Promoting community resilience through climate insurance

Bangladesh, Asia's largest and most populated delta, is highly vulnerable to a variety of natural hazards such as floods, cyclones, and drought, forcing people to live on risky topographies. 

Changing climate adds to the vulnerability by increasing ambiguity, rendering disaster risk management systems or traditional coping and contingency planning processes obsolete.

Severe natural disasters, such as the floods of 2004, 2007, 2019, and 2020, have a negative impact not only on public finances, but also on the subsistence of poor and climate-vulnerable communities.

During the design of the innovative Flood Insurance project outline, the need for ex-ante risk financing mechanisms was felt. In 2013, INGO along with partners, identified catastrophe insurance as a potentially powerful tool that could meet the needs. 

The motivation was that Articles 4.8 and 4.9 of the 1992 United Nations Framework Convention on Climate Change called on countries to consider insurance as a tool to meet the specific needs and concerns of developing country Parties arising from the adverse effects of climate change. 

Furthermore, Article 3.14 of the 1997 Kyoto Protocol stated that insurance should be considered as a tool for managing loss and damage from climate change.

A risk transfer mechanism - insurance coverage was developed under a joint initiative for the people (1661HHs) living in flood-prone char areas in Sirajganj to compensate their income losses for a three-month period (July-September) based on loss and damages caused by severe flooding.

The Sirajganj district is severely flooded every one or two years. When people in these areas are affected by a severe flood, they lose their livelihood and belongings. The sufferings of flood-affected people increase in proportion to the magnitude of the flooding and the number of days it lasts.

Before developing the tool, community level consultations were held with community members such as farmers, local representatives, businesspeople, women, and youths to gather risk information, premium paying capacity, and compensation related viewpoints.

The insurance programme was implemented using a CBO approach, and all programme beneficiaries were identified through CBO members. The working area was one of the most remote, unprotected, and disaster-prone in the country.

One resilience building project titled Resilience through Economic Empowerment, Climate Adaptation, Leadership, and Learning (REECALL) implemented by Oxfam addressed the same community for ensuring disaster preparedness activities at community level for a couple of years.  

The findings of the Participatory Capacity and Vulnerability Analysis (PCVA) and the Community Risk Reduction Plan (CRRP) have been shared with relevant communities. This will not only assist them in building capacity, but will also empower them to move forward with their development agenda.

Beneficiaries of the PCVA learned how to identify and analyse problems to the best of their abilities. They were also taught how to develop a contingency plan to effectively mitigate upcoming monsoon floods.

The necessary steps were taken for the statistical flood level value calculation, and IWM provided the flood level analysis. Some types of trigger values for payout decision were adopted for the project area based on statistical analysis of flood levels.

Flood maps generated on 152 days ranging from June 1 to October 30 from 1985 to the current project year were used in the calculation.

Because there is no administrative village boundary in Bangladesh, a tentative village boundary has been demarcated using spot information, household information, and Google Earth. 

Later, district-level gridded data (Water depth data converted to Reduced Level, i.e. Water Level) was cropped for these demarcated village boundaries. The yearly maximum flood depth data for each village were then analysed in order to calculate flood level severity in relation to the Return Period.

For the calculation of insurance premiums and payout matrix, index-based flood insurance considered only flood depth and duration. A grid-based water surface, as opposed to a DEM, was generated to produce flood depth and duration mapped surfaces in order to convert the model result into a suitable format of insurance payout matrix.

The generated flood maps are cropped for areas covering the project locations. These flood maps are then converted into points from the surface, using raster analysis tools of GIS software. 

These flood level data points, which represent each grid of the 300 m X 300 m DEM, fall within a specific village boundary and are then averaged for a specific day. When the average water level in the reference area exceeds the corresponding water level trigger, the day is considered a flood day.

Ex-post disaster funding, in the form of aid or loans from donors and other countries, is now a critical component of disaster recovery. The funds are transferred from the central government to the local governments, who then distribute them to the communities.

The same is true for the non-profit sector, where international NGOs collect relief funds and distribute them through their local teams or local partners. This top-down approach is slow and limited. One of the key characteristics of the 'disaster relief economy' is that funds must be spent as soon as possible.

The top-down approach also underestimates local communities' institutional capacity and fails to address their specific needs. This leads to slowed economic recovery and prolonged poverty. 

Ex-ante risk financing mechanisms, which involve communities in decision making, are needed to address these challenges.     

The community is involved in enrolling the members and ensuring the distribution of insurance payout.  Besides, the community is linked with local NGO/MFI whose primary job might be to monitor the processes and provide essential support. 

During the implementation of the insurance project, the Sirajganj district experienced three floods (2014, 2015, and 2020). The water level in the project areas had exceeded the danger level for all of these years.

During the flood season, the technical service provider-IWM reviewed the water level according to the index design, and while insurance claims happened in accordance with the policy proposal, the insurer gave payouts, which were distributed among the affected households in Sirajganj, who received cash as compensation for their wage loss on flood days.

Following floods in 2014, 2015, and 2020, insurers collaborated with a local NGO-MMS to distribute flood insurance payouts to policyholders. 

Though it serves as a good example of compensating households in accordance with the project objective, this initiative would be more sustainable and effective if a government entity, or any other stakeholder, participated in premium payment with the vulnerable community. It should not be expected that poor policyholders will always pay the entire premium.

The project aims to scale up a robust, flexible, and affordable index insurance product to benefit the targeted poor and vulnerable community members financially.

Furthermore, product diversification is required to ensure that insurance models are technically and financially sound, equitable, and adaptable to different geographies and communities.

This includes the further development of meso-level product structures, insurance coverage options, and the integration of risk mitigation measures with premium-setting and payment methods. 

Capacity building activities for potential policyholders on insurance issues, risk financial literacy, and information would be carried out to ensure farmer participation and multi-stakeholder engagement in insurance schemes.

Access to data and engaging a data service provider for technology services, data collection, and data analysis are key to improving the effectiveness of such projects.

ICT services would need to be expanded up to the village level in order for farmers to have greater access to forecasting information and mobile money transfer. Data on climate variables and water level measurements will be collected from reliable data sources using remote sensing satellites.

More advocacy is required to persuade the Insurance Development and Regulatory Authority of Bangladesh (IDRA) and insurers/reinsurers to implement demand-driven inclusive climate insurance policy mechanisms. This will increase social protection, climate change adaptation, and compensation for loss and damage caused by extreme events.

In collaboration with OXFAM

KNMN Azam is a development practitioner. He can be reached at [email protected]

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.