Fijians experience high levels of risk and uncertainty due to their exposure to natural hazards, especially tropical cyclones. These events can have disastrous effects on people’s houses, property, and crops. Additionally, according to the Republic of Fiji’s 2020 Financial Services Demand Side Survey, only 15% of Fijians use insurance currently. This leaves Fijians with limited financial options after extreme weather events to help them recover.
For this reason, the Pacific Insurance and Climate Adaptation Programme was created with the objective of improving the financial preparedness of Pacific households, communities, small businesses, organizations and governments towards climate change and natural hazards through the development of disaster risk financing instruments such as insurance. Without access to these financial instruments, Fijians would have to resort to selling off assets, using up their savings, relying on remittances from family and friends abroad, and waiting for government aid to recover from these devastating events. The initiative is a joint-UN programme being implemented by United Nations Capital Development Fund (UNCDF), the United Nations Development Programme (UNDP), and the United Nations University Institute for Environment and Human Security (UNU-EHS).
One of the reasons insurance protection against tropical cyclones was previously not widely used in Fiji was that the high cost of traditional forms of indemnity insurance made it unaffordable for much of the population. For this reason, the Programme has worked to develop and launch the first parametric microinsurance products in Fiji, which are more affordable and accessible than traditional insurance. There are two versions of the product available, a wind cover that pays out after extreme wind events and a storm cover that protects against both extreme rainfall and wind. Parametric insurance can be offered at more affordable prices as the payout amounts are determined by the severity of the event and not the amount of damage incurred by the policy holder. This means that the high cost of having a loss adjuster or claims handler investigate the damage can be eliminated.
Although the parametric nature of the products makes this form of insurance more affordable, it will still be an additional expense that most Fijian are not accustomed to paying and must now budget for. For this reason, the Programme has recommended the Government of Fiji waive value-added tax (VAT) for these climate risk insurance products. The Programme team held briefings with the Ministry of Economy’s budget team as well as with the Permanent Secretary to present the case for tax exemption and showed how the 9% VAT would substantially increase the premium costs and have negative consequences, especially during this difficult economic situation and among the target groups which largely comprise low-income households. The team also put forth a justification that since no parametric insurance exists in the country, there is no loss of income to the Government as compared to previous years.
Although a VAT exemption has been recommended for many years, including by the V20-led Sustainable Insurance Facility, Fiji is one of the first countries to have implemented the recommendation, thus becoming a global leader by initiating this important policy reform that has the potential to unlock greater private sector investments in climate and disaster risk financing and insurance. The result of this exemption will be that the insurance products will be more affordable for all income levels and encourage greater uptake among low-income households, given rise to greater financial inclusion. The lower price for parametric insurance will also allow cooperatives and aggregators to more easily pre-finance premiums for their members. Attorney-General and Minister for Economy, Aiyaz Sayed-Khaiyum, says that by making these products more affordable, the government is extending the products to low-income and vulnerable sectors previously beyond the reach of mainstream insurance. Lastly, and perhaps most importantly, this VAT exemption will mean that more people will be protected against extreme weather events and provided with quick financial support after their livelihoods have been affected.
The parametric insurance product will be launched on the August 25th, 2021 and will provide coverage to sugarcane, rice and copra farmers, fishermen and market vendors through cooperatives. Coverage is for 12 months and the product will automatically trigger payouts if the insured events take place, such as a specific amount of high rainfall, high wind-speed, or cyclone events.