Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [115]
Climate disasters exacerbate poverty in two major ways. (1) They destroy human and physical assets, livelihoods, and public infrastructure, thus setting back gains from development. And (2) households, small and medium-sized enterprises, and farmers with high uninsured risk exposure often adopt low-risk, low-return strategies (e.g., placing relatives in low-paid but secure employment, planting low-yield drought-resistant seeds), thus reducing their ability to accumulate the assets needed to escape poverty through savings and investment.
FIGURE 25.1Differential Burden ofNatural Disasters:(a) Fatalities Per Event and(b) Economic LossesAccording to CountryIncome Groups
Source: Author’s calculations based on data from the reinsurer Munich Re (2005).
INSURANCE FOR THE POOR AS SECURITY AGAINST WEATHER DISASTERS
Insurance and other financial instruments should be viewed within an overall risk management strategy. A cornerstone of risk management is investing in measures that limit exposure, increase preparedness, and reduce vulnerability. Estimates show that only about 2 percent of disaster management expenditures by bilateral and multilateral donors are spent on disaster risk reduction, whereas the benefits can be many times the expenditures. Reinhard Mechler from the International Institute for Applied Systems Analysis (IIASA) in Austria, for instance, has examined retrospective studies on disaster mitigation in developing countries and concluded that measures like building polder systems, planting mango trees, and relocating schools have demonstrated large benefits in relation to their costs. Risks, of course, will remain—and for this reason risk-sharing and risk-transfer mechanisms will increasingly be viewed as an essential component of risk management.
Insurance programs, which pool economic losses and smooth incomes, as well as transfer risks to the capital markets, are playing an increasingly visible role in developing countries. However, in countries where insurance penetration is low and the network of insurers on the ground is not that well developed, issuing a new policy and managing it over time can be quite costly. Moreover, there would be the high cost of handling claims that are spread over an entire region. To avoid these costs, new insurance programs have been developed in recent years that are index-based. By index-based I mean that the insurance claims issued by such programs are based not on the direct losses suffered by the insurance policyholders but, rather, on an external physical trigger, such as rainfall or wind intensity. If well defined, such a trigger is highly correlated with losses. An important advantage of index-based insurance is that it is simple to measure by anyone if good-quality weather stations are in place.
For example, herders in Mongolia can now purchase an index-based insurance policy to protect them against livestock loss due to extreme winter weather, or dzuds. Whereas the herders themselves absorb small losses that do not affect the viability of their business, larger losses are transferred to the private insurance industry and only the final layer of catastrophic losses is borne by the government with backing from the World Bank.5
Not only herders but also subsistence farmers are benefiting from index-based systems (e.g., in Malawi and India), and the potential for scaling up insurance programs to protect rural livelihoods is huge. For the most part, however, farmers and herders do not belong to the group referred to as the “poorest of the poor.” Lacking assets, this group is probably best served by post-disaster government relief. Here, too, pre-disaster financial instruments can provide needed security by insuring the providers of relief. For instance, in 2006, the World Food Programme, which is the food-aid branch of the United Nations and the world’s largest humanitarian organization,