Impact Case Study:
2021-2024 What happened next? What did PA get out of the PhD? 

Practical Action designed and implemented the Index-Based Flood Insurance (IBFI) project from 2021 to 2024 (during the COVID pandemic), with financial support from InsuResilience Solutions Fund (ISF) (implementing programme of the InsuResilience Global Partnership) and Z-Zurich Foundation in collaboration with Global Parametrics, Shikhar Insurance Company Limited, and StoneSteps as implementation partners. The project aimed to develop and introduce IBFI as a risk transfer mechanism to climate-vulnerable smallholder farmers in the communities falling in the flood early warning system risk polygon in five municipalities in the Lower Karnali River basin in western Nepal. Specifically, the project aimed to (1) build the personal and institutional capacity for parametric pro poor insurance administration, (2) establish an enabling environment to support IBFI delivery, and (3) develop and pilot the flood insurance to smallholder (non-commercial) farmers (PA 2024b, 8).

In 2022 (the first year of implementation), 935 policies through 12 cooperatives were sold with zero subsidy. The area was flooded twice during the monsoon period 2022, triggering first a 10% and then an incremental 25% (10+15%) payment of the sum insured to affected farmers. Farmers received the pay outs within 22 days and for the second flood, within 14 days. In 2023, almost 5,000 policies were sold with zero subsidy via 46 cooperatives. Of 666 households interviewed in Feb 2024, overwhelmingly, people were satisfied or very satisfied.  In 2024, insurance company through 46 cooperatives sold IBFI policies with zero subsidy to 1233[1] farmers.

^{[1] In 2024, Practical Action was working towards getting a 50% subsidy from a donor. However the insurance company could not provide the appropriate documents to the donor in a timely manner. This led to a shorter time period in which to sell the insurance resulting in the reduced number of insurance policies sold.}

Key learnings from pilot implementation

1. Context based data sets needed: Need years of field data of hazard and losses incurred to develop customized probabilistic catastrophe risk model[1]. It is not feasible to start with remote sensing satellite data.
2. Hazard/loss modeller: The relationship between the experienced hazard/loss modeller and the local insurance company is a critical factor to success.
3. Partnerships needed: Local delivery partners, getting the buy in of a likeminded insurance company, one driven to help poor people and not just generate a profit. Equally important is a local group policy holder or ‘aggregator’, an organisation with strong relationship with and is trusted by the beneficiaries, who is willing to accept the responsibility to hold the policies on behalf of the individual beneficiaries.
4. Insurance knowledge and trust: Insurance product is explained in detail to potential clients. Payout takes longer with indemnity insurance vs. quicker payout with parametric insurance. Trust - Locally registered financial institutions (cooperatives) were chosen as Aggregators whom the farmer trusted the most.
5. Reinsurer[2]: A reinsurer (to protect the implementing insurance company from financial distress also protects clients from unpredicted risk) is essential.

^{[1] The near to loss data (assets to be covered by insurance) of past catastrophic events helps to identify the potential indices (triggers) and associated potential loss to make the payouts near to loss. This is one of the elements of the pilot and used by modelers to localize the triggers.
[2] As provisioned in Article 81 of Insurance Act}

Gallery

What next for 2025-2026?

The original three-year pilot (2022-2024) has been so promising (including huge interest from farmers (see PA 2024b) that it is likely to get premium subsidy funding from the German Government (BMZ) for the next two years (2025-2026) of implementation in Nepal (PA 2024c). 

The long term ambitions

• Overriding aim is to challenge the traditional insurance approach to consider parametric (index-based) insurance as a mechanism to support climate vulnerable communities.
• Creating the effective funding model at scale is the business opportunity.

References

Practical Action (2024a) 2024 Nepal Insurance Concept document

Practical Action (2024b) Endline Survey Report: Index-Based Flood Insurance Project, Nepal Flood Resilience Programme, August 2024

Practical Action (2024c) Parametric Insurance, Sharing Practical Action experience in Nepal power point presentation, October 2024 at the Innovations in Insurance for Climate Adaptation – British Expertise International Event https://www.britishexpertise.org/product/innovations-in-insurance-for-climate-adaptation

Swiss Re (2023) Comprehensive Guide to Parametric Insurance https://corporatesolutions.swissre.com/dam/jcr:0cd24f12-ebfb-425a-ab42-0187c241bf4a/2023-01-corso-guide-of-parametric-insurance.pdf

Vavadaki E (2021) Rethinking financial instruments: The case study of floods in Nepal, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/14144/

Written by Hanna Ruszczyk, Colin McQuistan, Bikram Rana and Suman Chapagain - February 2025