Natural Resources & Conservation

Disaster Insurance Helps to Alleviate Poverty in Developing Nations

As climate change increases the frequency and severity of destructive weather events like typhoons, hurricanes, and droughts, the economies of developing nations are at the greatest risk. Without proper preparation and response to such events, communities risk losing progress on their socioeconomic goals. Disaster insurance, which helps protect local and central governments against sudden financial losses, is gaining traction as a means to avoid a rise in poverty following environmental catastrophes.

Natural Disasters and Disaster Insurance

Climate events have already caused many households in emerging nations to fall into financial hardship. The problem goes beyond the loss of personal property, although that’s no small issue itself. Consider the persistent inflation of food prices after droughts. According to the European Central Bank, such inflation can last for years. Or consider the illnesses associated with flooding, such as cholera and malaria. In this way, natural disasters are more than an event, they are long-term drags on communities.

Catastrophic risk insurance is one way to protect national and local government agencies against losses from natural disasters. A program providing $206 million overall coverage has been set up in the Philippines with the help of the World Bank. The country has suffered $23 billion in damage by storms and other natural disasters since 1990.

Private investors are participating in these efforts by buying insurance-like financial market instruments called catastrophic risk (CAT) bonds that add to the disaster insurance policies acquired by emerging nations. CAT bonds transfer a particular risk, such as flooding from storms, from the beneficiary to an investor. If the risk takes place, the principal is transferred to the beneficiary rather than being returned to the investor.

According to the Financial Times, CAT bonds issuances hit a record $11.3 billion in the first half of 2017. Although such bonds are most popular in the United States, demand is growing internationally. Singapore’s government announced it would pay all upfront costs for issuing CAT bonds as of January 2018, a compelling incentive for financiers considering entering this high-demand space.

Mitigating the Effects of Catastrophe

Nonprofit organizations are helping developing countries, too, by introducing disaster risk finance programs that provide income support—for instance, public works programs with labor-intensive jobs when natural disasters have damaged crops or flooded businesses. The $12 million World Bank–funded Disaster Risk Financing and Insurance Program, for example, enabled the Ugandan government to roll out a system to respond to frequent droughts by providing well-paying jobs until people are able to return to their farms.

Another way of helping developing countries deal with natural catastrophes is to fund the development of technologies that can rapidly assess where damage occurred and then analyze the data to understand its impact on people. In one project financed jointly by Columbia University’s Earth Institute, the Rockefeller Foundation, and the World Bank, satellite imagery was combined with statistical analysis to help developing countries—especially in Southeast Asia, where natural disasters are very common—to provide a rapid response to storms and flooding. “Of all the different natural hazards, floods seem to be, on average, the type of natural disaster which causes the most damage to life and development gains,” said Upmanu Lall, director of Columbia University’s Water Center.

Progress in agriculture and work-related fields may reduce poverty over time, but all it takes is one round of severe flooding to produce a net increase in poverty. While we can’t control the weather, capital can be deployed in multiple ways to mitigate its effects on the developing world.