Blended Finance Insurance: Bridging Protection Gaps Through Partnerships

Blended finance is increasingly recognised as an effective mechanism to mobilise private sector capital for public good. However, the insurance sector's role in blended finance has remained limited, primarily as investors or insurers. Insurers contribute by providing coverage for assets or projects involved in blended finance transactions, enhancing their risk-return profiles. They also offer specialised insurance solutions, such as non-payment insurance, often used by development institutions to expand their risk capacity and optimise balance sheets[1].

What about a blended finance form of an insurance solution instead of an asset or a project? Could this "blended finance insurance" be key in moving the needle to narrow protection gaps for vulnerable communities, offering innovative approaches to strengthen resilience for vulnerable populations amid escalating global risks?

What is Blended Finance?

Blended finance refers to the strategic use of public and/or philanthropic funds to mobilise or increase private sector investments for sustainable development objectives. It typically involves:

1. Catalytic Public or Philanthropic Capital: The funds from these parties de-risk investments, improving their risk-return profile, making them more bankable/investible, thus attracting and mobilising private sector capital;
2. Private Sector Engagement: Private capital is mobilised to invest in projects or initiatives at market risk/return. Note that overall, blended finance transactions are expected to yield a positive financial return, although different investors in a blended finance structure will have different return expectations, ranging from concessional to market rate[2];
3. Development Goals: Blended finance transactions contribute towards achieving the Sustainable Development Goals (SDGs) by addressing market failures or underserved needs, such as healthcare access, disaster or climate resilience, or social protection. However, not every participant needs to have that development objective. Private investors in a blended finance structure may simply be seeking a market-rate financial return².

In this vein, blended finance insurance will refer to insurance solutions that are developed and (sometimes) sustained through the use of public and/or philanthropic funds to mobilise private insurer(s) to underwrite the relevant risks and offer the insurance solution to individuals, families, businesses and potentially even governments, to achieve broader developmental objectives, contributing to the SDGs.

Blended Finance Insurance Examples

Based on the above definition, blended finance insurance is not new. There are a couple of examples of such. One example would be the Extreme Heat Income Insurance in India. This heat parametric insurance for underserved women of the Self Employed Women Association (SEWA) in India, catalysed philanthropic funding (by Arsht-Rockefeller Foundation in phase 1, and by Climate Resilience for All in phase 2) to subsidise premiums, with private insurers (ICICI Lombard, Blue Marble (only in phase 1) and Swiss Re (from phase 2)) underwriting the product. This insurance provides a payout automatically to the women's bank accounts to compensate them for income loss during extreme heat, building climate resilience.

Another example is the African Risk Capacity (ARC), a sovereign risk pool designed to help African nations manage disaster risks. The ARC uses public funds and donor support to subsidise premiums for African governments, allowing them to purchase weather-indexed insurance. Private reinsurers back the risk, and payouts are triggered when extreme weather events like drought occur, enabling governments to fund rapid disaster response measures and protect vulnerable communities. Similarly, the Southeast Asia Disaster Risk Insurance Facility (SEADRIF) leverages donor funding with private reinsurance to cover disaster risks in ASEAN countries (Lao PDR for flood risk at the moment), enabling disaster risk resilience for the covered country(ies).

An interesting example comes from the Horn of Africa Risk Transfer for Adaptation (HARITA) project. This project, funded by the Rockefeller Foundation and Swiss Re, developed an "insurance-for-work" program for cash-poor farmers. Farmers can work on community projects like irrigation or soil management to pay insurance premiums, reducing risk and building climate resilience. Payouts are triggered automatically in droughts when rainfall falls below a set threshold, enabling farmers to afford seeds and inputs without selling assets. As farmers prosper, they can transition from labour-based to cash payments for their insurance, ensuring long-term commercial viability for the insurance.

Blended Finance Insurance: A Tool to Narrow Protection Gaps

These examples show that blended finance insurance can be a powerful tool for addressing protection gaps across various sectors, especially for vulnerable communities. By combining public, philanthropic, and private resources, blended finance insurance can help reduce risks, incentivise private insurance sector participation, and build resilience in the face of escalating risk challenges.

1. Increasing Accessibility to Insurance: Public and philanthropic funds can lower the cost of insurance premiums to policyholders through subsidies, making the coverage more affordable for low-income groups. This enables vulnerable populations, who sometimes cannot obtain insurance coverage due to affordability issues, to protect themselves against risks.
2. Encouraging Private Sector Participation: Private insurers may shy away from certain risks in some underserved markets due to high risks and low returns. By using public and/or philanthropic funds to de-risk investments, blended finance can encourage private insurers to develop solutions for these markets. For example, the Extreme Heat Income Insurance in India leverages philanthropic funding to subsidise premiums while private insurers underwrite the risk, providing targeted support to vulnerable women workers.
3. Building Resilience Against Emerging Risks: Climate change, pandemics, and economic uncertainties are intensifying risks globally. Blended finance can fund parametric solutions, sovereign risk pools, or disaster insurance schemes that deliver timely payouts to affected communities. Initiatives like SEADRIF and ARC demonstrate how blended finance mechanisms can mobilise private sector expertise to address disaster risks.
4. Supporting Development Goals: Blended finance insurance contributes to broader developmental objectives by reducing financial vulnerabilities, improving health outcomes, and fostering economic stability. Programs like SEWA's heat insurance and the HARITA project not only protect incomes but also empower communities to adapt to climate change.

The role of blended finance insurance goes beyond risk management. It serves as a bridge between public good and private profit, enabling insurers to participate in markets they might otherwise overlook and, hence, potentially creating revenue or portfolio diversification opportunities. By aligning the incentives of governments, donors, and private insurers, blended finance insurance is a potential avenue that can ensure developmental goals are met in a financially viable manner.

The involvement of public and philanthropic funds can address systemic barriers, such as affordability and infrastructure gaps, making insurance solutions feasible for underserved communities. In our current times of growing uncertainties, blended finance insurance can be a vital mechanism to narrow protection gaps and build resilience.

The road ahead

Whilst a worthwhile approach, blended finance insurance is not without its challenges. Blended finance and blended finance insurance require intense and complex coordination due to the strategic combination of funds from public and/or philanthropic sources and private capital. Aligning the interests and efforts of the various parties is time-consuming and resource-intensive. In addition, scaling such solutions to larger populations or new risks can also be challenging without additional investments, systemic changes, or when funding sources diminish. 

At GAIP, recognising the various roles that the insurance sector can play in blended finance, including blended finance insurance, to support sustainability and development objectives, we are collaborating with Convergence, a blended finance network, to develop a “Playbook for Leveraging Insurance and Blended Finance for Climate Action”. This playbook will look to guide the insurance sector in engaging with blended finance to mobilise resources for sustainable development.

It is time for the insurance sector to embrace blended finance as a tool, not only for risk management but also for driving inclusive development and resilience.

[1] https://www.convergence.finance/news/7rCsvgf1RtCPyFpqU2FLCk/view

[2] https://www.convergence.finance/blended-finance