Well-designed insurance solutions backed by strong data will not only minimize loss and damage from rapid-onset extreme events but also incentivize climate-vulnerable people to opt for resilience measures
The agriculture sector has an indisputable role to play in Bangladesh’s economy. This sector employs around 50% of the population, with the livelihood of 70% of people overall depending on it. Unfortunately, this sector also suffers the most due to an unprecedented increase in the frequency of climate hazards in recent years.
The cyclone Amphan in 2020 affected crops from some 176,007 hectares of land across 17 coastal districts in Bangladesh. The year 2020 also saw the rise of a new problem of recurrent floods which caused production losses of around 149, 416 tonnes of crops to 449,285 farmers. These losses are only expected to worsen with time because as climate change becomes more prominent, these hazards will only exacerbate.
For combatting the losses to the agriculture industry, several financial schemes have been introduced by the government. However, it is difficult for the government to solely give financial protection to such a large industry. The private sector also has an integral part to play, particularly in terms of financial instruments like climate risk insurance. While agriculture — prone to systematic and covariant risks — does not lend itself easily to insurance, index-based climate risk insurance has been established as an appropriate financial tool to support this sector.
How can the insurance industry help?
Economists have long emphasized how insurance can help influence the behaviour of market actors through price signals, which are implicit information conveyed through changes in market prices and signal buyers and sellers to change their behaviour accordingly. Insurers practice price discrimination by charging a higher premium for riskier activities. Likewise, climate risk insurance puts a price tag on climate risks, by charging higher prices for activities with higher climate risk.
This characteristic of insurance, however, is also the reason leading to it not being considered as the most efficient tool for addressing climate risks. Moreover, operational costs for climate risk insurance tend to be higher than traditional insurances. Above all, the most climate-vulnerable people tend to be at the worse end of the poverty spectrum, and are unlikely to opt for insurance solutions due to the costs associated.
Even with all the misgivings about climate risk insurance, its market has only experienced growth over the years, particularly in the form of index-based insurance which has become a common financial tool used primarily in agriculture. For index-based insurance, payouts are usually made when a certain threshold is triggered by a pre-determined weather or crop index, usually a certain degree of rainfall or flood level. The more polished the data, the more immaculate the index will be, resulting in a well-designed insurance product. Index-based insurance is a form of risk transfer approach that might not completely eliminate the risk of loss and damage, but by providing compensation for it, can reduce the associated setbacks in development and livelihood.
The rise of index-based insurance in Bangladesh
Index-based insurance is slowly gaining momentum in Bangladesh. In 2020, 316 flood-struck Boro rice farmers from the region of Gaibandha received compensation as part of a satellite-based agricultural-based flood index (IBFI) program. This program was developed by International Water Management Institute (IWMI) in partnership with Oxfam Bangladesh, CGIAR Research Programs on Climate Change, Agriculture and Food Security (CCAFS) and Water, Land and Ecosystems (WLE), Green Delta Insurance Company Ltd (GDIC), Swiss Re and SKS Foundation.
World Food Program (WFP), with Oxfam Bangladesh and GDIC, piloted another index-based climate risk insurance scheme in 2020. Funded by the Korea International Cooperation Agency (KOICA), this insurance aimed at supporting 2,000 casual agricultural labourers for wages lost due to prolonged monsoon floods.
The ‘Promoting Risk Mitigation Measures for Climate Change Adaptation (Surokkha)’ project by Swiss Agency for Development and Cooperation (SDC) and Syngenta Foundation for Sustainable Agriculture Bangladesh (SFSA Bangladesh) has plans to providing index-based crop insurance to 233,000 smallholder farmers by 2022.
The Syngenta Foundation also recently signed a grant funding agreement with The Frankfurt School of Finance and Management (FS), implementing agency of the InsuResilience Solution Fund (ISF) which is funded by KfW. With BRAC and GDIC as local partners, this grant aims to co-finance the development and scale-up of climate risk insurance for a range of crops to meet the needs of the smallholder farmers.
While this increasing trend of climate risk insurance in Bangladesh is a positive sign for climate resilience, a fraction of people will never opt for it due to the cost of the insurance premium, regardless of how cheap it is. Also, insurance is only applicable to risks, not certainties, so it cannot provide protection against all hazards, such as slow-onset events like sea-level rise and acidification. Moreover, there is an evidence gap on how much of a role insurance can play in actually building climate resilience.
Despite its shortcomings, insurance is still acknowledged as a convenient tool to support the agriculture sector in dealing with climate hazards. Particularly, it is a financial tool that can help potentially fill the financial gap created in the agriculture sector due to the unprecedented increase in the frequency of rapid onset extreme events like floods and cyclones. However, that can only happen through designing competent insurance products backed by strong climate data which are also geographically refined and gender-responsive.
Well-designed insurance solutions backed by strong data will not only minimize loss and damage from rapid-onset extreme events but also incentivize climate-vulnerable people to opt for resilience measures. Nevertheless, the number of insurance companies engaging in index-based insurance in Bangladesh remains low, with only GDIC having made any significant penetration. A wider engagement of the insurance industry is needed for making index-based climate risk insurance effective.
Insurance is a costly solution and needs to be carefully designed for proper utilization. It should be preceded by proper risk assessment, and backed by robust data. Insurers also need to constantly innovate new insurance tools and adapt existing ones. Private insurance companies are much ahead in the game and can play a pivotal role in making climate risk insurance instrumental in climate change adaptation. A wider engagement of the insurance industry in climate risk insurance will lead to a larger fraction of the agriculture sector being penetrated by insurance and protected against climate hazards.
Towrin Zaman is working as Research Associate at ICCCAD.