Catastrophic risk insurance: Willingness and ability to pay

Catastrophic risk insurance assumes specific importance when we talk about disaster risk reduction or climate change adaptation or sustainable development since  risk insurance has been advocated and effectively used in small scale to achieve these broad goals in most instances. However, the spread or uptake of risk insurance in the Asia-Pacific region and  elsewhere remained negligible (compared to sales of Coke or cell phones?) due to several bottlenecks arising from policy and information imperfections. While part of the problem can be attributed to policy level imperfections, it is surprising to see that a subject that can greatly benefit corporate sector (really?) also seems to suffer same limitations that many other public policies face and the so called efficient and effective private sector seems to be oblivious to this fact that they are not able to reach out to a section of society that needs them most. The intriguing question here is, how come the same corporate sector that is extremely successful in selling a sugared drink (such as Coke or Pepsi) which in most opinion is useless and probably has least intrinsic value of whatsoever is failing to sell a very useful product such as risk insurance to the very same masses!

"If I could convince my son to ride bicycle without fear by wearing a helmet, I am sure our marketing agents are more than intelligent and can very well communicate the risk to adult population they are targeting!!!"

I am sure several people have already talked and written on this subject very extensively but I feel that there is definitely more than that meets the eye. In a quest to get even with this, I have been brainstorming (and writing) on this issue for quite some time and this is what I could come up with to summarize what may be limiting the spread of risk insurance in most cases:

1) Affordability: The issue of affordability could be put at the top of all the bottlenecks limiting the spread of risk insurance in the developing Asia-Pacific. Though insurance premiums in most of the developing Asia-Pacific region are lower than that of those in the developed countries, the annual insurance premium costs are still not affordable for most of the income groups in the developing countries. Part of the high insurance premium costs emerge from the high residual risks and low spread in terms of number of insured (i.e. poor development of the insurance portfolio). 

But, mind you, the cost of premium cannot be brought down beyond a point since the premium should meet lot of other expenses of the insurance company as well. Can we think about subsidizing the premium? Though this option appears to be most lucrative proposition for most policy makers, as they tend to go towards populistic measures, there are several others that go against this option. The argument here is sending proper price signal is important to make the insured feel the importance of [not]indulging in reckless risk taking behavior! Then the question is how do we bring down the price to an affordable level?

The price issue has two components, one is ability to pay and the second is willingness to pay. I think there is not much research on these points, if the success in uptake is achieved by targeting more on willingness to pay than on ability to pay.  I would be very happy to see an approach that targets both these components of price rather than getting lost in some kind of obscurity. 

2) Residual risks: High residual risks are one of the major causes for the poor risk insurance coverage in the region. The high residual risks are due to poor disaster risk mitigation mechanisms, lack of or poor enforcement of laws and codes such as building bylaws, structural codes, and laws pertaining to land use planning.

3) Presence of insurers and reinsurers: One of the reasons behind poor penetration of insurance and insurance prices above affordability is limited presence of private insurers and reinsurers. Reinsurers play an important role of providing shock absorbing capacity to the insurers. To date, very few national (e.g. General Insurance Corporation in India, China Reinsurance Company in China, Zenkyoren or Zenkoku Kyousai Seikatsukyoudoukumiai Rengou Kai in Japan) and international (e.g. Munich Re, Swiss Re, Toa Re, Axis Re) reinsurers operate in the region. Hence, there is a very high potential for the expansion of the reinsurance sector. Insurers and reinsurers cannot afford to operate in the region unless there is sufficient enabling environment including efforts to reduce the residual risks.

4) High premium costs: The high residual risks, lack of optimum number of insurers, low competition, and low number of insured population all lead to the higher premium costs than what they could be in the Asia-Pacific region.

5) Policy environment: Though risk insurance is a ‘market instrument’, its dynamics are determined or governed by the principles of an open market, government policies and regulatory guidelines act as precursors for flourishing of the sector and ensures the effectiveness of the instrument. Hence, the role of government in promoting the culture of risk mitigation by promoting awareness generation, and designing and implementing structural and non-structural disaster risk mitigation codes and laws including institutional mechanisms and regulations for promoting risk insurance is paramount.

Though there has already been significant improvement in terms of policy support to insurance sector, as observed from the high growth rates of insurance sector in the region, the support is still not comprehensive enough. For example, currently, most developing countries in the Asia-Pacific region are at the nascent stages of formulating national disaster risk mitigation plans and policies and haven’t fully utilized the potential of risk insurance in promoting risk reduction. Traditionally, strong emphasis of most governments on disaster response over mitigation is known to hinder the public participation in risk insurance schemes. Limited financing is the major reason behind the poor emphasis on disaster risk mitigation in the region.

6) Cultural and perceptional issues: General lack of awareness and misplaced perceptions about dealing with the risk in general and about the risk insurance in particular among the common people and business sector also serves as a bottleneck. Sociological research has indicated the existence of behavioral situation that can be characterized as ‘lethal attitude’ which suggests that things will happen whatever is done and that things are beyond ones’ control, which limit the risk mitigation behavior of individuals.

7) Lack of data: Infrastructure for collecting and managing the systematic and comparable data on past risks, vulnerabilities, disasters, and the nature of disaster losses provides important information for designing risk insurance schemes which is either not fully developed nor readily available and accessible to the risk insurance industry and for the general public in most of the developing nations in the Asia-Pacific region.

Another important challenge, which didn’t receive much attention in the region, that could undermine the implementation of an affective insurance facility is the liability challenge that insurers will have to deal with due to not reporting their climate related risks to their shareholders, and probability for high insurance payouts due to high potential for yield losses in a changing climate scenario. As a result of these limitations, most of the initiatives couldn’t be scaled-up to cover larger, and sometimes important geographic areas and socio-economic groups that could benefit from insurance related instruments.

For more information, write to me and I will be happy to send a full paper that I have been working on this subject. 

Decision making, public participation and fairness in CCA

Research carried out by IGES, its partners, and other research community elsewhere involving policy makers and other stakeholders in climate change adaptation has revealed that the adaptation decision making in most of the Asia-Pacific countries and elsewhere is at nascent stages due to various issues such as limited understanding on how adaptation decision making could (or should) be different from developmental decision making, lack of tools or limited application of available tools to prioritize adaptation actions and limitations with policy and institutional mechanisms. A large school of scholars have been proposing that sound adaptation decision making is possible by measuring the progress in adaptation, through adaptation metrics and by embedding the principles of adaptation metrics into the existing project and program monitoring and evaluation procedures. Several monitoring and evaluation frameworks have already been proposed for adaptation projects claiming that understanding these frameworks and applying them on the ground can be of great help to project developers and implementers at all scales. However, it is not clear if these tools can help address issues such as public participation and fairness in decision making though most decision support tools claim to employ participatory processes. It is difficult to test the veracity of these claims since most of these frameworks are yet to be tested and compared on the ground in the real world.

Since climate change adaptation is a question of public policy requiring collective action and cognitive decision making, fairness and public participation are integral requirements for successful adaptation. Ensuring public participation has long been and loudly claimed by the experts and practitioners of community based adaptation (CBA). While such CBA approaches may enable public participation, there is no evidence to prove that these approaches have promoted fairness in decision making. So, creating enabling conditions for ensuring fairness may be crucial even in CBA based approaches, a question to explore. Though public participation and fairness are issues that have been historically the point of focus in developmental interventions, it is not very much clear how these experiences can be learned and applied to adaptation decision making.

Keeping the above issues in view, the author, in association with the Asia Pacific Adaptation Network, has organized a session on decision making, public participation and fairness on 12-13 May 2012 at the 2nd Adaptation Forum in Bangkok, Thailand. This session has addressed the questions such as how different are public participation and fairness issues in adaptation decision making, to what extent the proposed frameworks address the issues of public participation and fairness in adaptation decision making, what are the current experiences in promoting public participation and fairness in adaptation decision making, what enabling factors are crucial to ensure public participation and fairness in decision making and how they can be promoted? 

Various processes being taken up in adaptation decision making at the national level are already considering the issue of public participation in adaptation planning (Dr. Frank Griffin, Papua New Guinea). The issue of public participation has been addressed through two-tier consultation process wherein technical consultations were conducted at the national level and these findings were taken to the local level consultations to contextualize and identify specific adaptation practices.  The technical consultations have helped in ironing out the terminology that is being used by various stakeholders that led to proper communication among various stakeholders. In addition, the process has employed a robust process of climate change vulnerability assessment that has underlined the adaptation practices identified.

The case study of Tachin river basin highlighted the issue of multiplicity of plans, programs, institutions at the local level (Muanpong Juntopas, SEI). It showed that the evidence is crucial for successful decision making. Community based processes have helped in solving the issues such as poor vertical integration, integration across boundaries, sectors and basins.

On the contrary, the adaptation decision making process in Malaysia is centralized and top down driven (Gurmit Singh, Centre for Environment, Malaysia). The federal structure, lack of public consultation, and lack of transparency have posed several bottlenecks in adaptation decision making and communicating the message of adaptation in effective manner. It is apparent that in Malaysia, and elsewhere, adaptation should be considered as a rights issue (at par with the right to development).

Adaptation is also an issue of fairness issue (Atiq Rahman, BCAS). Fairness issue is very much limited to the international negotiations and it has been neglected at the national level. Fairness is a pre-requisite for promoting  good governance, and vise versa, at any level and it should not be limited to just the international negotiations. It is clear that, in most cases, the issue of fairness has been ignored even in the traditional developmental discourse. However,  the climate change has given new opportunity for us to discuss these issues and give greater emphasis in the decision making. Promoting local knowledge through processes such as community based adaptation and integrating/contextualizing the fairness discussion into food security, energy security, water security, health security and education securities that communities care about could be the way promote fairness.

Greater access to natural resources is a critical entry point for enabling greater participation in decision making since those with resources often happen to be the ones who makes decisions (Marcus  Moench,  ISET). Decentralization; access to information, shared learning and strengthening local governance can help promoting access to resources.

It is clear that public participation and fairness in decision making will not happen automatically but rather they need to be facilitated and promoted at all levels in a conscious manner. Issue of fairness can be very tricky when it comes to operationalizing since 'fair to whom' depends on 'who is defining fairness' and who is driving the discussion. It is often challenging to be fair to the entire section of community since there will always be losers and gainers in any given combination of resource allocation (this is just my opinion). Can we claim to have addressed the the fairness issue if 90% of vulnerable in the project location are benefited while other 10% are not since community rankings said it is OK to benefit top x number of people ranked as vulnerable? Probably not. While most project implementing agencies would like to benefit all vulnerable population in their project, often they would have to make decisions (or facilitate communities to take decisions in a participatory manner) such that project finances are 'efficiently' used rather than 'thinned out' (managers may think thinning out is a disaster for project reporting). This brings the discussion to the point that fairness is also closely linked with the 'project resources'. In the current socio-political and economic environment, it appears that bringing fairness to all is not 'just one of the challenges' that development practitioners and researchers would have to deal rather it is the crux of the problem in decision making. Fairness should be a 'chapter' in the Bible or Quran or Upnishad (or other sacred texts you can think) of every project, whether it deals with development or adaptation or disaster risk reduction.