When tropical cyclone Gita tore through Tonga in February 2018, not even the safest buildings in the capital city, Nuku’alofa were spared. Generally considered to be more structurally secure than other buildings across the island, government buildings—including the century-old Parliament building in Nuku'alofa, the capital city—were flattened by the category 4 storm's 145 mph winds. It was the most intense tropical storm to impact Tonga since reliable records began, causing 2 fatalities, 41 injuries, damaged 4,000 homes and destroyed over 800, leading to an estimated USD61 million in damages (equivalent to 37.8% of the nominal GDP). Torrential rains and damaging winds from Gita also caused widespread disruptions in Samoa and American Samoa, prompting emergency declarations in both island countries. Outlying islands in Fiji’s Lau Group were significantly affected, too, particularly Ono-i-Lau and Vatoa. In a changing climate, the intensity of the most severe cyclones in Tonga and the South Pacific region is projected to increase.

Pacific Island Countries (PICs) are particularly exposed and vulnerable to extreme weather and geological hazards including droughts, hurricanes, floods, earthquakes, and tsunamis due to their location in a hurricane belt and on the geologically active Pacific Rim. While early warning systems, forecasting, and built and natural infrastructure have helped save lives during such events, the livelihoods of people in the region are often still negatively, and sometimes catastrophically, impacted.

By offering quick liquidity, insurance is one financial tool that can help residents restore their livelihoods after an extreme weather event. Many types of insurance exist, including micro-insurance (which insures individuals and businesses), meso-insurance (which insures groups of individuals, such as farmer cooperatives, or risk-aggregating firms, like microfinance institutions), and macro-insurance (which provides cover to municipalities and governments). Indemnity products insure against verifiable losses, while parametric products use indices – such as the strength of a cyclone, windspeed or rainfall - to make quick payouts based on observable data.

While a wide range of insurance products could be developed, most PICs residents have limited access to affordable products that meet their insurance needs. This is in part due to large geographic areas with dispersed and remote populations, making it difficult for insurers (and other financial service providers) to offer reasonably priced products. Service providers also find it difficult to scale across the Pacific due to a lack of robust data and assessments and increasing costs due to climate change (as a result of increasing frequency and intensity or storms). Premium costs will likely keep rising because of increasing climate risks associated with a changing climate. There are also understandable sensitivities over who should pay insurance premiums for climate risk products, given that PICs are experiencing losses and damages today despite having not appreciably contributed to global greenhouse gas emissions.

One promising example is the parametric microinsurance product introduced by the UNCDF’s flagship program, the Pacific Insurance and Climate Adaptation Programme (PICAP) in Fiji, Vanuatu, and Tonga, supported by the Governments of Australia, New Zealand, and Luxembourg. PICAP established strategic partnerships for an affordable product design, including an aggregator model for customer pooling and awareness raising, FinTech/Insurtech firms and mobile money operators for digital delivery to reach remote customers, and technical and premium support from government and development agencies. The unique partnership ecosystem allowed the parametric solution to be offered at relatively low costs and resulted in uptake by vulnerable groups such as women, low-income earners, smallholder farmers, MSMEs, persons with disabilities, and social welfare recipients.

Tim Shute, a copra farmer in Labasa, shared his motivations behind signing up for the product, saying: “In previous cyclones, we never received any assistance, and we find it very hard especially if our copra dryers are damaged. To cope with the impact of such events, we usually plant short term crops that will mature in a month or two and sell for quick cash. This new parametric microinsurance product will help us get back on our feet and repair our dryers immediately”.

While there are many challenges to scaling insurance products across PICs, the private sector can help to overcome these and leapfrog traditional scaling processes. The insurance space is ripe for innovation, such as in the scaling of digital solutions, especially solutions that would allow those living abroad to support their PIC resident families and communities by using remittances for climate risk insurance. Meso-insurance is largely unexplored, and there may be significant opportunities for insurers and risk-takers (including banks, input suppliers, and off-takers) to work with both agricultural and non-agricultural small and medium enterprises.

Since 2018, Tonga has been hit with a series of devastating disasters—first the COVID-19 pandemic, followed by tropical cyclone Harold in 2020, and a once in a millennium volcanic eruption and tsunami in February 2022 that affected 85% of the population and caused over $90 million USD in damages to public and private infrastructure. Market-based (unsubsidized) insurance is not a panacea for managing disaster risks in the Pacific. Ultimately, the most successful insurance solutions will likely be those that are integrated into holistic disaster risk management strategies and climate adaptation plans. Insurance solutions that incentivize individuals and businesses to take effective climate adaptation measures would help to meet immediate needs while advancing PICs along their adaptation pathways.

Investing in island nations presents an opportunity for innovation. Relative to mainlands, these are small countries with small, often dense populations, and well-defined physical boundaries. Evaluations of adaptation and energy transition interventions in island nations may be completed in less time and require fewer resources. Tonga and other Pacific nations have an opportunity to become hubs of financial innovation, data-driven solutions, new strategies for resource efficiency, and the application of new metrics and methods for technical design for climate adaptation projects.