Takaful Technical Note : Lessons Learned from the Use of Parametric Takaful for Climate Risk in the HoA DRIVE Project

This note highlights lessons learned on implementing parametric takaful to protect pastoralists against drought under the Horn of Africa De-Risking, Inclusion and Value Enhancement of Pastoral Economies (DRIVE) Project, which is being implemented by the governments of Djibouti, Ethiopia, Kenya, and Somalia with the World Bank’s support. Takaful is an emerging area of focus within the World Bank, and parametric takaful for climate risk is a significant innovation. The DRIVE project provides compelling lessons for other development projects and takaful regulators globally. This emerging product line will strengthen the World Bank’s crisis preparedness toolkit by expanding the range and relevance of risk transfer instruments that provide timely resources without adding to household or public debt. This work also makes an important contribution to improving financial inclusion. It is important for about 25 percent of the world’s population that are Muslim and reside in some of the world’s most disaster-prone countries. Financial protection may stem the tide of climate-induced fragility and enable the mobilization of private risk capital in fragile contexts. The high correlation between fragile and conflict-affected situations (FCS) and climate vulnerability is telling; 95 percent of all conflict-related displacements in 2020 occurred in countries that are already vulnerable to climate change, such as Yemen, Syria, Somalia, South Sudan, and Bangladesh.