Many of the world’s populations are vulnerable to climate shocks – to drought, flooding, irregular rainfall and natural disasters. For these countries, cities and communities, index-based insurance is a critical risk-management tool which allows victims of such shocks to continue to have access to finance and to build resilience against future risks.
Since natural disasters can strike anywhere and anytime, making far-sighted preparations is much more effective than scrambling to respond to a crisis. I recognized this after Hurricane Mitch ravaged Honduras and my grandmother had to be evacuated because the local river swelled to the second floor of her home.
As climate change intensifies extreme weather events across much of the planet, countries are seeking the World Bank Group’s support to improve both their physical and financial resilience to disasters.
We are increasingly working with governments to devise sound financial planning and risk management before a disaster strikes, not just to assemble financing to help countries recover in its wake.
Market-based instruments – such as insurance -- can act as shock absorbers in case of natural disaster, helping countries avoid the worst of a crisis’ financial impact.
I was recently at the Novafrica conference in Lisbon, where one of the keynote talks was given by Stefan Dercon. He based it around a newly released short book he has written with Daniel Clarke, called Dull Disasters (open access version). The title is meant to indicate both the aim to make dealing with disasters a dull event rather than media circus, as well as to discuss ways to ‘dull’ or reduce the impact of disasters.
Stefan started his talk by noting that disaster relief may well be the part of the whole international development and humanitarian system that is the least efficient and has had the least research on it. The book starts by noting the predictability of responses “every time a natural disaster hits any part of the world, the newspaper headlines ten days later can be written in advance: ‘why isn’t the response more coordinated?’. He gives the examples of the responses to the earthquakes in Nepal and Haiti, to Hurricane Katrina, and to Ebola as examples. But he then notes the crux of the problem “…The truth is everybody argues for coordination but nobody likes to be coordinated”.
Traditional insurance is either unavailable or is very expensive in many developing countries, leaving small farmers particularly vulnerable.
A severe drought, a devastating earthquake or another weather disaster can wipe out small farmers. Such uncertainties also make them more risk averse and less likely to invest in their farms.
Index-based rainfall insurance offers the potential to allow farmers to protect themselves against one of the most important risks they face – the risk of drought (or conversely too much rain).