amount of premiums they will collect over time and the capacity they provide, a key element for the sustainability of the program.

Golden Rule #3: Everything must be decided locally!

Focus groups with citizens and technical and political leaders in each city will be organized to prioritize the areas and public assets to be protected, as well as the contingency measures to be implemented when an insurance payment is received.

Golden Rule #4: Let’s open the insurance “black box”!

Technical and political managers will be trained in-depth in climate insurance, not only through a series of workshop, but by sharing with them transparent insurance product and pricing simulators. These user-friendly, non-technical tools will enable them to test different combinations of sum insured / premium / trigger frequency / insured zones, making it easier to understand the trade-offs between cost and coverage at the heart of insurance. This will enable to co-design a product that precisely matches the cities’ priorities.

Golden Rule #5: Insurance is only one tool among others!

The complementarity of insurance with other financial risk management solutions will be explored, including budget reallocations for frequent floods and building up municipal reserve funds for medium floods, to see how insurance could slot into a broader financial risk management strategy.

This project will take over a year to complete and will undoubtedly have many surprises. We will be reporting on them regularly to share our experience with the community of risk experts committed to climate resilience. Stay tuned!

For more information, contact Eliot Pernet, Public Sector Consultant,

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