Germany follows UK to launch €25M climate disaster insurance fund

BERLIN — The German government is looking to share the risk with the global south for climate-related catastrophes that happen there. The Ministry of Economic Cooperation and Development, or BMZ, has committed €25 million ($27.6 million) to a new capital pool that builds on a model already established by the United Kingdom. Beginning at the start of the year, that money can be used to underwrite risk-transfer instruments that speed up recovery payouts when disasters strike or that offer a financial safeguard to agencies looking to increase their programs across the developing world. “The incentive is really to transfer large volumes in the billions to capital markets and reinsurance markets, to really get those risks out of developing countries and into global capital markets.” --— Stefan Hirche, principal project manager, KfW Development Bank Known as the National Disaster Fund Deutschland, it will also draw $50 million from Hannover Re, a German-based reinsurance firm. Stefan Hirche, a principal project manager at KfW Development Bank, which is managing BMZ’s commitment, said the model was an innovative attempt to transfer risks from lower-income countries to industrialized nations and the private sector. “This is something we hope will make a new market work and encourage other providers to cooperate with us or provide similar offerings that help to transfer all those [natural catastrophe] risks out of developing countries and away from poor and vulnerable people in those countries,” he said. NDF Deutschland was announced in December during the United Nations climate conference in Madrid, Spain, where civil society activists were heavily critical of industrialized countries’ unwillingness to contribute more money to offset the damage done by climate change-related events. Sabine Minninger, a climate change policy officer at Bread for the World, said she hopes NDF might serve as a starting point for a broader suite of loss-and-damage interventions. “It is a step in the right direction, but it’s a very, very small step,” she said. Building a market NDF Deutschland is a technically complex effort that will be guided by the London-based Global Parametrics, a group that has been running NDF U.K. since 2018 with £25 million ($32.8 million) of capital from the U.K. Department for International Development. NDF Deutschland will work in partnership with NDF U.K. to increase that pool to more than $100 million over time. Launched in 2016 with money from the German and British governments, Global Parametrics had dual responsibilities. The first was to evaluate the risk of climate catastrophes — earthquakes, tropical cyclones, overwhelming rainfall, drought — in areas of the global south. “We want to be able to offer [economic and social impact] indices in areas of the world where there are a lack of models or where the market doesn’t have a very strong track record in terms of doing transactions” linked to natural disasters, said Hector Ibarra, Global Parametrics’ chief executive officer. That information helps guide the second area of Global Parametrics’ work: Structuring and investing in instruments that help offset risk for aid agencies or firms that are working in those regions, transferring the risk to the global capital markets. There have been a number of disparate early commitments to that cause. Through a partnership with World Vision, Global Parametrics is underwriting insurance for hundreds of thousands of people across Africa and Asia who are receiving services from VisionFund, a network of microfinance institutions. If those clients experience a natural disaster, Global Parametrics issues a payout to the institution, which can then distribute money to those clients to help them mount a quick response. Global Parametrics also purchased an option to buy up to $5 million of a catastrophe bond linked to volcanic risk that the Danish Red Cross and the International Red Cross and Red Crescent Societies are looking to release. The bond means that the agencies would get a quick payout in the event that certain parametric measurements are met — in this case, the height of possible ash plumes spewed by the volcanos. That means they can start a relief effort without worrying they will drain their reserves. Ibarra said the funders are looking for investments in specific sectors, including agriculture-related areas, social protection, renewable energy, emergency relief, financial inclusion, and resilient infrastructure. But the real emphasis is on helping organizations and their beneficiaries feel more secure, so they can then scale up their operations or use their reserves more efficiently. Hirche said officials from DFID and from either BMZ or KfW will sit on an NDF development committee that is involved at the outset of a project and decide if it is something they want to underwrite. Because of the highly technical nature of the projects, individual contracts will then be evaluated by an investment committee staffed by professionals in the field. The immediate task, though, is getting more projects underway. These kinds of risk-transfer instruments are still relatively unknown, particularly in poorer countries where disaster losses are rarely covered. Ibarra said Global Parametrics is trying to generate interest in the different instruments they offer. “A lot of these organizations do not have the financial sophistication to think about hedging,” he said. “The instruments are working, but what we want to see is that all industrialized countries are taking full responsibility for the climate crisis and are paying the costs of climate damages.” --— Sabine Minninger, climate change policy officer, Bread for the World Hirche said that KfW has pre-approval to issue another €12 million “as soon as we see the €25 million will be used to underwrite derivative contracts.” A proof of concept While NDF is a step toward a global target of having 500 million poor and vulnerable people covered against disaster and climate shocks, Hirche said he also sees it as a proof of concept that he hopes other reinsurance firms might copy. “The incentive is really to transfer large volumes in the billions to capital markets and reinsurance markets, to really get those risks out of developing countries and into global capital markets,” he said. Even that will not be enough to meet the full cost of loss and damage that climate change-related weather events are expected to cause, Minninger said, warning against looking to the private market to carry the full burden. “I think the Disaster Fund could be a role model for further commitments if governments finally come to the sense that they have to take responsibility for the climate crisis,” she said, but only alongside other efforts, such as a carbon tax and rerouting subsidies away from heavily polluting industries. “The instruments are working, but what we want to see is that all industrialized countries are taking full responsibility for the climate crisis and are paying the costs of climate damages,” she said.