Can Climate Risk Insurance Shield Bangladesh From Environmental Perils

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Bangladesh ranks sixth in natural catastrophe vulnerability worldwide, according to the Climate Risk Index 2000-2019 [1]. From 2016 to 2020, natural catastrophes cost Bangladesh 0.8 to 1.1 percent of GDP. Cyclones Roano (May 2016), Mora (May 2017), Fani (May 2019), Bulbul (November 2019), and Amphan (May 2020) affected coastal regions. Monsoon floods in 2020 covered around 36% of the nation and 30 districts in the North, North Eastern, and South-Eastern regions .

Only 39% of natural catastrophe damages in 2020 were insured, totaling US$ 82 billion. Bangladesh has one of the lowest non-life insurance penetration ratios in Asia Pacific, 0.16% in 2020, which explains its high uninsured catastrophe and climate change losses .

The IPCC predicts Bangladesh would be among the most impacted by the expected consequences of climate change. According to the analysis, coastal dangers would likely grow, including floods in low-lying regions.

Climate change is projected to displace 1 in 7 Bangladeshis by 2050 . To enhance resilience and safeguard people and communities from frequent and high-risk climate and weather catastrophes, integrated climate and disaster risk finance has been emphasized. Despite its infancy, Climate Risk Insurance (CRI) is becoming a crucial instrument for mitigating climate risk.

What is Climate Risk Insurance (CRI)

Climate Risk Insurance (CRI) was introduced to global policy debate during the 46th UN General Assembly Session in 1991 [6]. A Climate Risk Insurance (CRI) program provides financial protection against severe weather occurrences. CRI wants to help poor country families –

  • Handle climate shocks
  • Reduce migration’s economic drivers
  • Increase their food security danger reduction skills

It is based on a preparedness approach.

CRI is already in place elsewhere. In 2017, the German Federal Ministry for Economic Cooperation and Development (BMZ) launched the InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions, a G20 and V20 initiative.

GIZ RFPI studied 22 nations in Asia and the Pacific. The research emphasizes Bangladesh, Indonesia, the Philippines, and Vietnam. Out of 22 nations, only 14 have contingency funds under the Disaster Risk Management Framework (DRMF). Most nations’ integrated DRMFs exclude CDRI (climate disaster risk insurance). There are only 5 sovereign risk transfers and 6 catastrophe risk insurance schemes.

  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       

Bangladesh Climate Change Trust Fund distributions have lagged since the government allocated US$ 400 million over a decade ago [8]. Bangladesh hosted the 15th International Conference on Inclusive Insurance on Climate Change in 2019. Recently, the Bangladeshi government has prioritized insurance industry growth. The government is deploying climate risk management systems with international partners.

Bangladeshi banks must donate 10% of their CSR budget to the Climate Risk Fund. Grants or low-interest borrowing may finance this [9]. Banks and NBFIs received BDT 476.8 million (US$ 5.6 million) in grants and no-concessional loans from climate risk funds in 2020.

Readiness of the Insurance Sector in Bangladesh for Climate Risk Transfer Mechanism

Although climate risk insurance has great promise, its broad adoption is hindered. Poor smallholders seldom pay insurance premiums, which are unaffordable. There are also major climate risk insurance barriers:

  • Lack of climate risk insurance knowledge
  • Poor insurance literacy
  • Not enough cooperation between insurers and government agencies
  • Lack of institutional and human capacity to create and execute climate risk transfer mechanisms
  • Insufficient legislative support

studied in 2018. Bangladeshi insurers were appraised for climate risk insurance (CRI) introduction. Only 12.5% of insurers have conventional risk transfer insurance. Most of the highlighted schemes are inactive. Traditional livestock and rubber plantation insurance was held by 2.5% of insurers. Additionally, 2.5% of insurers are contemplating weather index-based insurance systems. Only 35% of insurance professionals understand foreign finances and 20% understand risk financing negotiations.

BRAC, Grameen Bank, and Proshika take on disaster risk transfer independently. Protecting animals and other productive assets is the main goal. In addition to MFIs, Sadharan Bima Corporation (SBC), a state-owned general insurance firm, collaborated with international and national organizations on experimental initiatives [6]. Most Bangladeshi small-scale donor-supported climate-based insurance schemes failed.

Climate Risk Insurance Products and Initiatives

A) Traditional Crop Insurance

In 1977, Sadharan Bima Corporation (SBC) developed crop insurance (CI). Aus, Aman, and Boro rice, wheat, jute, and sugarcane were covered by CI. The premium was 3%–5% of the insured crop’s market value. This crop insurance program covered 15,420 farmers before ending in 1992 owing to various obstacles. The loss claims routinely exceeded premiums, causing large losses.

B) Index-Based Crop Insurance (IBI)

In 2013, Sirajganj launched “meso-level” index-based flood insurance to prevent crop loss during peak flood periods. Payouts varied by flood level and days. All households got BDT 2,800 (US$ 36) if the flood level exceeded a locally defined threshold for 11 days, BDT 4,400 (US$ 56) for 21 days, and BDT 8,000 (US$ 103). National and international entities worked on this project.

  • Oxfam Bangladesh plans
  • The Swiss Development Agency and Corporation (SDC) provided money.
  • Implementation by local NGO Manob Mukti Songstha (MMS).
  • CRM India’s technical support
  • Institute of Water and Flood Management (IWFM) data gathering
  • Swiss Re as reinsurer

Since the financing agency paid the payment, insured families were relieved. The insurance system was expanded to neighboring communities but discontinued in 2015, perhaps owing to SDC’s project ending.

C) Weather Index-Based Crop Insurance (WIBCI)

From March 2014 to June 2018, Sadharan Bima Corporation (SBC) executed a Weather Index-Based Crop Insurance scheme in three vulnerable Bangladeshi districts with US$ 2.0 million from the ADB. These were drought-prone Rajshahi, flood-prone Sirajgonj, and cyclone-prone Noakhali. The project helped marginal farmers without climate risk-adaptation tools.

D) Index-Based Flood Insurance Product

Oxfam Bangladesh received financing from the UN World Food Program in June 2020 to create and market an index-based flood insurance product .KOICA (Korea International Cooperation Agency) supported the climate-risk insurance pilot program.The insurer is Green Delta Insurance Ltd (GDIC) and the local partner is National Development Programme (NDP). Three organizations—WRMS from India, IWMI from Sri Lanka, and SECSL from Bangladesh—provided data services and product development assistance.

The 2020 monsoon saw Bangladesh’s greatest and longest flooding disaster in 20 years, making the pilot project timely. Additionally, its mobile money platform paid each registered family US$ 32. The plan pays disadvantaged households for flood-related income losses using 19 years of satellite data plus the latest water level and rainfall data.

Way Forward

Most donor-funded climate risk insurance pilots failed once the experiment concluded. This suggests a transition toward an integrated and inclusive economic model that allows all stakeholders to function independently without donor funding is essential for long-term project viability.

Insurance firms, government, and private sector entities (key stakeholders in the commodities industry value chain) may collaborate to reimburse farmers for weather-related losses and assure food security. Besides stakeholder participation, satellite remote sensing, real-time data provider weather stations, digital transaction mechanisms, and local authority involvement in the structural distribution channel are needed.

State-led Initiative Is pertinent

A state-led effort supported by policy and financial incentives, such as premium payment, is necessary to encourage private sector climate risk insurance adoption. A VAT refund on index-based insurance products may be implemented to lower costs [11]. To provide trained and competent human resources, the government should invest in formal and informal risk transfer education such crop insurance, weather index-based insurance, etc.

Continuous innovation in product development is crucial for Climate Risk Insurance (CRI) instruments. Meeting the needs of the poor and vulnerable is essential. Otherwise, it will worsen if

  • Climate Risk Insurance (CRI) instruments are poorly conceived and executed.
  • High premiums prevent the poor and vulnerable from using financial products.

The introduction of insurance-related tools may also generate new smallholder farmer dependence. The dependencies might ultimately hinder resilience. We cannot insure all losses and damages. Climate change makes them susceptible, and CRI tools cannot compensate for such losses. However, insurance is part of a climate risk management system. It is essential to climate change mitigation.

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