How can insurance promote risk management and resilience in Indonesia?
Indonesia is located in a region highly vulnerable to the impacts of recurring extreme events like floods and droughts as well as long-term changes brought on by sea level rise, changes in rainfall patterns, and increasing temperatures.
Furthermore, high population density in hazard prone areas, coupled with strong dependence on the country’s natural resource base, make Indonesia highly vulnerable to the projected climate variability and climate change. The livelihood of smallholder farmers, who represent most of the agriculture workforce, is a correlated challenge and remains low due to limited access to capital, knowledge of proper agricultural practices, and farming risk management tools, among other reasons, leaving them highly exposed and vulnerable to climate risk related shocks.
Between 2016 and 2019, the government of Indonesia offered to address part of this issue through an insurance product for rice farmers, with damage being estimated by loss adjusters on an individual field level. The compensation processes were complex, leading to delayed claim processes and only reaching 4% of targeted rice fields.
This new insurance project is expected to make a big difference for smallholder farmers. Parametric insurance will give smallholder farmers rapid access to funding in the case of severe drought or excessive rainfall, without the need for an individual field-level assessment of the damage. The insurance will be bundled with input loans and provide access to inputs and off-takers through agents as last-mile delivery, thanks to microfinance institutions and partnering banks.
The project will start in 8 highly vulnerable provinces, has the potential to be upscaled to cover more farmers in the near future and will also support the transformation to climate-smart and resilient production technologies locally.
Which players are involved in the project?The project will be funded by the InsuResilience Solutions Fund (ISF), managed by the Frankfurt School of Finance and Management (FS), and financed by the KfW Development Bank on behalf of the German government. It will be led by PT Mandiri AXA General, with support from AXA Emerging Customers, an inclusive insurance center of expertise, in partnership with AXA Climate, and the smallholder farmer advisory and support organizations PT Jiva Agriculture and Yayasan Agri Sustineri Indonesia.
Antoine Denoix, CEO of AXA Climate, said: “While the COP15 on biodiversity aims to adopt a new global strategic framework on biodiversity, the biggest threat to biodiversity still arises from converting natural habitats to agriculture and farming land. Smallholder farmers feed 2 out of every 3 people on the planet, yet they only receive 1.7% of climate finance. Addressing the challenge of promoting risk management and resilience among them is becoming increasingly urgent. Today, this project perfectly illustrates how parametric insurance can contribute to this pressing challenge.”
Garance Wattez-Richard, CEO of AXA Emerging Customers, said: “Those that are the most impacted by climate change are often the most vulnerable. It is essential that we break down the silos between “E” and “S” and projects like this are essential in reconciling the end of the month with the end of the world. Moreover, given the depth of the challenge, a multistakeholder approach such as the one we are adopting is necessary in order to combine our assets to protect smallholder farmers against climate change.”