New types of insurance could cut the costs of natural disasters for poorer countries and reduce the amount of humanitarian aid needed, according to a report commissioned by Britain’s international development ministry.
The cost of natural disasters to some of the world’s poorest countries has averaged a total of $29.1 billion a year in the past 15 years, catastrophe modeling firm RMS said.
While aid has covered 8 percent of this, insurance has only paid for 3 percent of the average costs of earthquakes, drought or floods in 77 low and low-middle income countries, or $900 million, but could cover up to $6.8 billion if more insurance structures were used, RMS said in the report prepared for Britain’s Department for International Development.
Britain said at last weekend’s G20 meeting it would set up the London Centre for Global Disaster Protection to help developing countries use insurance to cut disaster costs.
“There is clear potential for insurance to both reduce the shortfall in funding for natural disaster losses in low and low-middle income countries, and to relieve pressure on humanitarian aid budgets,” RMS said.
This includes using so-called “parametric” structures, where insurance payments are triggered by a predetermined factor, such as an increase in water height, at a specified location.
Such models are used in existing insurance facilities such as African Risk Capacity and make payments more effective.
On a disaster loss of $30 billion, every dollar paid out through parametric insurancehas the same impact as $3.50 of slower-moving aid payments, RMS said.
“It’s not just about speed, it’s about certainty,” said Daniel Stander, global head of the firm’s public sector group, adding that parametric insurance enables countries to know in advance how much money they will receive in a disaster.