The first blog in this series explored how insurance premium subsidies could help break the cycle of underinsurance in low- and middle-income countries. But poorly designed subsidies can do as much harm as good. This instalment sets out five design principles that make the difference, drawing on our latest engagement brief on resilience-linked insurance premium subsidies.
Key messages
• Poorly designed premium subsidies can be inefficient or even harmful to long-term resilience, echoing problems seen across agricultural subsidies more broadly.
• Five design principles can turn a conventional subsidy into one that builds resilience: link subsidies to measurable risk reduction, choose financially material indicators, share costs, build the supply-side infrastructure insurers need, and reflect resilience gains in sovereign risk assessments.
• Done well, insurance premium subsidies can do more than reduce costs. They can support wider coverage, deeper risk pools and lower prices over time.
In June, the Swiss Re Institute reported that uninsured natural-catastrophe losses had risen above $424 billion globally, an increase of more than 7% in a single year. Much of that gap sits in the countries least equipped to close it. Aon’s latest catastrophe report highlighted severe flood losses across South and Southeast Asia, where underinsurance remains widespread. Globally, around half of all economic losses from disasters went uncovered.
As the first article in this series showed, insurance premium subsidies have significant, underused potential to strengthen climate resilience in low- and middle-income countries. But get the design wrong, and they can just as easily become inefficient or even maladaptive, rewarding risky and unsustainable behaviour rather than curbing it.
The wider history of agricultural subsidies offers a warning. The World Bank has shown that poorly structured pricing interventions can distort production decisions and damage the environment. Insurance premium subsidies can fall into the same trap, rewarding exposure instead of resilience, if they are not designed with intent.
Getting the design right comes down to five core principles.
Five design principles for resilience-linked premium subsidies
1. Link subsidies to measurable risk reduction
When the insured have less “skin in the game”, subsidies can backfire: instead of reducing physical risk, they can end up rewarding it. This is moral hazard at work. In agriculture, for example, a farmer who knows that losses are covered may have less incentive to change risky or unsustainable land-use practices. The US Federal Crop Insurance Program is a case in point. Rather than encouraging farmers to adopt more resilient practices, critics argue the scheme’s design does the opposite, rewarding the continued use of conventional, high-risk monocultures.
The design fix is to reward verified risk reduction, not simply the fact of being insured. Subsidy levels can be tied to actions or outcomes that are measured credibly through key performance indicators and backed by robust science, measurement and verification.
In agriculture, this could mean subsidising regenerative farming practices such as agroforestry and no-tillage, which have demonstrable effects on building long-term resilience to climate risks. Regenerative farming can also match or outperform conventional methods economically over the long term, but the transition period takes time. This is where subsidies can come into play, bridging that gap before being reduced as resilience gains are realised.
2. Choose indicators that are financially material
Government subsidies can also fail to strengthen fiscal resilience if they do not target the sectors that matter most to the economy. A government can subsidise insurance widely and still see little reduction in disaster-related spending if coverage does not reach the sectors driving its fiscal exposure.
The solution is to be deliberate about where support goes. Subsidies deliver the most value when they target sectors that are both climate-exposed and economically significant, with indicators that measure whether specific interventions actually reduce risk. With the right targeting, the fiscal savings from avoided losses can outweigh the cost of the subsidy.
Uganda shows what this can look like. Agriculture is central to the country’s exports, employment and food security, while also being highly exposed to climate risk. NatureFinance and its partners are working with the Government of Uganda to model how agricultural resilience interventions, including agroforestry, could affect the country’s sovereign debt dynamics and credit profile. These interventions are tracked against financially material indicators aligned with Uganda’s national development plan. Preliminary findings point to meaningful gains for public debt dynamics and credit rating sensitivities.
3. Share costs across public, private and philanthropic actors
Affordability remains a major constraint. Even with a subsidy, the remaining premium may still be out of reach for those on low incomes. Governments can also struggle to sustain subsidy programmes when public budgets come under pressure. Brazil’s Rural Premium Subsidy Program shows the risk of relying on government funding alone: its subsidy bill more than tripled between 2018 and 2021, before falling back sharply amid budget cuts, taking coverage down with it.
Bringing in private sector companies, development institutions and philanthropic funders can spread the cost and create additional channels for adaptation finance to reach exposed sectors. The African Risk Capacity’s Premium Support Facility shows how this can work in practice. It subsidises sovereign insurance premiums for African Union member states, with support designed to shrink as countries and partners take on more of the cost. In Malawi, an African Development Bank-supported drought policy put this model into practice in 2023/24, supporting over two million farming households after a record dry spell.
4. Make sure insurers can meet the demand a subsidy creates
Even a well-funded subsidy will struggle if insurers cannot keep pace with the demand it creates. Most low- and middle-income insurance markets are too small to absorb a sudden spike in demand, and a subsidy can end up creating demand for coverage that insurers lack the capacity to provide.
The design fix is structural: regulatory reform to ease market entry, cross-border reinsurance to help local insurers pool risk beyond their domestic markets, and better data and distribution infrastructure to help insurers price risk accurately and reach more customers.
Product design matters too. Insurance products need to respond to customers’ actual risks and minimise basis risk if they are to deliver the intended resilience outcomes. Without these foundations, subsidies may boost demand but fail to produce a deeper, more resilient insurance market.
5. Fix the blind spot in how sovereign credit gets priced
The fifth design risk is the most systemic. Sovereign risk models increasingly account for climate risk, but rarely capture the financial benefits of adapting to it. A subsidy’s cost gets counted. The reduction in risk it can deliver often does not. Governments can therefore incur the cost of investing in resilience without seeing the resulting risk reduction reflected in their sovereign credit profile.
The fix is straightforward in principle. Where a subsidy’s resilience gains can be robustly measured, through reduced volatility, stronger exports, or lower contingent liabilities, credit rating agencies and international financial institutions should reflect those gains in their assessments of sovereign risk.
NatureFinance’s analysis of Ghana’s forestry sector shows what this could look like in practice. The study models how reforestation and reduced deforestation could improve the country’s credit rating and debt trajectory by reducing the economic and fiscal impacts of deforestation. Those gains can then be reflected in the sovereign debt and credit metrics used to assess financial risk.
Where good design leads
Taken together, these five design principles describe a resilience-linked approach: one that ties subsidy levels to measurable adaptation outcomes, and lets governments, insurers, reinsurers, brokers, donors and corporates share the cost of protection while strengthening sovereign resilience.
Measurable, financially material indicators sit at the centre of this approach. They can curb moral hazard, improve fiscal outcomes and pull in extra co-financing from supply-chain actors with a direct stake in resilience. Feeding those benefits into sovereign risk analysis and credit assessments, in turn, gives governments a real incentive to build and scale these schemes.
None of this makes subsidies a silver bullet. But get the design right, and a subsidy can do far more than lower premiums. It can spark the same flywheel that Germany’s feed-in tariff helped create in the solar industry: wider coverage, deeper risk pools, falling prices and, eventually, a market that no longer needs the subsidy to keep turning.
