Translating SMART Principles into Action
The V20/G7 Global Shield against Climate Risks has provided a USD 10 million contribution to the Pacific Catastrophe Risk Insurance Company (PCRIC) via the Global Shield Solutions Platform – one of the financing vehicles under the Global Shield. With this funding, enabled through contributions from the German Ministry for Economic Cooperation and Development (BMZ), PCRIC will be able to offer member countries premium support and thus increase accessibility and affordability of financial protection from the Pacific regional risk pool. This is part of the Global Shield’s efforts to strengthen the regional risk pools, address affordability barriers in climate-vulnerable countries, and expand protection against climate risks in Pacific Small Island and Development States (PSIDS).
This premium finance package is the first-of-its-kind to fully implement the SMART Principles for Premium and Capital Support (PCS) and the methodological guidance on sizing PCS which were developed under Global Shield’s predecessor program, InsuResilience Global Partnership (IGP) in 2021 and 2022. The Overseas Development Institute (ODI) designed the premium allocation methodology based on the SMART principles. PCS entails both the (co)financing of risk transfer premiums (“premium support”) and capital investments in risk transfer vehicles (“capital support”). The SMART principles provide a valuable framework for designing and implementing PCS schemes that effectively enhance risk transfer affordability and address other implementation hurdles.
With the Pacific Islands being a pathfinder region under the Global Shield, the provision of SMART premium financing for PCRIC provides a framework for implementation and learning ground for further PCS-related interventions by the Global Shield in the Pacific as well as other regions. It also serves as a solid foundation for programmatic premium financing for other regional risk pools. PCRIC’s premium financing strategy, which incorporates the allocation methodology developed by ODI, was endorsed by the Pacific Catastrophe Risk Insurance Foundation (PCRIF) Council of Members meeting, held in Morocco in October 2023. Consequently, PCRIC has used this allocation methodology to subsidize premiums for the renewal of policies among the existing policyholders (Samoa and Tonga), while extending new policy coverage to Fiji and Niue for the 2023/2024 risk period.
Methodological approach
The allocation methodology offers two approaches for allocating premium subsidies using a multi-criteria decision model (MCDM). It aims to offer a transparent and fair way of providing premium subsidies to encourage uptake of PCRIC’s insurance policies in the region. The first approach is quantitative, relying on readily available and quantifiable factors to distribute premium subsidies. It employs a Performance-Based Allocation (PBA) system with two key components: the needs-based component and the performance-based component, with the latter measuring policy performance and institutional capacities. The second approach is more qualitative, involving a scoring methodology that combines qualitative and quantitative criteria. It requires expert judgment to assign scores to different criteria on a standardized scale and demands transparent justifications for the scores and weights assigned to ensure fair allocation decisions. PCRIC opted for the quantitative approach to allocate this premium support package, favoring it due to data availability, industry practice in allocating development funds and the less subjective nature of this method.
What’s next?
PCS is an increasingly relevant field within global efforts to close financial protection gaps. As affordability remains a significant barrier to the uptake of financial protection, and climate vulnerable countries emphasis of the shared global responsibility for dealing with risks intensified by climate change, the call for comprehensive financial support to respond to losses and damages will likely become louder. The Global Shield provides a unique platform to implement SMART PCS systematically, at scale and at a global level, as it brings together various financing vehicles with the ability to deliver PCS. Over time, Global Shield can generate relevant evidence and shared learnings and help deploy donor funds efficiently to leverage private sector risk capital for effective, inclusive, and sustainable financial protection of vulnerable people.