Development Assistance as Insurance
One of the most inventive financial instruments that has arisen in the past few years has been insurance schemes. Much like their structured fund counterparts, the insurance instrument is designed to provide market-rate insurance coverage with a tranched institutional design that leverages donor government-provided assistance in a public-private partnership. Within the past few years, insurance programs have specifically mitigated against climate change-related natural disasters. This has included a much more sophisticated methodology for monitoring and quantifying risks (Syroka and Wilcox 2006) and developing a regulatory system to administer the insurance plans (CISL 2015). The principle advantages of an insurance fund are its flexibility of institutional design and the efficiency in disbursement. First, and much like its structured fund counterparts, development institutions are free to design an insurance fund with a variety of variables. This includes the amount of donor government support, the size of the first-loss risk tranche, and the policies of investment diversification. The ability to adjust the amount of government subsidy gives the fund flexibility to ensure that insurances policies are additional and do not crowd out existing insurance companies. Moreover, the flexibility in designing insurance policies allows the insurance pool to provide separate policies to each country that vary in coverage scope and premium costs. Second, with regard to disbursement, an insurance fund clarifies the policies of payment prior to any natural disaster. In this way, the stipulation of requirements and payment amounts expedites the disbursement procedure to a matter of weeks or months, significantly less than the current strategy of gaining approval for project loans. This allows critical funds to quickly flow to the recipient government or other pre-approved recipient organizations, and, at least theoretically, eliminates the possibility of political interference in the process. Moreover, it reduces the dependence on public emergency assistance, which eliminates the recipient country from incurring large amounts of debt in a short period of time (Development Practitioner #55 2017).
Both the German government via BMZ and KfW have become ardent supporters of insurance schemes, particularly as a means to mitigate the impact of climate-related risks and create resilience in developing countries. In the past few years, KfW has participated in numerous insurance schemes. This has included a contribution to the Caribbean and Central American Catastrophe Risk Insurance Facility (CCRIF), the innovative AgroProtekt bad weather insurance program in Serbia, and the National Health Insurance Fund (NHIF) in Kenya. Collectively these total nearly
EUR 100 million (KfW 2016a, 2). However, the two most prominent funds are the African Risk Capacity Insurance Company (ARC) and the InsuResilience Investment Fund and InsuResilience Solutions Fund (ISF).
In ARC, KfW and BMZ provided the initial capitalization for the fund; for the ISF, KfW was the primary initiator. KfW has also been crucial in convincing other donors such as the UK and the UN to support commercialized forms of insurance schemes, favoring tranched equity stakes over grant elements (Development Practitioner #42 2016). Together, these two insurance funds have transformed the way that development institutions have interacted with the private insurance markets.