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🧑‍🏫 When we were in elementary school and learning the difference between similar sounding words, we always got hung up on the trio of assure, ensure and insure. Confusing? Forsure.

📖 Thankfully, Grammarly has framed this very simply for us in this blog:

1. To assure someone is to remove someone’s doubts

2. To ensure something it to make sure it happens—to guarantee it

3. To insure something or someone is to cover it with an insurance policy

👌 In this issue, we are going to focus on #3, particularly how it relates to the climate! While insurance is typically quite a dry subject, we ensure you that it will be a fascinating read and assure you that we’ve got the perfect interviewee this week to cap it all off. Let’s jump in!

🤔 What’s the deal with climate insurance?

Note: all following $ figures are in USD

As those who live in Southeast Asia (SEA) already know, the region is a very natural disaster prone area.

So what are some of these natural disasters?

5 out of these 8 natural disasters are directly linked to climate change:

1. Landslides 🪨

2. Cyclones 🌀

3. Floods 🌊

4. Wildfires 🔥

5. Droughts 🏜️

➕ If we sum all of the economic exposure from natural disasters that are linked to climate change, we get to $6.8 trillion, which is around 56% of the total economic exposure to natural disasters in SEA. Beyond economic damage, thousands of fatalities and millions of lives are affected by these phenomena annually.

🌩️ As we discussed in both last week’s issue on climate venture capital, as well as our climate disaster issue last year, climate change leads to an increase in the frequency and intensity of extreme weather events, such as storms, droughts and floods.

📈 In SEA, the total average annual losses from the current disaster riskscape is estimated to be around $91 billion. This jumps up to $108 billion under the moderate climate change scenario (left side of the image above), and $127 billion under the worst-case climate change scenario (right side of the image above) (UNESCAP, 2022). The below infographic provides a good overview of the pathways through which these socioeconomic impacts occur.

🥵 In the above infographic, the “Emerging Asia” category lists most of the SEA countries, which depicts these countries as witnessing a high increase in the working hours limited by heat. Such impacts are especially felt by lower income members of Southeast Asian society, such as construction workers and smallholder farmers, all of whom are already more vulnerable to poverty to begin with.

🪙 Climate insurance is a way of adapting to this by providing financial protection against risks arising due to the aforementioned extreme weather events (InsuResilience, 2022). However, insurance penetration is still very low: since 1980, there have been around $1.8 trillion worth of losses due to weather-related natural disasters in Asia-Pacific, yet only 10% of these have been insured (Munich RE, 2023). More generally, less than 10% of all climate finance globally goes to adaptation efforts, with global adaptation finance needs currently 10 to 18 times greater than actual public adaptation finance flows (UNEP, 2022).

So what are some examples of climate insurance products?

🔢 One popular product structure is parametric insurance (AKA index insurance). In a nutshell, it uses a transparent and well-defined index that is correlated with the outcome that’s being insured in order to generate payouts. The classic example is using a rainfall index to insure against a farmer’s loss in agricultural yield due to lower-than-expected rainfall, which tends to work well since rainfall tends to be heavily correlated with crop yields. Later on, we have an interview with an InsurTech startup that offers exactly this type of insurance to farmers.

😷 Another unique example of parametric insurance is the so-called HazeShield product from Swiss Re that protects Singapore-based companies against seasonal air pollution caused by burning peatlands in Indonesia—which you may recall from our land use issue is a major climate problem. The product is tied to a pollutant standard index that’s measured by Singapore’s National Environmental Agency (Eco-Business, 2018).

🪸 These insurance products can certainly get quite exotic! Swiss Re also worked with The Nature Conservancy to pilot an insurance product to protect coral reefs in Latin America against hurricanes based on windspeed and wave strength parameters (Swiss Re Foundation, 2024); this has inspired others to launch similar products in Asia as well, such as ADB’s $3.8 million support for coral reef insurance across 4 Southeast Asia & Pacific countries (ADB, 2022) and RISCO, which is currently piloting in Philippines & Vietnam (Climate Policy Initiative, 2021).

📉 One of the things to look out for with regards to such parametric products is basis risk. Basis risk is effectively the lack of correlation between the index and the outcome that’s beyond insured. For instance, let’s say that there’s abundant rainfall during a particular insured period, yet agricultural yields are still low. In this case the farmer would not get a payout in spite of the fact that their yields were low because the rainfall index did not fall below the parameter; this is what’s known as negative basis risk and results in the yellow-shaded “shortfall” portion in the above chart. However, basis risk is not the only type of risk that needs to be managed. The other classic risks associated with insurance products (regardless if parametric or not) are moral hazard and adverse selection.

💱 In terms of non-parametric insurance products related to the climate, carbon credit related insurance products are starting to gain of traction. For instance, startups like Oka and Kita offer to replace “faulty” carbon credits that have been invalidated due to issues with verification that we covered in our carbon markets issue (Eco-Business, 2023).

📚 Want to learn more about this topic?

1. “Adaptation and Resilience in ASEAN” from UK FCDO

2. “Disaster Insurance in Developing Asia” from ADB

3. “Pathways to adaptation and resilience in South-East Asia” from UNESCAP

4. “Landscape of Climate and Disaster Risk Insurance in Asia and the Pacific” from Insuresilience

📢 Shout-out to SEADRIF!

🛡️ Eight countries have joined SEADRIF, signing the Memorandum of Understanding: Cambodia, Indonesia, Lao PDR, Myanmar, Philippines, Singapore, Japan, and Vietnam.

💸 In August 2023, the SEADRIF Insurance Company made the first payout of $1.5 million to the Government of the Lao PDR, within just 1 business day of the request due to severe flooding. Their vision of an ASEAN region resilient to climate and disaster shocks can only be achieved through the teamwork of combined support of ASEAN+3 countries, development banks, multilateral partners, donors and the private sector coming together.

📬 To learn more about SEADRIF, you can check out their website, and LinkedIn, and even get the latest updates in your mailbox.

🗞️ Recent News

🎙️ Interview with Jack of Igloo

💡 Why were you initially inspired to launch a climate insurance product to begin with?

Igloo was inspired by the large insurance gap for climate-related disasters. Insurance penetration is low in Southeast Asia, and it’s largely due to 2 things:

1. Awareness 👁️: Individuals—especially farmers—are unfamiliar with the concept of insurance.

2. Affordability 🤑: Traditional insurance costs ~5-10% of annual income, making it unaffordable.

🧑‍🌾 Because of this, Igloo's vision is to educate farmers and develop affordable products for them. By testing the micro products with low premia and getting payouts, we can begin to build their understanding of such insurance products. We strive to make climate insurance and other related microinsurance policies available more broadly by increasing coverage and expanding to new markets in Indonesia and the Philippines.

🛠️ How exactly is Igloo taking action against this problem?

🫗 We realized that many insurers prefer when agriculture insurance initiatives are heavily subsidized by the government and/or donors. However, in such instances it becomes difficult to sustain after funding runs out.

🧊 Igloo's model is based on our mission, which is to make a micro version of agriculture insurance that educates farmers on what insurance is, thus increasing insurance penetration. We aim to make it accessible and affordable, continuously improving coverage sustainably.

We currently offer two products:

1. Our seasonal product at $2 per month

2. Our product that is embedded in Mobifone's data plan, which is at $0.20 per day, with the index insurance premium being a small fraction of the bundle

Although we are only covering specific indexes for now, we will launch comprehensive products with a wider range when the market is ready.

😲 What is a misconception or surprising fact about climate insurance?

🤔 Farmers find it difficult to understand the term ‘insurance’. Agriculture insurance products in developing countries have to be offered through the right distribution channels; you cannot start to sell to individual farmers when they do not understand the concept of insurance.

🧑‍🌾 Typically, distribution needs to go through a value chain where trusted companies such as Farm Angel who already help farmers with agricultural techniques and inputs, can also distribution our insurance products.

📶 Another channel can also be through a bundled service with a telecommunications provider like what we do with Mobifone—the largest in Vietnam. They have has an application called MobiAgri, which provides data, farming consulting, and weather forecasting that we bundle together with. Moreover, we also offer weather index forecasting is something we offer together with them.

🎬 How can readers support Igloo?

💰 We closed our pre-Series C round in December of last year, raising $36 million. This new funding will go towards both horizontal and vertical M&A opportunities.  On the product and value chain enhancement aspect, we are looking to double down on motor, health, climate-related products, underwriting and claims digitization and AI and blockchain technologies.

🤝 That being said, we are always on the lookout for like-minded investors, as well as insurers / commercial partners looking to co-develop insurance products or innovative embedded insurance distribution channels to improve the insurance penetration rate across Southeast Asia.

📧 If any of this interests you, you can reach us at [email protected].

🦸🏻 What do you do when you’re not saving the world?

☕ I enjoy having a cup (or two) of "Kopi Tubruk" with partners and friends in Indonesia. I hope that one day I can enjoy coffee cultivated by farmers who are covered by Igloo’s insurance products!

⏭️ Next week, we’ll be discussing financing decarbonization, so stay tuned!

❓ Did you enjoy this week’s issue? If yes, please forward to your friends who would enjoy the read as well. Also, feel free to let us know what you thought by giving us feedback at [email protected].

🌊 SEA you next week!

Karina & Massimiliano