I was invited to speak at the opening session of the ESCAP training workshop organized by the ICT and DRR Division, March 8-9, 2016. This was to introduce the report we had prepared for ESCAP on Building e-resilience, which is about to be released. The slides I used in my presentation are here.
Because there was enough time (unusually), I went into some depth on one recommendation per inter-governmental organizations; governments and telecom service operators. Insurance appeared under two headings and took much of the time devoted to discussion. Here is why.
Under government ownership, governments for the most part self-insured with respect to the kinds of catastrophic losses caused by disasters. Following liberalization, the question of who will compensate the owners of damaged infrastructure and to what extent has come to the fore. If government continues to act as an informal insurer of last resort, wrong incentives will be created, whereby private owners will not take prudent measures to safeguard their assets from disaster risk.
On the other hand, mandating compulsory insurance would mean passing on significant additional costs to end-users of services, especially in regulated industries. Regulatory agencies will have to achieve a reasonable balance between these two outcomes.
One possible solution is to create risk pooling systems, with adequate diversification strategies, that rest on the fact that a hazard cannot affect at the same time all the infrastructures in a group of countries. The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), a regional program that seeks to provide disaster risk modeling and assessment tools to member countries is a possible model can be used in South Asia and other regions to ease the burden by providing immediate liquidity to governments. It can also provide expertise on financing strategies and disaster risk management and foster regional collaboration.
Given the vulnerability to natural disasters, risk pooling mechanisms enable these Pacific Island Countries to insure and purchase catastrophe coverage at a significantly lower cost than what individual government reserves or independent insurance covers will cost. When a disaster occurs, emergency funds are often derived from other development projects that are likely to create new debt. Therefore, in certain cases risk pooling strategies are desirable. This is however, subject to severe scrutiny of a country’s profile, cost estimates of prior damages caused by natural disasters, catastrophe risk models etc.
In order for catastrophe insurance to be feasible on both the supply and demand sides, the pricing of the insurance products needs to be transparent and there needs to be a critical business volume. A further advantage is that the integration of insurance mechanisms into disaster risk reduction strategies at the regional and national levels will result in insurance elements working their way down to the company level. Insurance, properly deployed, will create the proper incentives for building resilience into critical infrastructure.