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Senior Economist, CSIRO, Canberra
The 2004 Asian tsunami illustrated the disproportionate impact that natural disasters have on poorer communities. More recent natural disasters in New Zealand, Japan, Australia and the US have shown that even well-to-do communities can be significantly hard hit by the impact of catastrophic and severe weather events. Preparing for natural disasters has many facets. They can range from adaptive response measures to the use of modern technologies to provide early warnings.
A measure which is often talked about and seldom practiced is disaster risk management. In this regard, the recent mid-term review by the UNISDR of the Hyogo Framework for Action to substantially reduce disaster losses by 2015 is timely. A key message emerging from the UNISDR mid-term review is the need for economies to undertake proper disaster risk assessments that could help them to draw up better risk management plans which can be implemented by effective institutions with adequate resources in a well coordinated manner.
Disaster risk management involves the participation of domestic and international public sector agencies as well as households and businesses. Public sector agencies need to support risk management programs which promote loss mitigation. Households and businesses need to recognise the usefulness of participating in insurance schemes which support risk-pooling and risk-transferring. The real challenge is to increase the participation of households and businesses in low-income economies to take commercial insurance to cover their disaster risks. At present a very small percentage of households and businesses in low-income economies have insurance coverage against natural disasters.
Farmers and rural communities in low-income economies are particularly vulnerable to natural disasters. Droughts, floods and other severe weather events could reduce their farm output, rural incomes and access to credit to purchase seeds, farm inputs etc. A more recent and innovative financial risk management tool known as ‘index-based farm insurance’ has been available in some low-income economies to help farmers against crop and income losses due to natural disasters.
Index-based farm insurance schemes are generally based on rainfall, temperature, humidity or average crop yields. Under these schemes, farmers can purchase an index-based weather derivative. This is a contingent contract with a payoff determined by future weather events such as a specified lack of rainfall measured at a weather station. Under these insurance schemes, farmers have an incentive to reduce potential losses through for instance by diversifying their crops. The index-based farm insurance schemes are still at a subsidised pilot stage in several developing economies, and they are supported by key international donor agencies. If index-based farm insurance schemes can be up-scaled sufficiently, they hold considerable promise for many farmers in developing economies that face threats to their livelihoods from natural disasters.
One might argue that subsidising insurance programs in developing economies will distort prices and create the wrong signals for avoiding risk exposure. However, this argument is hardly relevant for poorer communities. These communities have few affordable options for relocating or otherwise reducing their exposure to disaster risk. In the absence of options such as subsidised insurance instruments, these communities will continue to rely on international aid. However, the argument against subsidised insurance programs emphasises the importance of explicitly tying pre-disaster support to affordable loss prevention and phasing out the subsidies as recipient economies develop. Risk sharing and risk transfer tools can reduce the risk of disasters under certain conditions. Such measures are only a part of the solution to reduce vulnerability to disasters. These tools are most effective when used along with other relevant disaster risk reduction measures.
In the Asia-Pacific region many domestic and regional agencies including fora such as the APEC Forum, ASEAN Regional Forum (ARF) and ASEAN Defence Ministers Meeting (ADMM) are directly or indirectly involved in natural disaster mitigation in one form or another. The challenge for them is to strengthen disaster risk management efforts that leverage disaster assistance with public and private contributions which advocate loss mitigation.
The idea of greater emphasis on disaster risk management is to complement post-disaster humanitarian aid with pre-disaster support of risk management programs that link prevention and risk transfer. There are many challenges for implementing domestic and donor-supported disaster risk-transfer programs on a large scale and ensuring that they genuinely provide affordable security to vulnerable communities. One of the key challenges is to promote good governance and sound regulatory practices as prerequisites for any risk-transfer program.
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