Climate Risk Insurance in Pacific Small Island Developing States: Possibilities, Challenges and Vulnerabilities

• Opinion by Raghbendra Jha (canberra, australia)
• Thursday, April 14, 2022
• Inter Press Service

Concurrently, the poverty head count ratio in these countries has been persistently high and has probably increased during the pandemic. The PSIDS face deep-rooted structural reasons why, unlike many developing countries in the world, they might not be able to grow rapidly and reduce poverty quickly. These reasons include the small size of their economies, their remoteness, inadequate access to large markets and skilled labour force and their vulnerability to external shocks.

Almost all the PSIDS have been subjected to extreme weather shocks including hurricanes and other climate change related disasters, apart from earthquakes, volcanic eruption and the like. The PSIDS face a disproportionately large number of external shocks. It has been estimated that the cost of climate-induced disasters can be as high as 30% of GDP. In some cases threats of climate change can be existential. For instance, climate change is particularly threatening for the long-term habitability of the island state of Tuvalu. This is because the average height of the islands is less than 2 metres above sea level, with the highest point of Niulakita being about 4.6 metres above sea level. Indeed the PSIDS have been classified as among the most vulnerable to risk areas in the world.

When risk and vulnerability are so high, it is natural to turn to insurance as an antidote. However, just as there are strong structural reasons why economic growth and poverty reduction cannot accelerate rapidly in the PSIDS there are compelling structural reasons why insurance cannot be widely used in the PSIDS. Most citizens of the PSIDS are part of the informal economy.

The incidence of informality of economic activity is around 60 to 85% in Melanesia and Micronesia countries and is increasing in Polynesian countries. More than half the workers are in the informal sector. A majority of these are women and/or have low levels of education. Therefore, it would be difficult for them to negotiate complex insurance contracts. Further, most climate insurance disasters are quite debilitating so that there the longer the delay in executing the insurance obligations the higher is the loss to the individuals. This would lead to dis-saving on the part of individual to meet their consumption needs. This would then reduce the resources available for investment and growth. Therefore, even a single climate disaster can have effects well beyond its immediate effect on humans and property.

A measure to complement individual insurance is aggregation of risks with the insurance being taken out by higher level entities. For instance, a tripartite partnership among insurers, aid agencies and the government can be created so that a country-specific risk pool can be created. This requires that the payout triggers be well defined.

There are clear advantages to making comprehensive housing insurance to be made compulsory for all income groups. Policyholders could also be encouraged to aggregate risks through cooperatives, credit unions and the like. Finally, the insurance policy can be held by the government or other national or international agencies. Payouts can be used to accommodate government services and maintain post-disaster programs.

If these provisions were accepted, then it would follow that quite a bit of the premium for insurance would have to be paid for by international aid. Multilateral aid would be preferred to bilateral aid as many of the insuring agencies could well be located in donor countries creating complex problems of moral hazard. In contrast, the use of multilateral aid would be more hands off.

The case for providing insurance rapidly remains strong. Keeping this in mind, the UNDP has designed a climate risk insurance product for six PSIDS. However, much remains to be done. Clearly any long-term meaningful insurance policy should not be viewed in isolation but should be embedded in a broader policy of providing climate change relief for PSIDS.

Raghbendra Jha is Professor of Economics and Executive Director, Australia South Asia Research Centre, Australian National University

[1] This article draws on my article co-authored with D. Jain, A. Chida, R.D. Pathak and S. Russell “Climate risk insurance in Pacific Small Island Developing States: Possibilities, challenges and vulnerabilities – a comprehensive review”. See https://link.springer.com/article/10.1007/s11027-022-10002-z

[2] See https://www.cgdev.org/publication/are-pacific-islands-insurable-challenges-opportunities-disaster-risk-finance

[3] See https://info.undp.org/docs/pdc/Documents/PSC/PC%20%20Prodoc%20Final%2017%20Dec%20(signed%20copy).pdf

[4] This further supports the general case for an increase in multilateral aid. See https://onlinelibrary.wiley.com/doi/10.1111/j.1467-9701.2004.00596.x

[5] https://www.preventionweb.net/news/new-insurance-product-aid-fight-against-climate-change-pacific

© Inter Press Service (2022) — All Rights ReservedOriginal source: Inter Press Service

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