Can Climate Risk Insurance Shield Bangladesh From Environmental Perils?

    LightCastle Analytics Wing
    LightCastle Analytics Wing
    Climate Risk Insurance

    Bangladesh is the seventh most vulnerable country to natural disasters in the world as per the Climate Risk Index 2000-2019 [1]. During 2016-2020 economic losses due to natural disasters in Bangladesh ranged from 0.8 to 1.1 percent of GDP. A number of cyclones including Roano (May 2016), Mora (May 2017), Fani (May 2019), Bulbul (November 2019), and Amphan (May 2020) hit the coastal areas of the country. The monsoon floods in 2020 engulfed more than 36 percent of the country and impacted 30 districts in the Northern, North Eastern, and South-Eastern regions [2]. 

    In 2020, global losses due to natural disasters amounted to US$ 210 billion, only 39% of which was insured, making insured losses of US$ 82 billion [3]. With a Non-life insurance penetration ratio of only 0.16% in 2020, one of the lowest among the Asia Pacific countries, it is easy to understand that the uninsured losses due to disasters and climate change in Bangladesh are significantly higher than that of other countries [4]. 

    The Intergovernmental Panel on Climate Change (IPCC) has identified Bangladesh as one of the countries that will be hard hit by the anticipated effects of climate change in the coming days. According to the report, there is high confidence that coastal hazards will increase leading to flooding in low lying areas [12]. By 2050, 1 in every 7 people in Bangladesh will be displaced by climate change [5]. With high exposure to frequent and high-risk climate and weather events, there has been a heavy emphasis on the need for integrated climate and disaster risk financing to build greater resilience and protect individuals and communities. Though nascent, the importance of Climate Risk Insurance (CRI) as an integrated tool against climate risk is being recognized.

    What is Climate Risk Insurance (CRI)?

    In 1991 at the 46th Session of the United Nations General Assembly the Climate Risk Insurance (CRI) came into global policy discourse [6]. Climate risk insurance (CRI) scheme is a financial safety net against the negative impacts of extreme weather events. CRI aims to enhance the ability of households in vulnerable countries to deal with climate shocks, reduce the economic push factors of migration and improve their ability to reduce threats to food security. It is based on a preparedness approach.

    CRI is already in effect in other parts of the world. For instance, in 2017, the German Federal Ministry for Economic Cooperation and Development (BMZ) joined forces with the UK, Fiji, Ethiopia, and the World Bank to launch the InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions, as a joint G20 and V20 (Vulnerable Twenty Group) initiative [7]. 

    A study conducted by GIZ RFPI on 22 countries in Asia and the Pacific region, with special focus on Bangladesh, Indonesia, the Philippines, and Vietnam found that in the disaster risk management frameworks (DRMFs) present in the region, only 14 of the 22 countries have some form of contingency funds. In the majority of the countries, CDRI (climate disaster risk insurance) is not part of the integrated DRMF. There are only 5 sovereign risk transfers and 6 disaster risk insurance programs. These are the Pacific Catastrophic Risk Insurance Company, South East Asia Disaster Risk Insurance Facility, The Philippines City Disaster Insurance Pool, World Bank Catas­trophe Bonds for the Philippines and Maldives, CAT DDO, and PEM facility [8]. 

    Climate Risk Insurance (CRI) in Bangladesh       

    Almost a decade ago, the government earmarked US$ 400 million to set up the Bangladesh Climate Change Trust Fund but allocations since have not kept pace at the same level [8]. In 2019, the 15th International Conference on Inclusive Insurance focused on Coping with Climate Change was held in Bangladesh. In recent years, the Bangladesh Government has become more committed to support the development of the national insurance sector and work with international partners to deploy climate risk management solutions. 

    Banks and financial institutions in Bangladesh now need to allocate at least 10% of their Corporate Social Responsibility budget for the Climate Risk Fund. This funding can be done in both ways-by providing grants or financing at reduced rates of interest [9]. In 2020, BDT 476.8 million (US$ 5.6 million) has been utilized from climate risk funds by banks and NBFIs as grants and no concessional loans [9]. 

    Readiness of the Insurance Sector in Bangladesh for Climate Risk Transfer Mechanism

    Despite the potential of climate risk insurance, there is still inertia in the widespread adoption of climate risk insurance. Evidence of poor smallholders paying insurance premiums is scanty and is neither affordable for them. Besides these, there are some other key barriers to introducing climate risk insurance: 

    • Insufficient knowledge and understanding of the climate risk insurance
    • Low level of insurance literacy
    • Lack of coordination among the insurers and the relevant government agencies
    • Lack of institutional and human capacities to design and implement climate risk transfer mechanisms
    • Lack of supportive legislative framework
    Percentage of Surveyed Insurers with Climate Risk Insurance Knowledge in Bangladesh
    Percentage of Surveyed Insurers with Climate Risk Insurance Knowledge in Bangladesh / Source: Center for Participatory Research and Development, 2018

    A study conducted by CPRD in 2018, to assess the capacity of the insurance sector of Bangladesh for introducing climate risk insurance (CRI) found that only 12.5% of insurers featured in their website have (traditional) risk transfer insurance, and most of these featured schemes are not in operation. Only 2.5% of insurers affirmed to have traditional insurance for livestock and rubber plantation and 2.5 % of the insurers are at the initial planning stages of developing weather index-based insurance schemes. Only 35% of the insurance professionals know international funds and 20% are aware of the UNFCCC negotiation process on the risk financing [6]. 

    Microfinance institutions like BRAC, Grameen Bank, and Proshika undertake some standalone disaster risk transfer initiatives, primarily to protect their investments in livestock and other productive assets. Other than MFIs, Sadharan Bima Corporation (SBC)-a state-owned company for general insurance undertook a few pilot projects in collaboration with international and national organizations [6]. Most of the small-scale donor-supported climate-based insurance projects in Bangladesh could not succeed in the long run. 

    A few of the climate risk insurance products and initiatives are discussed below:

    A) Traditional Crop Insurance

    As per the order of the Bangladesh Government, Sadharan Bima Corporation (SBC) introduced crop insurance (CI) in 1977 that insured production of key cereal and cash crops like Aus, Aman and Boro rice, wheat, jute, and sugarcane against a premium ranging from 3%-5% of the market value of the insured crop. This crop insurance reached 15,420 farmers before coming to an end in 1992 due to numerous challenges. One of which was the significant losses due to loss claims consistently exceeding the premiums [6]. 

    B) Index-Based Crop Insurance (IBI)

    A “meso-level” index-based flood insurance was introduced in Sirajganj in 2013 to protect the transfer risk of crop loss during a peak flood period each year. Depending on the flood level and the number of days, the payout was different. If flood level surpassed a locally determined threshold and remained for 11 days, each household received BDT 2,800 (US$ 36); if the flood remained for 21 days, BDT 4,400 (US$ 56); and for 26 days, BDT 8,000 (US$ 103). Different national and international organizations collaborated in this project and had differentiated roles and responsibilities: Oxfam Bangladesh in planning, SDC (Swiss Development Agency and Corporation) in the financing, Local NGO MMS (Manob Mukti Songstha) in implementation, CRM India in technical support, IWFM (Institute of Water and Flood Management) in data collection, and Swiss Re as the reinsurer. The insured households were relieved from paying the premium as the funding agency paid the premium on their behalf. The insurance scheme was extended to other villages but then suddenly phased out in 2015 presumably due to the end of the project supported by SDC [6]. 

    C) Weather Index-Based Crop Insurance (WIBCI)

    With the aid of US$ 2.0 million from the ADB, Sadharan Bima Corporatio (SBC) piloted another Weather Index-Based Crop Insurance project from March 2014 to June 2018 in three vulnerable districts of Bangladesh. These were drought-prone Rajshahi, flood-prone Sirajgonj, and cyclone-prone Noakhali. The project beneficiaries were the small and marginal farmers who had limited access to climate risk-adaptation tools [6]. 

    D) Index-Based Flood Insurance Product

    In June 2020 the United Nations World Food Program supported Oxfam Bangladesh, to design and launch an index-based flood insurance product [10]. This climate-risk insurance pilot scheme was funded by KOICA (the Korea International Cooperation Agency). Green Delta Insurance Ltd (GDIC) is the insurer and National Development Programme (NDP) is the local partner. Three organizations -Weather Risk Management Services (WRMS) from India, International Water Management Institute (IWMI) from Sri Lanka, and Save the Earth Climate Services Ltd (SECSL) from Bangladesh, provided support for data services and product development [11]. The pilot project has been proved to be very time effective as Bangladesh experienced the largest and longest flooding event in 20 years during the 2020 monsoon. This triggered a payout that provided each enrolled household with US$ 32 through their mobile money platform. The scheme compensates vulnerable families for wage losses due to the floods and is based on the analysis of satellite data collected over 19 years, backed by the latest water level and rainfall data [10]. 

    Way Forward

    Though there have been a few pilot initiatives for climate risk insurance, most of these were donor-funded and could not sustain when the donor support ended at the end of project tenure. This indicates a shift towards an integrated and inclusive business model enabling all stakeholders to operate independently without direct financial aid from donor agencies is critical for long-term sustainability of such projects. Tripartite collaboration between insurance companies, government, and private sector players (major players in the commodity business value chain) can propel such initiatives forward to compensate farmers for any weather-related losses and thus ensure food security of the country. Satellite remote sensing, real-time data provider weather stations, digitized transaction methods, and involvement of local authorities in the structural distribution channel are necessary besides building stronger collaboration among stakeholders. 

    A state-led initiative with proper policy support and financial incentives like premium payment is essential to incentivize the private sector players to introduce climate risk insurance soon. A Value Added Tax (VAT) rebate on index-based insurance products might be introduced for reducing the price [11]. Government should also invest in formal and informal education on the risk transfer measures like crop insurance, weather index-based insurance, etc. to ensure the availability of qualified and competent human resources. 

    Climate Risk Insurance (CRI) instruments require consistent innovation in product development to tailor to the needs of the poorest and most vulnerable populations bearing the highest levels of risk. If CRI instruments are not designed and implemented carefully, and if these financial instruments are not accessible to the poorest and most vulnerable people due to high premium costs, the already existing social inequalities will be exacerbated. In addition, the implementation of insurance-related instruments can also potentially create new dependencies for smallholder farmers – which would work against empowering resilience. It must also be acknowledged that there are different kinds of losses and damages that cannot be insured but will be affected by climate change and CRI instruments cannot be an answer to those losses. Nevertheless, insurance is one of the building blocks of a comprehensive climate risk management framework and plays a crucial role in protecting and mitigating the impact of climate change.

    Rahnuma Binte Rashed, Content Writer, and Tamanna Shahnowaz Sohanee, Business Consultant, at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]

    References

    • 1. Global Climate Risk Index 2021 – Germanwatch
    • 2. National Plan For Disaster Management (2021-2025) – Ministry of Disaster Management and Relief
    • 3. Record hurricane season and major wildfires – The natural disaster figures for 2020 – Munich RE
    • 4. Financial Stability Report 2020 – Bangladesh Bank
    • 5. Climate Displacement in Bangladesh – Environmental Justice Foundation (EJF)
    • 6. Transferring Climate Induced Disaster Risks: Policy, Practices and Readiness of Bangladesh – Center for Participatory Research & Development
    • 7. Climate risk insurance – The German Federal Ministry for Economic Cooperation and Development (BMZ)
    • 8. Report 15th International Conference on Inclusive Insurance – Munich RE
    • 9. Annual Report July 2019 – June 2020 – Bangladesh Bank
    • 10. How flood insurance empowers people facing extreme weather in Bangladesh – UNWFP
    • 11. Climate Risk Insurance and Pay-out of the Flood Insurance Product – The Daily Star
    • 12. IPCC Climate Change 2021: The Physical Science Basis

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    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.