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OPINION: Risk transfer through microinsurance for adaptation to climate change

Vishal Pathak and Khyati Halani from All-India Disaster Mitigation Institute (AIDMI) reflect on the opportunity to use micro- disaster insurance for building resilience against climate change.

For decades, the financing of disasters in developing countries has relied on reactive approaches that consist of diverting funds to recovery needs. Such ex post funding approaches are ineffective and often insufficient. Moreover, they provide no incentives for proactive risk reduction measures. Thus, a shift of attention to ex ante actions is essential.

As the frequency, impact and costs of natural disasters continue to rise, catalysed by the pressures of climate change, urbanisation and population growth; so disaster prevention, mitigation and reduction strategies have now become a global priority.

There is a pressing need to reduce disaster risk because people reside in unsafe locations such as flood plains, and/or reside in structures that do not meet building standards. Local governments lack the resources to improve the conditions of such settlements.

In addition, the people of rural India are heavily dependent on climate-sensitive industries such as agriculture, fishing and animal rearing –both their lives and livelihoods can be at risk in the event of climate extremes and disasters. As a result, they heavily rely on the relief from international entities that are very unpredictable.

Without microinsurance, extreme climate events can worsen poverty: victims take out high interest loans, sell assets or engage in low yield farming or jobs to reduce their expose to extreme events. Therefore, there is a large potential for microinsurance in India and elsewhere in the developing world to change the way development organisations provide disaster assistance and the post disaster funding.

The principle and practice of microinsurance can play a big role in reducing the vulnerability of people in developing countries and managing risks. Microinsurance provides mechanisms for transferring or sharing risk and this can help to reduce the impact of certain risks that cannot be eliminated. In this respect, microinsurance can play a developmental role by mitigating disasters and minimising the potential negative impact and costs on the lives of the poor. Microinsurance has the potential to break the vicious cycle of poverty by providing low income households security with access to cash, following disasters, to get back on their feet again.

Microinsurance such as AfatVimo schemes insure people from the impacts of hazards on their assets by compensating policyholders for life and non life losses in 19 types of disasters. The scheme covered disaster-affected, low-income households at an annual premium that is approximately three days’ of a household’ income. AfatVimo was tailored to regional realities and was replicated to disaster affected areas in India including Odisha. The efforts were owned by local institutions in partnership with insurance companies and with technical support by AIDMI.

Following cyclone Phailin, 112 Afat Vimo policyholders received their payout as they had covered themselves under the policy to protect against loss and damage to their shelter, livelihood and household items. Afat Vimo has penetrated further into the communities of the poor, in order to accelerate the economic recovery of poor communities.

AIDMI is studying the effectiveness of   Afat Vimo  in 2013 Cyclone Phailin, with support from CDKN. It aims to gain insights into the schemes’ effectiveness in reducing economic insecurity.

Preliminary results of our study indicate that programmes such as Afat Vimo in Odisha offer lessons from the ground  upon which the Government and the climate adaptation community can build. The findings of the project will  be used to initiate debate with key policymakers and stakeholders and may, indeed, justify the scaling up and institutionalisation of disaster microinsurance into disaster risk planning and management.

For more information contact the authors Vishal Pathak and Khyati Halani at
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