Insuring against flood risk in Bangladesh

Last year, half a million people were left homeless as a result of another bout of severe flooding in Bangladesh. Oxfam, along with other NGOs and the Bangladesh government, supported people in the usual ways, including providing food, shelter and cash. 

Uniquely, Oxfam also supported communities with an insurance programme.  708 families in Sirajganj district each received $35 (2800 Bangladeshi taka), triggered by a prearranged insurance policy that started in 2013.

One of those who received the insurance payout was Ranu Begum.  When the flood hit, she lost much of what she had worked for.  “We lost all our rice and vegetables”, she told us. “The house was flooded for 11 days, and the yard was flooded for 18 days.  We managed to keep the animals safe on higher ground, though.  When the flood was over, we rebuilt our home with straw.  We will start again with planting crops.”  She plans to spend the $35 payout on buying lentil seeds and a goat.

Oxfam GB's private sector adviser, Juni Sul, answers some questions about the programme.

Why is Oxfam supporting an insurance programme, rather than giving cash handouts in the usual way for charities?

Our goal with the insurance programme is to give people some degree of certainty in an uncertain world.  Insurance is a contract agreed in advance of any disaster happening, or not happening.  When people look ahead to the monsoon season, they may not know whether there will be a flood, how bad that flood might be, or how much they might lose, but – with insurance – they know that, if the worst does happen, they will at least have $35.

This is a fundamentally different approach to the usual charity reactions that happen once a disaster has already happened, and are therefore less predictable.  As we all know, charity support depends on how much money is forthcoming from donors and the public, and how many other unfortunate disasters are happening around the world at the same time.

But Oxfam isn’t an insurance company.  How is the insurance set up?

This flood insurance programme has been a multi-stakeholder effort, using cutting-edge expertise within Bangladesh and internationally.  Pragati is the insurance company issuing the policy in Bangladesh, and Swiss Re re-insures and provides technical support.  This private sector insurance mechanism transfers risk to global capital markets, so that payouts can be made promptly and consistently when a major flood happens in Bangladesh.

The flood hazard model was developed and implemented by the Institute for Water Modelling in Bangladesh, together with the Centre for Insurance and Risk Management in India.  The programme was supported by funding from the Swiss Agency for Development and Cooperation (SDC).

Can very poor people afford insurance premiums?

We do not expect them to pay premiums in this programme.  This insurance is not aimed directly at individuals, but at organisations that serve them, e.g. local and national government institutions, community-based organisations, and companies working with the communities.  Currently, the policyholder is a community-based organisation, Manab Mukti Sangstha, that works closely with local people in Sirajganj district.  Oxfam and SDC have been supporting the premiums so far.

Unlike micro-insurance, which is aimed at individuals, this kind of insurance is known as meso-insurance.  Such meso-insurance uses existing organisations to reach people more effectively.  These organisations are deeply engaged with people in the community and have a shared interest in people having more secure livelihoods through insurance. 

How will this insurance help people have more secure livelihoods?

Insurance can act as a safety net that enables people to plan ahead.  They can make investments, such as purchasing seeds, leasing land or fattening livestock, in the knowledge that they will have some financial income from insurance even if that investment fails due to a flood. 

They can also avoid taking harmful actions to make quick money in desperate times, such as sending children to work, or selling livestock in a hurry at a low price.

What if people stop being careful in a flood, because they rely on insurance?

Economists call this “moral hazard”, when there is an incentive for people to take greater risks if they know that the eventual costs will be covered by insurance.

To counteract moral hazard, this insurance programme pays out based on a village-level index.  This means that every poor household in the village gets the same payout.  Therefore, if a particular family takes greater risks and incurs greater loss, this is not compensated by a higher payout.  On the other hand, if a particular family acts to reduce their loss (e.g. rescuing their livestock in time), then they are still paid the same payout, and thus still rewarded for reducing their loss. 

What’s next?  Is more insurance the solution?

This flood insurance programme has been a pilot, and Oxfam is now working to make it a fully viable mechanism reaching hundreds of thousands of people in Bangladesh.

But insurance is always only one aspect of flood risk management. Oxfam, together with our partners and with communities, will continue to raise the ground level of homesteads, develop early warning systems, and support crops and livestock that are more resilient to floods.  

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