Effectiveness of Insurance for Disaster Risk Reduction and Climate Change Adaptation: Challenges and Opportunities
Agrarian and poor communities in general in the Asia-Pacific region are highly vulnerable to climate change. Effective reduction of vulnerabilities requires aligning sustainable development (SD), climate change adaptation (CCA) and disaster risk reduction (DRR) initiatives. Insurance has been increasingly advocated as a risk management tool both by the CCA and DRR communities. However, to what extent insurance has been able to provide risk management benefits is not clearly evident from available experience. The discussion in this report shows that the uptake and effectiveness of insurance is low in the agricultural sector and amongst the most vulnerable groups. Major barriers exist, and while ways to overcome these can be suggested, the limits of insurance must also be recognized. Insurance does not prevent the occurrence of losses, but it does have the potential to benefit DRR and CCA if the current barriers are adequately addressed. Each country and each region within countries have unique risk and vulnerability contexts and thus the design of insurance services must be context specific and targeted to specific vulnerable communities. Keeping in view the importance of agriculture in the livelihoods of Asian communities, this report mostly delves into the experiences emanating from agriculture insurance, though lessons from other forms of insurance has also been drawn wherever relevant.
There is a lack of clear assessment and recognition of insurance benefits and costs in terms of DRR, CCA and SD in existing research. Specifically, there is no evidence to suggest that the current form of insurance provides long-term risk reduction. To the contrary, the ways the insurance programs are designed and implemented today do not provide the full potential benefits that risk insurance offers.
For insurance to provide DRR and CCA benefits, there is a need for the insurance industry to first address the traditional issues that are hindering its effectiveness. From the discussion in this report, it is evident that the traditional insurance programs impose a huge financial burden on the insured because of administrative costs, and unresolved adverse selection and moral hazard problems. Administrative and legislative remedies are necessary to address some of these problems. Another challenge is for the insurer to have an adequate financial base. This report suggests fast-tracking pilot testing of index insurance programs, promoting greater access to international reinsurance markets and promoting targeted government-supported insurance programs for the poorest people who cannot otherwise afford insurance.
The effectiveness of insurance to risk management varies between developed and developing countries. From the studies presented in this report, it is evident that the crop insurance market environment is customer friendly in developed markets like Australia and Japan, while many issues seem to limit crop insurance penetration in the developing markets such as India and the Philippines. The studies in the developing markets indicate that farmers’ awareness of insurance is quite low, particularly in India; they even are not aware about their own insurance coverage and claim settlement as the claims are directly settled by the banks that provided the crop loans to the farmers. These findings suggest that a piecemeal approach to solving the issues that are hindering the functioning of crop insurance programs will not work; rather, all the important issues and impediments need to be resolved through policy interventions and well-coordinated efforts from all the key stakeholders.
After addressing common insurance issues, the national level policy environment need to focus on product innovation, compulsory and multiple year coverage, development and sharing of comprehensive databases and capacity enhancement of loss adjusters, among other issues facing rural insurance in developing countries in the region. In terms of the agrarian community, more needs to be done to enhance awareness and effect change in behavior and movement towards a proactive collective risk management approach. CCA and DRR benefits can be generated even by taking new approaches to drawing up insurance contracts. For example, insurance contracts could specify payouts to be made to female household members, which could in turn increase the role of women in household risk management decisions. Insurance could be designed in such a way that it is mandatorily combined with on-farm risk mitigation practices and conveys proper price indications to those who implement risk mitigation practices.
The report examines the available methodologies and indicators to assess the effectiveness of risk insurance. The major limitations to effectivness measurement methodologies are a lack of a uniform set of indicators to measure insurance outcomes, which makes cross comparison between different studies and insurance products nearly impossible, and lack of a clear definition of expected insurance outcomes for CCA and DRR. The dearth of literature quantifying real benefits and costs of insurance is associated with the complexity of connections between CCA, DRR and SD, the complex ways in which stakeholders are impacted by insurance, and limited understanding on the CCA, DRR and SD concepts among the related professionals.
Insurance premium costs or affordability has emerged as an important issue regarding outreach to the most vulnerable and poor households. NGO-MFIs and other developmental NGOs with a strong presence in rural communities that are willing to experiment with product design and delivery may be the most effective conduits for insurance to poor farming households. To take on this role, they will first need to invest in generating local data and building information systems and the technical capacity of staff to handle insurance. They will also need to experiment with the losses covered, payout arrangements and triggers, packaging of insurance with other products, as well as with delivery models.
Engaging appropriate stakeholders and building their capacity in insurance delivery is an important aspect of ensuring insurance effectiveness. The report has identified that there could be different means of delivering insurance to different sections of the society. Most importantly, the report indicated that public-private partnerships form an important means of insurance delivery and capacity building of the stakeholders engaged. For reaching the poorest communities in the rural areas, NGOs could provide an effective means of delivering insurance services and can strengthen the community-based insurance approaches. Governments must play the role of an enabler through appropriate policies and as a regulator by putting in place proper monitoring and evaluation procedures that encourage movement beyond the notions of traditional insurance effectiveness towards considering the adaptation and disaster risk reduction benefits of insurance.