…Or should there be more focus on disaster risk reduction and social protection? This is an abridged article from the FT, first published on 15 August 2017.
Western governments believe insurance will help deliver relief more effectively by putting in place a quicker and more predictable source of funds when the worst happens. But some fear the policies do not cover the real risks
The insurance industry, including ICMIF and a number of its members, has assembled a host of executives, alongside the UN and the World Bank, into a group called the Insurance Development Forum, which aims to extend the use of insurance and risk management techniques to “build greater resilience and protection” in the developing world.
Last year $166bn of damage was caused by natural catastrophes around the world, according to the insurer Swiss Re, and only $46bn was covered by insurance, leaving humanitarian aid organisations to help deal with the rest.
There are two big problems. The first is the often late arrival of aid. Countries only ask for help when problems become apparent, and that help can take months to arrive. By that time the problem has become much worse, and much more expensive. Second, aid is unpredictable. Governments that ask for help have no idea what they are going to receive, and so cannot make firm plans for how to spend it.
In the decade since 2007 there has been $1.5bn of risk transfer. The new Global Centre for Disaster Protection, which is being built in London in conjunction with the World Bank and the UK government’s Department for International Development (DfID), could provide $2bn of cover to help with disasters.
A recent $322m pandemic insurance bond sold by the World Bank shows how this should work. Governments should receive money in the early stages of an outbreak, when there is still time to contain it. According to the DfID, it would have cost $5m to contain the 2014 Ebola outbreak when it was first detected in Guinea. Eight months later the cost had increased to $1bn. The pandemic ended up killing more than 11,000 people.
Stefan Dercon, chief economist at the UK government’s Department for International Development (DfID) and an Oxford professor of economic policy, says: “When there are appeals, often less than half of what is appealed for is actually collected.”
So-called parametric insurance, say its backers, can provide solutions to both problems. Here, the insurance policy pays out not when there is firm evidence of a loss, but as soon as the first sign of trouble emerges. That can be when a storm happens, for example, or in the early stages of a drought.
The policyholders, in this case the governments of the countries affected, know exactly what they are going to get and when they are going to get it. They can then spend the money in the worst affected areas.
“If you give people money straight away, they can stay put. Otherwise they leave their land and sell their assets in a fire sale, which turns something bad into an absolute catastrophe,” says Mr Barder. Prof Dercon adds: “Faster payouts really help with slow onset disasters such as droughts.”
There are however some challenges associated with climate risk insurance. In its report, Action Aid argues that: “The G7, World Bank, Insurance Development Forum, African Risk Capacity (ARC) and others promoting the expansion of climate risk insurance markets for the poor and vulnerable should pause and reconsider this quest in the face of a lack of evidence of its equity and effectiveness and indications that it may be exacerbating inequality and vulnerability.”
ARC responded that some of the NGO’s claims were flawed and its recommendations were misguided. Thomas Kwesi Quartey, a Ghanaian diplomat who is deputy chair of the African Union commission, says the ARC has paid out $34m over the past three years to countries affected by drought, including Senegal, Niger and Mauritania. “This is solidarity combined with innovation in practice,” he says.
Rowan Douglas, chair of the Insurance Development Forum’s implementation group and Director of ICMIF’s Supporting Member Willis Towers Watson, says
“The question has got to be: if these instruments work effectively say 90 per cent of the time, is that better than not having them at all and losing all the benefits of this important innovation?” He says there are many situations where schemes such as the ARC have worked well: Haiti’s rapid payout for Hurricane Matthew is an example.
In late September and early October last year Hurricane Matthew smashed through the Caribbean. Winds of up to 145 miles per hour killed hundreds of people and caused extensive damage, devastating huge swaths of the region. It was the worst storm to hit the area in a decade.
As ever when this sort of storm hits, appeals for help were not far behind. But many of the worst hit countries were part of an insurance scheme that paid out within weeks, rather than the months that it sometimes takes for aid to arrive.
One of the solutions to this problem is better modelling. Risks in Europe and the US are extensively modelled, partly because there is a well-developed insurance industry. Insurers will know, sometimes down to a few metres, the flood risks for a specific property.
That is not the case in the developing world. “Only around half the world’s population is covered by mainstream insurance risk models at the moment,” says Mr Douglas. “Although the expertise has been around for three decades.”
Experts say climate change, which could make weather patterns less predictable, is compounding the modelling problem. But even if the models can be more finely tuned and the basis risk cut down, there are still obstacles to the wider use of insurance in response to natural catastrophes. One is the question of who pays the premium for the policy. In some of the schemes operating at the moment, donor governments pay. In others, it is the recipient countries.
“Mutual bewilderment” is the phrase that Rowan Douglas of the Insurance Development Forum has heard to describe the traditional relationship between the insurance industry on one side, and developing countries, donor governments and NGOs on the other. The chair of the forum’s implementation group says that until recently they have not spoken the same language, but this is changing.
The UK in July announced an attempt to break down the barriers through the establishment of the London Centre for Global Disaster Protection, in combination with the World Bank. The aim is to help developing countries plan for disasters and assess what insurance, if any, they need. The government says insurance “built” by the centre, which has £30m of funding from the UK, could provide £2bn of cover to help deal with disasters.
Professor Stefan Dercon, chief economist at the UK’s Department for International Development, says: “The centre is about supporting governments to build systems to cope with disasters. It will help them to understand where the liabilities are, where insurance and risk finance can be used and what to do when disasters happen.”
Shaun Tarbuck, Co-chair of the IDF’s Microinsurance Working Group concluded: “Insurance alone isn’t the silver bullet that we are all desperately searching for. The answers lie in a multi-layered response including disaster risk reduction, social protection and insurance. Thanks to the collaboration with the UN, World Bank, Civil Society and insurance the IDF will strive to promote the right response at the right time.”