The political economy of premium subsidies: searching for better impact and design

This report investigates the political economy of country decision-making in relation to sovereign-level climate and disaster risk finance and insurance, and the role of premium and capital support (PCS) in these decisions. The study aims to further global understanding on the uptake, size and value of PCS. It also analyses the political economy of donor decisions in relation to the provision of PCS.

The key messages of this report include the following:

• Risk pools offering climate-related insurance have been operating for several years in Africa, the Caribbean and the Pacific. All have benefited from donor capitalisation and subsidisation of premiums in the past. With growing climate risks across all these regions, limited fiscal space in low- and middle-income countries, and an over-burdened humanitarian caseload, there is increasing interest in using donor subsidies to grow risk pools offering climate-related insurance, and offer more reliable, more cost-effective and faster support to disaster-affected communities.
• Affordability is the main barrier to insurance uptake, but it is one among many factors, including: a lack of understanding and technical capacity; availability of alternatives; and perceptions of reliability. The balance of which factors are most important will vary in each country, affecting the impact of subsidies.
• The design of subsidies has also proved a barrier in the past. Stakeholders argued strongly that recipient countries should be much more involved in the design of subsidies, so that donor objectives can be carefully aligned with country perspectives and priorities.
• Subsidy allocation is complex and has used different criteria in the past, supporting varying objectives for the risk pools. Overall, 'proportion of vulnerable population in total population' and 'climate and disaster risk profile' were viewed as the most important factors. However, donors also seemed to prioritise and value a range of other factors in making decisions about subsidy allocations.
• Subsidy design can support a donor's objectives, but there is little consensus on the appropriate size and duration of premium subsidies. The majority of interviewees argued that support should be multi-year, although it was acknowledged that this can be unpopular with some governments.