Risk spreading instruments and their benefits to climate change adaptation and disaster risk reduction
Natural and man-made hazards have historically undermined the developmental gains across the world, and the Asia-Pacific region is no exception. The Asia-Pacific region is one of the regions most vulnerable to a range of primary hydro-meteorological natural hazards such as storms, floods and droughts. The data from EM-DAT suggest that the number of hydro-meteorological natural disasters has been increasing at an average annual rate of 217% over the past 40 years in the Asia-Pacific region (CRED, 2012). As a result, an increase in the number of catastrophic natural disasters and related losses was also reported by Munich Re (2010), according to which both insured and uninsured losses have been increasing over the years.
Climate change has brought an additional dimension to disaster risks in the Asia-Pacific region as it is projected to exacerbate the intensity and magnitude of various natural hazards such as storms, high-intensity rainfall events, heat waves, floods and droughts. Especially, the projections suggest high probability for an increasing trend in the high-intensity and low probability events (IPCC, 2007; Kunreuther and Michel-Kerjan, 2007). These increased catastrophic risks will further undermine the developmental gains already made in the Asia-Pacific region.
Research has indicated that risk insurance can provide several benefits. Risk transfer has been widely advocated as one of the best means of risk mitigation across the world (Siamwalla and Valdes, 1986; Arnold, 2008; Swiss Re, 2010a) due to several advantages it provides:
- Promotes emphasis on risk mitigation compared to the current response-driven mechanisms.
- Provides a cost-effective way of coping with the financial impacts of climate- and weather-induced hazards.
- Supports climate change adaptation by covering the residual risks uncovered by other risk reduction mechanisms such as building regulations, land-use planning and disaster risk management plans.
- Stabilises rural incomes and hence reduces the adverse effects on income fluctuation and socio-economic development.
- Provides opportunities for public-private partnerships.
- Reduces burden on government resources for post-disaster relief and reconstruction.
- Helps communities and individuals to quickly renew and restore their livelihood activity.
- Addresses a wide variety of risks emanating from climatic and non-climatic origin, depending on the way the insurance products are designed.
Although risk insurance can moderate impacts of climatic hazards in rural and urban contexts and several risk insurance initiatives have been implemented at grassroots level over the years for reducing the vulnerability of communities to disasters, the penetration of risk insurance in the developing Asia Pacific is poor compared to many developed countries in the region. The limiting factors are poor globalisation of insurance benefits, high insurance costs, poor access and availability of qualified location specific weather data, poor structural risk mitigation, lack of enabling policies, imperfect information, and technical complexity. UNFCCC and Hyogo Framework for Action (HFA) are seeking a global framework for promoting risk insurance but with little clarity on efficacy in addressing issues at the community level. Hence, in order to address additional risks brought by the impact of climate change, there is a need to review and reframe the current risk reduction strategies especially in terms of development and utilisation of risk spreading instruments within the Asia-Pacific region.
The poor spread of insurance remains to be a concern for the Asia-Pacific region especially in non-health catastrophic risk insurance sector, which is attributed to the following factors. The SWOT analysis of crop insurance in some of the project countries is presented in Table 1 (Prabhakar et al., 2013).
High premium costs: The high residual risks, lack of optimum number of insurers, low competition, and low number of insured population all lead to the higher premium costs than what they could be in the Asia-Pacific region.
Low affordability: Affordability relates to both the high cost of insurance and the low willingness to subscribe to insurance services which is in turn a function of lack of risk awareness.
High residual risks: Residual risks are the risks uncovered by other structural and regulatory risk mitigation mechanisms which are poorly developed in the region.
Policy environment: Though risk insurance is a 'market instrument', i.e. its dynamics are determined or governed by the principles of an open market, government policies and regulatory guidelines act as precursors for flourishing of the sector and ensures the effectiveness of the instrument.
Poor presence of insurers and reinsurers: All the above factors act as disincentives for the proliferation of insurers and reinsurers.
It can be seen that most of the above factors are inter-linked and this provides an example of the “chicken and egg” dilemma. In order to promote risk insurance in the Asia-Pacific region, there is a need to overcome these limitations. Several policy solutions have been identified to overcome some of the above identified issues with the current risk insurance environment in the study countries (Table 2).
Table 1. Major strengths and weaknesses of insurance for arable crops identified through surveys conducted in Malaysia, Philippines and Vietnam.
Table 2. Major issues and policy solutions identified for promoting agriculture insurance in the study countries (Prabhakar et al., 2013)
Quantifying risk insurance benefits will help various stakeholders to recognise the value of insurance in risk mitigation and hence will pave the way to greater acceptance of risk insurance as a risk management tool. Surprising enough, there are not many studies that bring out the climate change adaptation and disaster risk reduction benefits of risk insurance, even though insurance has been widely regarded as an effective risk mitigation tool. This project therefore aims to assess the benefits accrued through community level risk insurance experiences in the region, evaluate barriers limiting its penetration, and identify interventions for greater risk insurance penetration leading to climate change adaptation and disaster risk reduction. The specific objectives of the project are as follows:
- To identify technical, socio-economic, institutional and policy barriers limiting penetration of risk insurance: what insurance alternatives can be designed for locations with poor weather data?
- To assess climate change adaptation and disaster risk reduction benefits and costs accrued through risk insurance initiatives: What benefits of risk insurance help it to scale up?
- To identify an enabling environment to scale up risk insurance: What policy and institutional processes can help scale up risk insurance?
- To sensitise policy makers and other stakeholders about scaling up the risk insurance
This research identifies solutions to issues like poor availability or access to available weather information, identifying alternative innovative risk insurance products where weather information is not available, and exchanging research outcomes through various international and regional policy forums. This research is consistent with the CCAFS project of the CG-alliance as it investigates index-based crop insurance, which plays an important role in climate related risk reduction in the agriculture sector.
Outline of activities
Comparative case studies:
a. Stakeholder consultations to obtain inputs from the insurance sector (specifically insurance implemented by community-based organisations), beneficiaries, meteorological agencies, and state regulatory officials for identifying issues and solutions for scaling-up the risk insurance practices in the region.
b. Participatory surveys with communities, insurance sector, meteorological agencies, and government officials to identify indicator framework for evaluating the risk insurance systems and to quantify benefits and costs of various risk insurance models.
Sharing research outputs through research-policy sessions at APAN Adaptation Forum, IGES ISAP, Earth System Governance Conference organized by IHDP-ESG, journal papers and policy briefs.
Research reports, policy briefs, synthesis reports, journal articles, book chapters, & proceedings.
Risk insurance benefits quantified, informed stakeholders create enabling environment for scaling up risk insurance.
References cited in the text
- Arnold, M. (2008) The role of risk transfer and insurance in disaster risk reduction and climate change adaptation. Stockholm: Commission on Climate Change and Development
- CRED (2012) EM-DAT Database, 2012. OFDA/CRED International Disaster Database, Data Version 12.07. Brussels: Université Catholique de Louvain. Retrieved from www.emdat.be.
- IPCC (2007) Summary for Policymakers. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K. B. Averyt, M. Tignor & H. L. Miller (Eds), Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, New York: Cambridge University Press.
- Kunreuther, H. & E. Michel-Kerjan (2007) Climate Change, Insurability of Large-Scale Disasters and the Emerging Liability Challenge. NBER Working Paper No. W12821, Cambridge, USA: National Bureau of Economic Research.
- Munich Re (2010) Topics Geo. Natural catastrophes 2009: Analysis, assessments and positions. München, Germany: Munich Re.
- Prabhakar, S.V.R.K., A. Abu-Bakar, C. Claudio and H.V. Hung (2013) Scaling up Risk Financing in Asia and the Pacific Region: Bottom-up Lessons from Agriculture Insurance in Malaysia, Philippines and Vietnam. Hayama, Japan: Asia Pacific Adaptation Network and Institute for Global Environmental Strategies.
- Siamwalla, A. & A. Valdes (1986) Should crop insurance be subsidized? In P. Hazell, C. Pomareda and A. Valdez, (Eds). Crop insurance for agricultural development: Issues and experience. Baltimore: John Hopkins University Press.
- Swiss Re (2010) Weathering climate change: Insurance solutions for more resilient communities. Zurich, Switzerland: Swiss Reinsurance Company Ltd.