The push for faster aid to de­vel­op­ing coun­tries

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY FT EN­ERGY COR­RE­SPON­DENT

In late Septem­ber and early Oc­to­ber last year Hur­ri­cane Matthew smashed through the Caribbean. Winds of up to 145 miles per hour killed hun­dreds of peo­ple and caused ex­ten­sive dam­age, dev­as­tat­ing huge swaths of the re­gion.

In late Septem­ber and early Oc­to­ber last year Hur­ri­cane Matthew smashed through the Caribbean. Winds of up to 145 miles per hour killed hun­dreds of peo­ple and caused ex­ten­sive dam­age, dev­as­tat­ing huge swaths of the re­gion. It was the worst storm to hit the area in a decade.

As ever when this sort of storm hits, ap­peals for help were not far be­hind. But many of the worst hit coun­tries were part of an in­surance scheme that paid out within weeks, rather than the months that it some­times takes for aid to ar­rive.

By mid-Oc­to­ber, the Caribbean Catas­tro­phe Risk In­surance Facility had paid US $23m to Haiti, one of the worst hit by the hur­ri­cane. The pol­icy also paid out to Bar­ba­dos, Saint Lu­cia and St Vin­cent & the Gre­nadines.

The Caribbean scheme is not the only one of its type. Across the world, sim­i­lar ini­tia­tives are pro­lif­er­at­ing, from in­surance against pan­demic out­breaks to cover for the cost of droughts and floods. While in­sur­ing for nat­u­ral dis­as­ters is not new, the use of in­surance as a form of aid to de­vel­op­ing coun­tries is gath­er­ing pace.

Sup­port­ers say that us­ing in­surance to re­spond to nat­u­ral dis­as­ters can help to save mil­lions of lives in the world’s poor­est coun­tries, by putting in place a quicker and more pre­dictable source of funds when the worst hap­pens.

In 2015 the G7 promised to de­liver cli­mate risk in­surance to 400m of the world’s most vul­ner­a­ble peo­ple by 2020. Ger­many, Ja­pan and the UK are lead­ing the charge to put the prom­ise into ac­tion.

“We are on the cusp of some­thing re­ally ex­cit­ing,” Lord Bates, the UK’s in­ter­na­tional de­vel­op­ment min­is­ter, told a con­fer­ence last month on the is­sue in Lon­don. Jo Scheuer, di­rec­tor of cli­mate change and dis­as­ter risk re­duc­tion at the UN De­vel­op­ment Pro­gramme, recently called it “a game changer” for the de­vel­op­ing world.

Tak­ing out in­surance can leave African states “bet­ter equipped” to man­age cli­mate change, says Mo­hamed Béavogui, di­rec­tor-gen­eral of African Risk Ca­pac­ity, an in­surer set up by the African Union to help coun­tries fi­nance dis­as­ter re­sponse. Oth­er­wise, “by the time the re­sponse to a cri­sis ar­rives, much of the dam­age has al­ready been done”.

The in­surance in­dus­try has as­sem­bled a host of ex­ec­u­tives, along­side the UN and the World Bank, into a group called the In­surance De­vel­op­ment Fo­rum, which aims to ex­tend the use of in­surance and risk man­age­ment tech­niques to “build greater re­silience and pro­tec­tion” in the de­vel­op­ing world.

“For the first time ever we’ve had [in­surance] car­ri­ers and bro­kers at CEO level sat round a ta­ble and work­ing to­gether. I’ve never seen so many al­phas in the in­surance in­dus­try work­ing to­gether,” Stephen Catlin, the IDF’s chair, told the Lon­don con­fer­ence.

Michael Ben­nett, head of de­riv­a­tives and struc­tured fi­nance at the World Bank, says that “be­tween 2007 and 2017 there was $1.5bn of risk trans­fer [by the bank]. But there has been $1bn” of trans­ac­tions in the past two months. He adds: “There is a lot of mo­men­tum now.”

There is plenty of po­ten­tial for more of the same. Ac­cord­ing to Swiss Re, nat­u­ral catas­tro­phes around the world caused US $166bn of eco­nomic losses in 2016. Only $46bn of that was cov­ered by in­surance. Much of the rest, es­pe­cially in the de­vel­op­ing world, is left to hu­man­i­tar­ian aid.

“The cur­rent hu­man­i­tar­ian sys­tem works re­ally badly,” says Owen Barder, a vice-pres­i­dent at the Cen­ter for Global De­vel­op­ment, a think-tank.

He says there are two big prob­lems. The first is the of­ten late ar­rival of aid. Coun­tries only ask for help when prob­lems be­come ap­par­ent, and that help can take months to ar­rive. By that time the prob­lem has be­come much worse, and much more ex­pen­sive. Sec­ond, aid is un­pre­dictable. Gov­ern­ments that ask for help have no idea what they are go­ing to re­ceive, and so can­not make firm plans for how to spend it.

Ste­fan Der­con, chief econ­o­mist at the UK govern­ment’s Depart­ment for In­ter­na­tional De­vel­op­ment (DfID) and an Ox­ford pro­fes­sor of eco­nomic pol­icy, says: “When there are ap­peals, of­ten less than half of what is ap­pealed for is ac­tu­ally col­lected.”

So-called para­met­ric in­surance, say its back­ers, can pro­vide so­lu­tions to both prob­lems. Here, the in­surance pol­icy pays out not when there is firm ev­i­dence of a loss, but as soon as the first sign of trou­ble emerges. That can be when a storm hap­pens, for ex­am­ple, or in the early stages of a drought.

The pol­i­cy­hold­ers, in this case the gov­ern­ments of the coun­tries af­fected, know ex­actly what they are go­ing to get and when they are go­ing to get it. They can then spend the money in the worst af­fected ar­eas.

“If you give peo­ple money straight away, they can stay put. Oth­er­wise they leave their land and sell their as­sets in a fire sale, which turns some­thing bad into an ab­so­lute catas­tro­phe,” says Mr Barder. Prof Der­con adds: “Faster pay­outs re­ally help with slow on­set dis­as­ters such as droughts.”

A re­cent US$322m pan­demic in­surance bond sold by the World Bank shows how this should work. Gov­ern­ments should re­ceive money in the early stages of an out­break, when there is still time to con­tain it. Ac­cord­ing to the DfID, it would have cost $5m to con­tain the 2014 Ebola out­break when it was first de­tected in Guinea. Eight months later the cost had in­creased to $1bn. The pan­demic ended up killing more than 11,000 peo­ple.

Kenya has in­tro­duced an in­surance scheme to help farm­ers deal with cli­mate change, whereby the govern­ment pays pre­mi­ums for up to five cows in arid ar­eas in the north and north-east. At times of drought, the pay­outs are de­signed to pro­vide food and other ne­ces­si­ties to keep the an­i­mals alive, not to com­pen­sate for dead cows.

“It’s all about pre­ven­tion rather than re­place­ment,” says Richard Kyuma, who runs the Kenya Live­stock In­surance Pro­gramme. “It’s a new idea and there’s a lot of re­search go­ing on to make it even bet­ter.”

De­spite those po­ten­tial ben­e­fits, not ev­ery­one is con­vinced that in­surance is the an­swer to dis­as­ter re­sponse in de­vel­op­ing coun­tries. “There is a lot of hoopla from the in­surance sec­tor and from donors,” says Deb­bie Hil­lier, se­nior hu­man­i­tar­ian pol­icy ad­viser at Ox­fam. “The rhetoric has mas­sively gone be­yond re­al­ity. They say that in­surance can make ev­ery­thing fine but that’s patently not true.”

One of the big prob­lems, say crit­ics of the idea, is called ba­sis risk. This is when the in­surance pol­icy does not pay out be­cause the spe­cific na­ture of a par­tic­u­lar dis­as­ter does not meet the con­di­tions laid down in the pol­icy.

A re­cent drought in Malawi showed ba­sis risk in ac­tion. Ac­cord­ing to a re­port from Ac­tion Aid, an NGO, the coun­try paid $5m for an in­surance pol­icy from African Risk Ca­pac­ity, which was sup­posed to cover drought.

But when the rains failed last year and 6.7m peo­ple needed help, says Ac­tion Aid, the pol­icy did not pay out. That was largely be­cause the types of maize seeds used by the farm­ers were not the same ones en­vis­aged by the pol­icy, so the dam­age caused by the drought was worse than the in­surer’s model pre­dicted. Af­ter ad­just­ing its model, ARC agreed to pay out $8m but Ac­tion Aid says the to­tal cost of the drought re­sponse was $395m.

In its re­port, Ac­tion Aid ar­gues that: “The G7, World Bank, In­surance De­vel­op­ment Fo­rum, ARC and oth­ers pro­mot­ing the ex­pan­sion of cli­mate risk in­surance mar­kets for the poor and vul­ner­a­ble should pause and re­con­sider this quest in the face of a lack of ev­i­dence of its eq­uity and ef­fec­tive­ness, and in­di­ca­tions that it may be ex­ac­er­bat­ing in­equal­ity and vul­ner­a­bil­ity.”

ARC re­sponded that some of the NGO’s claims were flawed and its rec­om­men­da­tions were mis­guided. Thomas Kwesi Quartey, a Ghana­ian diplo­mat who is deputy chair of the African Union com­mis­sion, says the ARC has paid out $34m over the past three years to coun­tries af­fected by drought, in­clud­ing Sene­gal, Niger and Mau­ri­ta­nia. “This is sol­i­dar­ity com­bined with in­no­va­tion in prac­tice,” he says.

Rowan Dou­glas, chair of the In­surance De­vel­op­ment Fo­rum’s im­ple­men­ta­tion group, says the ex­pe­ri­ence in Malawi shows there will al­ways be some ba­sis risk with this type of in­surance.

“The ques­tion has got to be: if these in­stru­ments work ef­fec­tively say 90 per cent of the time, is that bet­ter than not hav­ing them at all and los­ing all the ben­e­fits of this im­por­tant in­no­va­tion?” Mr Dou­glas asks. He says there are many sit­u­a­tions where schemes such as the ARC have worked well: Haiti’s rapid pay­out for Hur­ri­cane Matthew is an ex­am­ple.

One of the so­lu­tions to this prob­lem is bet­ter mod­el­ling. Risks in Europe and the US are ex­ten­sively mod­elled, partly be­cause there is a well de­vel­oped in­surance in­dus­try. In­sur­ers will know, some­times down to a few me­tres, the flood risks for a spe­cific prop­erty. That is not the case in the de­vel­op­ing world. “Only around half the world’s pop­u­la­tion is cov­ered by main­stream in­surance risk mod­els at the mo­ment,” says Mr Dou­glas. “Al­though the ex­per­tise has been around for three decades.”

Ex­perts say cli­mate change, which could make weather pat­terns less pre­dictable, is com­pound­ing the mod­el­ling prob­lem. But even if the mod­els can be more finely tuned and the ba­sis risk cut down, there are still ob­sta­cles to the wider use of in­surance in re­sponse to nat­u­ral catas­tro­phes. One is the ques­tion of who pays the pre­mium for the pol­icy. In some of the schemes op­er­at­ing at the mo­ment, donor gov­ern­ments pay. In oth­ers, it is the re­cip­i­ent coun­tries.

Ac­cord­ing to Mr Barder, there are rea­sons why both donor coun­tries and re­cip­i­ents are re­luc­tant to pay up. “Politi­cians have short-time hori­zons,” he says. “You could pay a pre­mium while in of­fice and not get a pay­out. Why would you spend your scarce re­sources on an in­surance pol­icy?”

Like­wise, he says, some donor coun­tries hold back. “It is very rare for donor coun­tries to pay the pre­mium . . . there is a real re­luc­tance,” he says, partly be­cause some donors pre­fer to wait un­til the af­ter­math of a dis­as­ter to de­cide how much they want to give. There is also, he adds, some sus­pi­cion of the pri­vate sec­tor.

Fi­nally, some NGOs ar­gue that the fo­cus on in­surance de­tracts from more im­por­tant work in build­ing re­silience to nat­u­ral dis­as­ters.

“The in­surance de­bate has crowded out ev­ery­thing else. There is a place for in­surance, but it is a small place,” says Ms Hil­lier. “It is crowd­ing out dis­as­ter risk re­duc­tion and so­cial pro­tec­tion, where there are mas­sive gaps.”

Richard Ew­bank, global cli­mate ad­viser at Chris­tian Aid, says: “Hav­ing a more ef­fi­cient sys­tem to shovel money out of the door is im­por­tant but we need to fo­cus on early ac­tion and early warn­ing to bring the costs down to a more man­age­able place.”

Even sup­port­ers of the idea ar­gue that there is a long way to go. “We are in the 21st cen­tury when it comes to lend­ing to the de­vel­op­ing world, but only in the 12th cen­tury when it comes to risk,” says Prof Der­con. “We are just try­ing things out. If some­thing doesn’t work well, then we’ll learn the lessons.”

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