Managing Floods through Insurance

by Emma-Kate Kunth Symons

Though Asia is the most flood-affected continent in the world, flood insurance is still at its nascent stage in the region. Flood management has so far consisted of structural measures, such as dams or dikes, river levees or embankments. Because of budgetary constraints, most developing Asian nations do not have any flood insurance scheme, with the exception of a pilot program in the People's Republic of China in the 1980s that was subsequently abandoned.

But according to a flood management study done by the Asian Development Bank in 2007, the conditions for the development of comprehensive insurance programs in Asia are ripe. With global warming and rising sea levels, the frequency of flooding in Asia is rapidly increasing.

Flood insurance can be adapted from the developed world to the Asian setting, but a “one-size-fits-all” approach is not appropriate due to the specific contexts of flooding. Insurance for flooding should be designed with country-specific conditions in mind, and tested for its feasibility.

The study says that flood insurance schemes based on market forces and greater risk sharing for flood losses between governments and affected communities could reduce loss of life and property and ultimately reduce the impact of increasing inundations on Asia’s poor.

“Greater private sector participation through transfer of a portion of liability for flood losses to individuals and wider risk sharing will reduce a government’s fiscal burden, while at the same time discouraging migration and development in flood-prone areas,” the study says.

The study outlines a theoretical insurance model that imposes a user charge on both migrants and older residents.

Reliance on market forces encourages individual responsibility for minimizing flood losses and insuring against them, the study says. “Therefore, a well-designed flood insurance scheme should promote greater sharing of risks and cross subsidies to poor groups.”

The formulation of flood insurance schemes will have to take account of local political economy considerations and the requirement to be seen as “fair, viable, and sustainable by the private insurance industry, policyholders, and the government, the study adds.” •