ImpactAlpha, December 9 – Belgian impact investor Incofin is backing Nicaraguan microfinance organizations Fundenuse and Micrédito in rolling out “event-based” insurance policies to 6,000 small farmers. The insurance product will protect farmers against destructive weather events.
Small farmers’ livelihoods are particularly vulnerable to climate change impacts because many don’t have insurance to guarantee their incomes. So when drought or excessive rain strike, they lose their crops and thus their source of income. Many, in turn, can’t afford basic necessities or fall behind on other financial obligations.
The product Incofin is supporting uses a unique policy structure to make insurance more accessible and affordable to smallholder farmers. Microfinance companies Fundenuse and Micrédito purchase the policy from insurers on behalf of their farmer customers, rather than each insurer applying for an individual policy. The microfinance organizations receive insurance payouts automatically when rainfall falls above or below certain pre-determined levels, indicating drought or excessive rain. Those payouts are then used to restructure farmers’ microfinance loans.
Drought in Nicaragua has already triggered a payout on the new policy. With increasingly extreme and unpredictable weather, event-based policies may become more common as insurance companies look to cut costs on underwriting, administration and claims processing. For instance, U.K. insurance startup FlashFlood offers a similar type of policy for small businesses located in flood areas.
The product in Nicaragua was designed by Swiss development consulting firm MG Consulting, AXA XL Reinsurance, and Nicaraguan insurance company Iniser. Incofin supported Fundenuse and Micrédito in launching the product through its Rural Finance Partnership technical assistance facility, which is backed by Dutch development bank FMO and the Inter-American Development Bank’s Multilateral Investment Fund.