Can Climate Risk Insurance Shield Bangladesh From Environmental Perils?

LightCastle Analytics Wing
September 19, 2021
Can Climate Risk Insurance Shield Bangladesh From Environmental Perils?

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. 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 Climate Risk Insurance (CRI) came into global policy discourse [6]. A 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
  • Improve their ability to reduce threats to food security

It is based on a preparedness approach.

Meanwhile, 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]. 

GIZ RFPI conducted a study on 22 countries in Asia and the Pacific region. The study especially focuses on Bangladesh, Indonesia, the Philippines, and Vietnam. Only 14 of the 22 countries have some form of contingency funds in the Disaster Risk Management Framework (DRMF). In the majority of 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. [8]

  1. Pacific Catastrophic Risk Insurance Company
  2. South East Asia Disaster Risk Insurance Facility
  3. The Philippines City Disaster Insurance Pool
  4. World Bank Catas­trophe Bonds for the Philippines and Maldives
  5. CAT DDO
  6. PEM facility

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. Lately, the Bangladesh Government has become more committed to supporting the development of the national insurance sector. The government is working 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 (CSR) budget to 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 Non-Bank Financial Institutions (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
  • Inadequate institutional and human capacities to design and implement climate risk transfer mechanisms
  • Insufficiency of a 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

Center for Participatory Research and Development (CPRD) conducted a study in 2018. They assessed the capacity of the insurance sector of Bangladesh for introducing climate risk insurance (CRI). They found that only 12.5% of insurers have (traditional) risk transfer insurance. However, most of these featured schemes are not in operation. Only 2.5% of insurers affirmed having traditional insurance for livestock and rubber plantation. Furthermore, 2.5 % of the insurers are in 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 United Nations Framework Convention on Climate Change (UNFCCC) negotiation process on risk financing [6]. 

Microfinance institutions like BRAC, Grameen Bank, and Proshika undertake some standalone disaster risk transfer initiatives. The objective is 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. 

Climate Risk Insurance Products and Initiatives

A) Traditional Crop Insurance

Sadharan Bima Corporation (SBC) introduced crop insurance (CI) in 1977. CI covered key cereal and cash crops like Aus, Aman, and Boro rice, wheat, jute, and sugarcane. The premium ranged 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 the 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 on this project.

Nevertheless, 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 Corporation (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]. KOICA (the Korea International Cooperation Agency) funded this climate-risk insurance pilot scheme. 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 time effective as Bangladesh experienced the largest and longest flooding event in 20 years during the 2020 monsoon. Besides, 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 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

Despite a few pilot initiatives for climate risk insurance, most of these donor-funded could not sustain when the donor support ended at the end of the 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 the 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 the 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. 

State-led Initiative Is pertinent

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 significantly require consistent innovation in product development. It is imperative to tailor to the needs of the poorest and most vulnerable populations. Otherwise, it will exacerbate if –

  • Climate Risk Insurance (CRI) instruments are not designed and implemented carefully
  • The financial instruments are not accessible to the poorest and most vulnerable people due to high premium costs

In addition, the implementation of insurance-related instruments can also potentially create new dependencies for smallholder farmers. These dependencies would eventually work against empowering resilience. Certainly, there are different kinds of losses and damages that we cannot insure. However, they are vulnerable to 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. It 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]


  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

WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a data-driven approach to create opportunities for growth and impact. We consult and collaborate with development partners, the public sector, and private organizations to promote inclusive economic growth that positively changes the lives of people at scale. Being a data-driven and transparent organization, we believe in democratizing knowledge and information among the stakeholders of the economy to drive inclusive growth.

For further clarifications, contact here: [email protected]

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