Weather Index-Based Insurance in Bangladesh
The report has been written by Mr. Mamunul Hassan, MA, LLB, ACII (UK).
This is a case study on Weather Index-Based Insurance in Bangladesh: A case study. Hope you will find it extensive and informative for the FLOOD INSURANCE experiments.
Weather Index-Based Insurance is one of the mechanisms to eliminate the moral hazards and improve the livelihood of the poorest people in the flood-prone areas.
Background for Weather Index Based Flood Insurance
Bangladesh experienced eight major floods during the period 1977 to 2007 of which, the floods in 1988, 1998, 2004 and 2007 were the most dangerous. In 1998, two-thirds of the country, including capital Dhaka were flooded for a period of more than two months. The lack of pre-preparedness for floods among low-income households resulting from the limited resources available at their disposal, leads to the dependency on government, NGOs, MFIs and external agencies.
These institutions help them out by reserves, funds, grants, donations and international credit in the form of aid and other relief activities. The few ex-ante strategies followed by the vulnerable households in Bangladesh include more construction and raising of river embankments, construction of flood protection shelters, and food and medical stores.
Excess dependency on ex-post disaster risks financing mechanisms and lack of sufficient ex-ante financing technique may place problems like unforeseen pressure on budgets of government and meso-level agencies having limited funds, delays in relief generation, disbursement and receipt and non-encouragement of risk mitigation methods. These problems may be circumvented only by increasing ex-ante disaster risk financing mechanisms. One such mechanism is Index Based Flood Insurance.
Under the following process, a meso-level Index Based Flood Insurance pilot project in Bangladesh implemented jointly by Oxfam GB, CIRM (India), IWM(Bangladesh), Pragati Insurance Limited, Swiss Re(India) and Manab Mukti Sangstha (MMS), a local partner of Oxfam GB, in Sirajgonj District. This project, apart from being the first such attempt in Bangladesh, is also a trendsetter for catastrophe insurance in disaster-prone developing countries.
Oxfam, Bangladesh has been involved in various resilient communities, Oxfam, Bangladesh for flood-affected segments of Bangladesh’s population, especially those with low income and limited means. Oxfam not only engages in ex-post relief activities, but also helps the communities be pre-prepared for floods by helping them raise their homesteads and river embankments.
Oxfam realized that the flood disasters were gradually increasing in their unpredictability. There are success stories of various catastrophe risk management across the world, including the work done by Oxfam in other countries, flood insurance came up as the most viable options for ex-ante disaster risk financing in Bangladesh.
Oxfam with Centre for Insurance and Risk Management (CIRM), India for developing a flood insurance project in Bangladesh. Leveraging from Oxfam’s ground-level experience and CIRM’s expertise, a model triggered meso-level flood project was initiated in Bangladesh in the year 2009.
However, due to the complexity of the products and related procedures, the project gained momentum only in 2012. Flood Hazard Model was developed by Institute of Water Modeling (IWM), Bangladesh. IWM acted as the data provider and an important technology partner for the project.
Index Based Flood Insurance: Product Features:
The following product features were agreed upon for this meso-level flood index insurance product:
- It is a meso(group) insurance policy where all the poor and extremely poor households (CBO members) under MMS in the 14 target villages are the ultimate beneficiaries or insured. MMS is the main insured while the beneficiary household heads are the schedule members under the policy, i.e. the claims for the beneficiaries will be routed through MMS.
- Damage due to a flood can be put into two categories:
- Intangible Damage – where it is difficult to assign the monetary value, such as ill-health, anxiety, and loss of opportunity
- Tangible Damage – where a monetary value can be assigned. This can be further classified into:
- Direct damage – damage to physical assets due to flood (damage to the house, household goods, vegetable garden, livestock)
- Indirect damage – losses caused by disruption of economic activities which causes price rise and loss of personal income.
In this project, at the pilot stage, it was decided that the compensation from the insurance product will be based on Indirect Tangible Damage. The Indirect Tangible Damage caused to a target household by flood event of a particular magnitude was assessed.
- Based on this, the sum insured (SI) was fixed at Tk.8,000.00 per household
- The premium was quoted and agreed to be 10.3% of SI
- It is an index based product, where payouts will be made if the flood level in any particular village exceeds the strike level/threshold for that village during the cover period.
- Apart from thresholds payouts are also based on duration.
- The fund is meant to make the payout to the intended beneficiaries in case of severe floods, which means, the beneficiary households are not meant to get payouts for the normal yearly floods.
Structure of Index Based Flood Insurance:
Insured Units: Insured Units are the households in a given Reference Area. Village-wise number of insured Units corresponding to each Reference Area (r) are as set forth in the table below:
|Reference Area||Village Name||Total|
|Boro Chouhali||Boro Chouhali||56|
|Choto Chouhali||Choto Chouhalli||105|
Type of insurance Products Based on Flood Water Level Index:
Index: The flood vulnerability index is described below:
- The index would depend on the flood water level and
- The index would also depend on the time period of inundation.
Flood vulnerability index would pay if inundation continues to be above certain flood water level trigger (as defined in table below) for a pre-defend number of days. For each village covered under this program, daily modelded flood level data for various grids falling in a village are averaged, thus creating village-level flood level data.
Village-wise Water Level Trigger
|Reference Area (r)||Water Level Trigger (WLT_r(m)||Limit of Indemnity/Sum Insured (Sl_r) (BDT)|
Claims Payment in Index Based Flood Insurance
For all the Reference Areas(r) covered in this contract, the Loss/Payout Amount(LA_r) is calculated as a function of the Limit of Indemnity/Sum Insured (SL_r) for that Reference Area (r) as set forth in the table below:
|WL_dr > WLT_r from 0 upto 10 continuous days||LA_r=0|
|WL_dr > WLT_r from 11 continuous days upto 20 continuous days||LA_r=SI_r*0.35|
|WL_dr > WLT_r from 21 continuous days upto 25 continuous days||LA_r=SI_r*0.55|
|WL_dr > WLT_r for continuous 26 days or more||LA_r=SI-r|
Premium: Net Reinsurance Premium Rate= 10.3% of SI or BDT 1,368,664
Advantages of Index Based Flood Insurance:
- Lack of moral hazard
- Low operational and transaction costs
- Rapid and easy payout
- Easy documentation
- Lack of weather data
- Lack of technical expert
- Limited perils
Bottom lines on the Project:
The project was initiated with a vision of helping the poor and vulnerable flood-affected households in Bangladesh to overcome the bottlenecks associated with ex-post risk mitigation techniques by having access to cash relief through ex-ante disaster risk financing techniques. The meso-level flood insurance pilot was therefore conceptualized and launched in Char areas of the Sirajgonj district in Bangladesh. The common goal for all project partners is to bring forth the importance of:
- Ex-ante disaster risk financing in Bangladesh
- Multi-lateral institutions and government engagement for funding the premium on behalf of the poor
- Community-based distribution mechanism
This project is the first meso-level flood index insurance in Bangladesh having a tremendous potential of success within the country and outside. This potential has attracted national and international stakeholders for this pilot and will surely attract more when the program is scaled up.
We hope our Weather Index-Based Insurance in Bangladesh: A Case Study will be a source of inspiration for the future Weather Index Based Flood Insurance Projects in the world. For more information on the project, you can ask the author here.
- The Process Note on Meso-Level Flood Index Insurance Pilot in Sirajgonj, Bangladesh – Published by Kinnary R. Desai, CIRM Advisory services.
- Reports on Meso-Level Flood Index Insurance Pilot in Sirajgonj, Bangladesh – published by Oxfam GB (Bangladesh)
- News Letter of Institute of Water Modelling (IWM)
- Insurance Policy issued by Pragati Insurance Limited
- Swiss Re supports flood insurance for river basin residents in Bangladesh, Swiss Re, Switzerland.