Planning for the Disasters to Come: How Climate Risk Insurance Rewrites the Rules of Recovery

Climate disasters are being felt more than ever by the most vulnerable and marginalized communities around the world. In Asia, temperatures are rising twice as fast as the global average and giving rise to more extreme weather events such as floods and droughts. In Africa, which has just experienced its warmest decade on record, extreme weather has intensified the issues of hunger, insecurity and displacement.

With this reality, the outlook for climate resilience can seem overwhelming for microfinance institutions (MFIs). But our experience working with communities after disasters has taught us some powerful lessons. Above all, that we can’t wait for disasters to happen before we take action. We must plan ahead. And this is where financial tools, like insurance and recovery lending, come in.  

The powerful storm that taught us a lesson

In 2013, Super Typhoon Haiyan (locally known as Yolanda) barreled through central Philippines, causing massive destruction. Millions of people’s livelihoods were destroyed. To make matters worse, we saw many financial institutions pull back or cancel loans after a disaster, precisely when people needed help the most. So VisionFund developed an approach to provide loans to support recovery efforts for those whose livelihoods were destroyed by climate-related disasters.

We offered targeted recovery loans to help disaster-affected communities rebuild – to repair their fishing boats, reopen small shops, and start earning again for their families. The loans not only provided them with the resources they needed to get back on their feet, but they also restored their dignity, as they no longer had to rely on humanitarian aid. Since the loans were affordable, they didn’t cause excessive debt and clients were able to repay them well.

These experiences showed us how recovery lending helped people bounce back faster after disasters. In particular, we learned how important it is to be prepared before a disaster happens and to have recovery loan products ready in advance. These lessons led to the creation of ARDIS.  

Providing a safety net for MFIs

Launched by VisionFund in 2018, the African, American and Asian Resilience in Disaster Insurance Scheme (ARDIS) is a disaster insurance scheme that aims to improve the financial resilience of clients and institutions. It provides MFIs with a safety net, enabling them to continue lending, even in disaster-prone areas.

The program consists of four C’s:

• Credit: A contingency credit line, managed by VisionFund, ensures MFIs have access to funds when traditional funding sources are unavailable.
• Capital: Cash payouts using parametric (index-based) insurance release money automatically to VisionFund when certain environmental conditions, such as heavy rainfall and strong winds, are met.
• Climate data: The data provided by our partner, Global Parametrics, helps MFIs understand climate patterns and make lending decisions accordingly.
• Catastrophe planning: MFIs can make more informed recovery lending planning using the climate data provided to make sure they have loan products ready in advance.  

What also makes this program unique is that the climate and portfolio exposure models are tailored to each branch, depending on local climate risks. ARDIS uses satellite-based climate data and forecasting tools to trigger payouts automatically when specific conditions are met. This eliminates lengthy claims assessments and enables funds to reach the recovery lending pot available for clients within days.

Contributing to climate resilience

When ARDIS was launched, it became the world’s largest climate risk insurance program for MFIs not run by a government. Over the past seven years, this program has helped strengthen the resilience of micro, small and medium enterprises (MSMEs), serving over one million clients—80% of whom are women. Through these efforts, it has helped protect four million people across 22 countries. More than $0.8 million has been paid out as claims to VisionFund to support communities and businesses, helping them grow through the recovery lending plans provided by our MFIs.

Importantly, the ARDIS program has successfully contributed to achieving 1% of the G7’s goal set under the United Nations Framework Convention on Climate Change (UNFCCC) to provide climate risk insurance to 400 million vulnerable people. We aim to continue expanding to reach more people in the future. The mechanism of ARDIS is currently being adapted for the humanitarian sector with pilot projects planned in the Amazon Basin, the Mekong area and East Africa.

ARDIS was designed as a scalable and replicable model, offering strong potential for broader impact through partnerships with other organizations. By working alongside existing financial networks, development finance institutions and global initiatives, ARDIS can help close the insurance gap for MSMEs and extend its reach to even more communities worldwide.

What we’ve learned

Through these experiences, VisionFund has identified key lessons that can guide effective financial solutions for vulnerable communities:

Combine financial tools for greater impact: Using a mix of financial instruments – such as insurance for risk transfer and credit for recovery - offers both affordability and resilience for vulnerable families. Through ARDIS, insurance payouts deliver timely liquidity after climate shocks, easing financial pressure on both MFIs and the families they support, in line with recovery plans developed by our MFIs. Simultaneously, recovery lending enables businesses to rebuild and recover without taking on unsustainable debt.

Design financial services around real needs: Tailoring products to the specific situations of communities increases both their usage and their effectiveness. VisionFund’s experience has shown that in the aftermath of a disaster, standardized loans may not meet the diverse needs of all clients. By offering flexible repayment terms tied to agricultural cycles or incorporating grace periods after disasters, MFIs have seen higher client retention and faster recovery rates.

Build trust through transparency and education: Trust is essential for adoption, especially with tools like index insurance, where payouts are based on data rather than direct loss assessment. To gain that trust in the ARDIS program, our leadership team at VisionFund and the MFIs’ leaders first need to understand how the payout triggers work. Therefore, training for the VisionFund leadership team and MFI management teams focuses on understanding the specific mechanism, the triggers and the process. Communications with MFIs also explain how they can benefit from ARDIS and on preparing a recovery lending plan to submit to VisionFund’s Finance Team.

Collaboration is essential for scaling: Expanding impact requires coordinated efforts with governments, donors, private insurers and development finance institutions. Ongoing discussions around ARDIS’s potential - as part of the climate resilience strategies of DFIs, public institutions and donors - reflect a growing interest in expanding this mechanism. They also highlight how public-private partnerships can help bridge funding gaps for MSMEs. Many of our implementing partners have reached out to VisionFund to request support in expanding ARDIS to their organizations, underscoring demand for the program as well as the need for funding to cover its associated costs.

A more resilient future for all

Resilience can’t be just another buzzword we throw around. More than a word, it should translate into concrete actions that reflect real, tangible systems that genuinely help people prepare for, withstand and recover from climate disasters. As the challenges posed by climate change continue to grow, this type of approach will be crucial to make sure we can create a more resilient future for all.