Can risk insurance address climate and disaster risks in India?

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“Out of all international humanitarian aid about 1/6th is going for disaster response and we know that in spite of this large volume of aid that is going it is not enough and it comes too late in the day. At the same time, there is interest from national governments to absorb that response within their national capacity. From Department of International Development (DFID), we are very keen to support that movement,” said Neha Bansal from DFID India in her opening remarks at the Climate Risk Insurance meet in New Delhi on June 28th.

Action for Climate Today (ACT) – a DFID supported multi-country initiative on climate-proofing growth and development in South Asia conducted a workshop on “Tapping the potential of risk insurance in addressing climate and disaster risks in India.” The conference marked the completion of its project on “designing a framework for promoting and introducing innovative market mechanisms for climate risk insurance in Smart Cities that are also climate and disaster sensitive” in Guwahati. The workshop brought together national and international expert to discuss the importance of risk insurance in addressing disaster risks and deliberated on challenges, opportunities and immediate next steps to operationalise this at a State and city level.

Throughout the day, representatives of private sector, civil society, international experts, and research organisation deliberated on the pressing need for a comprehensive approach to risk financing. The themes included: Measures to simplify response to disasters; the role of insurance in facilitating risk management and the bottlenecks in the system; and the potential of risk transfer mechanisms to help cities better address and manage disaster risks.

Vidya Soundarajan, India Programme Manager ACT followed up with examples of ACT’s work in building a flood forecasting system in Odisha and emphasised on “the need to embed climate change adaptation central theme so that it takes precedence over other aspects of development through policy, capacity building training, system updation, and new policy ideas.”
ACT shared its experience from the study of risk insurance models to manage flood related impacts in Guwahati. Some of the insights from the conference are:
1. A comprehensive and people-centric risk management approach: The first session witnessed a discussion on upscaling risk management strategies for climate resilient development in India. Ashish Chaturvedi from GIZ, India spoke about the role of development organisations and pointed out the extensive focus on attribution- that is, how to attribute events to climate change and quantify losses and damage.  He suggested that the problems of attribution and quantification concerns researchers more than communities who are hit by extreme climate events such as droughts or floods.

“The current challenge in the state of the art is about attributing the extreme weather event to slow onset events to climate change. What percentage of disaster can actually be attributed to climate change? That’s a job of a researcher. For a community, it doesn’t matter.”


2. Reaching the poor: Mihir Bhatt from All India Disaster Management Institute raised concerns on the failure of the current mechanisms to reach the poor. He said that there were many challenges to providing insurance, especially since a large proportion of the population is in the informal sector and hence there is a need to design models that are beneficial to poor people.

“Perhaps insurance companies don’t do enough for certain kind of customers such as disaster prone or disaster affected customers, especially if they are in low income group categories.”

3. A proactive response mechanism: The second session went into the details of ACT’s study on developing a climate and disaster risk insurance development model for Guwahati. Jeniffer Steeves of Acclimatise explained how the current mechanism for relief relies on financial reserves, budget re-allocations and emergency loans as a means of financing post disaster loss. She made a case for shift from a reactive model relying towards a more forward-looking approach.

“Typically, we tend to operate in the ex-post (post-disaster) instrument space, but there are some challenges with these kinds of instruments. They are fairly obvious from perpetually re-allocating of budgets in the wake of disasters to jeopardising investments in development. Emergency Loans, it might take time  for that income to come and sometimes they take time to pay out too. Risk transfer is globally recognised as a beneficial tool. It spreads and smooths losses. It provides certainty of payment”.

4. A starting point: In the same session, Dhyanesh Bhatt from ICICI Lombard shared the different products that are possible and on a broad level the role private sector could play. One insurance product, he described was parametric insurance in which insurance pay-outs are made based on pre-agreed parameters rather than observed damages. This speed up the delivery of insurance payments and reduces the cost of insurance product.

“The whole idea here for parametric insurance cover is to ensure that the quantum of loss that is associated which a natural calamity or a disaster is kind of worked upon and decide upon up front in between the city officials and the insurers and the re-insurers…One of the challenges faced in traditional insurance instruments is loss assessment. In this case, there is no need to go in the field as the parameters are set up front.”

5. Resilience reinforcement: In the final session of the day “Models for risk insurance in India- case of Indian cities” Prashant Regy from National Institute of Public Finance and Policy put forth an idea of using insurance to mitigate risk itself. The panel discussed how insurance could be used not only to compensate to compensate the beneficiary for losses but also providing incentives for reducing in the first place.

“You have house in flood plain area and you buy insurance. Part of the gain accrued to insurance company. Would it be possible for the insurance company to channel some of this back to you- so that you invest in resilient structures? This could be if risk was made clear to you and risks explained upfront”

There was a broad agreement within the participants on the need to collect accurate, sufficient and credible data, insuring government assets, and bringing the different stakeholders together to create awareness and understanding.

6. A robust system: While there were broader discussions around risk management framework and risk financing options, the absence of a comprehensive system came out to be a major challenge. A need to better understand Insurance as a risk financing option and where does this option fit in was felt. The forum was unanimous on risk insurance as one of the valid risk financing options, however, it was also felt that there is a long way to go in planning for robust risk insurance models and products.

Major suggestions pointed towards need for more experiments and pilots needed to be conducted. International experience around risk insurance in cities can give insights and a base to start planning the same In India. A lot of work and effort has to be put in building Data management capacities and adopting technology. Adequate laws and regulatory frameworks will be the biggest enabling factors to institutionalising risk insurance.

Any discussion on climate risk insurance should be seen through the lens of comprehensive climate risk approach, in which insurance is one important tool out of many. Since risk insurance is a less explored area in the overall risk management discourse, cities and governments could commission pilots that help to develop proof of concept and show the potential benefits and costs of insurance solutions. On a more micro level, detailed risk profile should be developed for the cities for the purpose of assessing insurance options, quantifying risks through risk modelling and linking to an aggregate assessment of pre and post-disaster fund flows. Enabling regulatory environment has to be built that regulates the entire ecosystem around risk management framework, particularly that of risk financing and budgeting processes and brining in innovation in our approach to the same.

The workshop was closed with the assertion that risk financing needs to be understood better to be able to be mandated at the policy level and risk insurance in particular will need to be designed involving all the players like Government, private sector, Insurance industry and intended beneficiaries. An ecosystem around design and implementation of relevant insurance products has to be created and as a risk financing instruments insurance has to be understood better by the Government as well as the community. For the comprehensive list of nine recommendations scroll down. The full report can be downloaded here.


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