Disaster insurance

Insurance programs can be effective tools both for providing assistance in the aftermath of a disaster and for promoting mitigation activities.

While most developing countries do not have comprehensive disaster insurance schemes, insurance has been a strategy for disaster recovery and mitigation for over a century. There is increasing interest in insurance as a means of restricting government's liabilities in the case of a disaster and as a tool for ensuring compliance with building codes and other mitigation measures.

When insurance programs are in place, material damage can more quickly be replaced; disaster survivors have more prospect of rebuilding their homes and businesses because they have cash from their insurance policy and don't have to wait for other types of assistance.

Insurance allows risk to be spread over a larger community. The burden of the hardest hit is reduced by the less severely affected who bear part of the cost (through premium payment). It also allows the cost to be spread over a longer period of time. Insurance does not, of course, reduce the physical impact, but it may reduce the psychological impact of a disaster by removing the uncertainty involved in financing recovery.

There are several important points to remember about insurance. First, insurance can be taken out on almost anything, subject to the premium being commensurate with the risk involved. Second, although insurance might be taken out to cover the hill loss of a resource - whether it be an infrastructural asset, an annual crop, a livestock or fish population, or a plantation - claims are generally made for partial loss, rather than the full value of the loss. Third, insurance is a commercial proposition, i.e. intended to result in profit and, therefore, an insurance company is not obliged to offer insurance.

Disaster insurance policies have proven viable for a number of hazards including flood, tropical storm and earthquake. However, major disasters can be extremely costly to individual insurance companies. For this reason, re-insurance programs, which allow even wider spreading of risk, have recently proven essential.

The following discussion focuses on one specific type of insurance - crop insurance - as a means of understanding general issues involved in disaster insurance.

Crop insurance can be a source of finance with which to fund post-disaster rehabilitation. The potential for using this type of finance is significant, in that insurance is not yet widely used in developing countries. For example, in the 54 countries of Africa and the Near East, only 12 have introduced crop insurance schemes.

There are two levels of food security “disasters” in developing country agriculture, where insurance might be more widely used.

First, there might be a national production shortfall of food crops which requires government to use scarce foreign exchange to maintain national food security. While developing countries can overcome this source of food insecurity by increasing their foreign exchange expenditure on food imports, this can hamper overall economic development. Food security schemes must, therefore, deal with fluctuations in food import expenditures. The objectives of the food security/insurance scheme devised by Konandreas, Huddlestone and Ramangkura are to permit developing countries to stabilize their food consumption and food imports.

Second, insurance can be used to support smallholder incomes which are reduced as a result of poor yields caused by natural or human-made disasters. Further information on the possibilities for using insurance to offset the financial implications of disaster are given in FAO's 1991 Crop Insurance Compendium which provides:

- A world summary of crop insurance availability, with analysis by insured perils, sum insured, deductibles, reinsurance, loss assessment, insured crop and compulsory or voluntary participation. (An example for selected countries is given in Figure 3.)

- Regional reports summarizing the nature of crop insurance available in each region with regional statistics of crop insurance results.

- Country reports which detail crop insurance structures and representative crop insurance schemes. (Summarized for Bangladesh in Figure 4.)

Figure 3: Multiperil insurance schemes

Country	Crops Insured	Multiperil cover	Voluntary	Loss ratios for five years %
ALBANIA	wheat, maize, rice	hail, storm, rainstorm, windstorm, flood, cyclone, snow, freeze	voluntary but compulsory for state enterprises	90	81	174	86
AUSTRALIA	bananas	cyclone, storm, flood, pest, disease, other natural events	automatic
AUSTRALIA	apples, pears	frost, fire, hail, wind, flood, storm, sunburn, drought	compulsory	211	116	89	151	37
BANGLADESH	wheat, rice, sugar cane, jute	flood, drought, cyclone hail, pest, disease	voluntary	441	596	61	879	321
BARBADOS	sugar cane	fire, hurricane, earthquake, flood, riot, strike, vandalism	voluntary	197	54	4	13	4
BRAZIL	cereals, pulses, vegetables, fruits, roots & tubers, sugar cane, wine grapes, fibre crops	fire, flood, windstorm, hail, excessive rain, drought, frost, pest, disease, dramatic temp. change	voluntary	172	81	81	13
CANADA	collective programme for forages, cereals, honey	frost, hail, excess wind, hurricane, excess moisture, heat, ground freeze, flood, drought, snow, pest, disease	voluntary	33	23	164	18	151
CANADA	38 crops including: cereals, sunflower, rapeseed, mustard, sugar beet, legumes, alfalfa	frost, hail, wind, flood, excess rain, drought, pest, disease, excess heat	voluntary	22	192	369	91	78
COSTA RICA	cereals, pulses, vegetables & melons, fruits, roots & tubers, fibre crops	drought, excess rain, flood, wind, volcanic ash, pest, disease, hail	semi-compulsory	79	37	80	692	247
CYPRUS	deciduous, grapes, cereals, potatoes, citrus, forage crops	drought, frost, flood, rust (cereals)	compulsory	135	90	10	61
DOMINICAN REPUBLIC	rice, beans, maize, groundnuts, yucca, sorghum	cyclone, drought, earthquake, flood, excess rain, hail, tornado, fire, pests, disease	voluntary, but compulsory for those with loans
HUNGARY	all standing field crops, vineyards, orchards	fire, hall, flood, frost damage	voluntary	92	125	82	191
INDIA	wheat, maize, rice, millet, pulses	all risks	voluntary, but compulsory with credit	216	261	1,034	896	826
ISRAEL	vegetables, fruits, groundnuts, cotton, poultry, dairy, aquaculture	hail, frost, storm, heat, flood, birds, rain, cold	mainly compulsory	52	148	72	60
JAPAN	paddy rice, wheat, potatoes, soya-beans, red kidney beans, sugar cane, sugar beet, hops, tea	fire, hail, wind, flood, excess rain, drought, snow, pest, disease, earthquake, volcanic eruption, pests,	compulsory for rice, wheat and barley, voluntary for others	15	152	28

Figure 4: Representative Crop Insurance Scheme Report

Representative Crop Insurance Scheme Report
COUNTRY	BANGLADESH		Company Name		Sadharan Bima Corporation		Sheet N°	1
Crop(s) group insured	Wheat, rice, sugar cane, jute
Perils covered for these crops	Multi-peril: flood, drought, cyclone, hail, pest, disease, insects
Policy holder	Individual		Voluntary or compulsory		Voluntary		N° of Insured	N/A
Basis of sum insured	Estimated crop potential yield
Deductible or excess details	Deductible. 10% of sum insured
Basis of premium calculation	Specific rate charged on 80% of crop value
Automatic rating	None
Types of linkages	Banks & credit organisations, Ministry of Agriculture, B.R.D.B. and Nationalised Commercial Banks
Means of reinsurance	None
Type of reinsurance	N/A
Loss assessors	Loss assessment committee of local agricultural extension officer, loaning agency representative, plus person from Sadharan Bima Corporation
Loss assessment procedures	Eye estimation and crop cutting according to needs
Year	Premium	Total sum		Total	Premium	Loss	Loss
1990	330,275	9,735,308		1,455,456	3.39	15.0	440.7
1989	228,212	6,348,384		1,364,965	3.59	21.5	598.1
1988	1,021,132	2,948,536		620 373	34.63	21.0	60.8
1987	42,074	1,686,481		285.805	2.49	16.9	679.3
1986	41,109	1,108,400		131,874	3.71	11.9	320.8
1985	103,582	2,599,909		482,683	3.98	18.6	466.0
Notes: Currency unit = Bangladesh Taka

In order that crop insurance companies can provide cover for growers against peril and still remain in business, there are a number of policy issues which must be considered. These include:

1. The choice and number of perils to be insured against as well as the number and type of crops

2. Whether coverage is by individual, area, or group

3. The period of coverage i.e. the whole growing season or a specific growth stage

4. Whether insurance should be state operated, privately funded and self-supporting; or mixed public-private

Recently, it has been shown that multi-peril crop insurance operated by the public sector has been an expensive failure. This is because of very high administrative costs and politically-inspired inability on the part of government to charge fair premiums and enforce impartial loss adjustment. FAO's conclusions concerning crop insurance suggest the following:

· Most governments are not in a position to provide heavy subsidies to crop insurance. Most insurance schemes should, therefore, be private. The alternative parastatal body can only be successful if it has complete independence from political influence over fixing premiums and indemnities, and adjusting losses.

· Despite the attraction of offering all risk cover, crop insurance is more viable on a limited peril basis, provided it addresses the main concerns of growers.

· A scheme involving small farmers should be compulsory. It is possible to design a voluntary program for larger farmers, but the economies of scale must be such that the insurer can afford the level of field supervision necessary to avoid adverse selection.

· Commercial crops lend themselves most readily to insurance. Food crops grown at subsistence or non-commercial levels are extremely difficult to insure. Payments for perennial crops should be based on the loss of one season's production only.

· Financial transactions between the insurer and insured farmers are by no means frequent. This means that insurers should try to forge linkages, where possible, with organizations or firms which already have ongoing financial dealings with farmers, so that transactions can be carried out at minimum cost.

· There are no short cuts to sound loss adjustment. There must be adequate field presence, preferably in the form of trained agronomists in a supervisory role, with less qualified persons carrying out field assessments.

· Close contact should be maintained with reinsurers in order to assist in shaping programs so that reinsurance (which is normally essential as a portfolio grows) can be readily arranged.

· Public education is important for an insurance program. Education programs and publicity material should be used by insurers in order to ensure that their clientele can take full advantage of the insurance service being provided. These should also help to avoid situations where unrealistic expectations are nurtured by farmers regarding the benefits that insurance programs can provide.

Q. Why are insurance programs a potentially important disaster management program?

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ANSWER

Disaster insurance schemes provide a fast response private sector financing mechanism to promote recovery and can be used to inspire pre-disaster mitigation efforts.