Asia-Pacific needs stronger financial preparedness for disasters

Asia and the Pacific is one of the regions that is most vulnerable to natural disasters and the effects of climate change. And yet, most governments have limited financing arrangements for disaster response and the levels of disaster insurance penetration are very low.

As part of its efforts to help its developing member countries boost their capacity to anticipate and manage risks from climate change and natural disasters, the Asian Development Bank has been incorporating disaster risk reduction and climate change adaptation actions in its projects. ADB has also started to support efforts to address demand and supply constraints to increased penetration of disaster insurance.

“There’s widespread recognition of the need to strengthen financial preparedness for disasters [including through] homeowner, business, agricultural and microinsurance penetration,” Charlotte Benson, principal disaster risk management specialist at ADB, told Devex. There’s also considerable innovation in the area, she added.

Last year, a day before the United Nations Sustainable Development Summit opened in New York, ADB announced that it would raise its annual climate financing for Asia and the Pacific to $6 billion by 2020, of which $2 billion will be spent on adaptation measures, including more resilient infrastructure and better preparation for weather-related disasters. The majority of funds ADB allocates for adaptation measures come from its own resources. But these are supplemented by financing from multilateral and bilateral sources.

“Through a combination of internal and external concessional resources, we’re able to ‘de-risk’ investments and assist vulnerable countries in Asia and the Pacific in increasing capacity to anticipate and manage climate risks, pilot adaptation solutions and mainstream climate adaptation in national development plans,” Cinzia Losenno, senior climate change specialist at ADB, explained to Devex.

Below are more highlights of our conversation with Benson and Losenno on how ADB finance is helping Asia and the Pacific strengthen its capacity to manage climate and disaster risks.

What role is ADB finance playing in the effort to mitigate the effects of climate change and prevent future natural disasters, including floods?

Losenno: ADB is playing — and will continue to play — a key role in shifting the Asia-Pacific region to a climate-resilient and low-carbon economy and we’ve committed to scale up support for helping developing member countries in the region reduce the negative effects of climate change.

We’ve committed to increasing our annual climate finance from the current level of almost $3 billion to $6 billion by 2020 and spending on tackling climate change will rise to around 30 percent of overall financing from [our] own resources by the end of the decade. From this $6 billion, $2 billion will be for adaptation through more resilient infrastructure, climate-smart agriculture, innovative technologies and better preparation for weather-related disasters; and $4 billion will be dedicated to mitigation through scaling up support for renewable energy, energy efficiency, sustainable transport, and building smart cities.

Providing concessional finance is crucial to build climate resilience that also supports economic performance. Blending grant finance with [a] finance package involving loans has allowed us to promote innovation and pilot new approaches to reducing climate change risks in the region. Most of our adaptation finance is sourced from [our] own internal resources, and is complemented by financing from external funds such as the Pilot Program for Climate Resilience of the Climate Investment Funds, the Global Environment Facility, the Green Climate Fund and bilateral sources. Through a combination of internal and external concessional resources, we’re able to “de-risk” investments and assist vulnerable countries in Asia and the Pacific in increasing capacity to anticipate and manage climate risks, pilot adaptation solutions and mainstream climate adaptation in national development plans.

And what are some examples of this approach in practice?

Losenno: In Bangladesh, for example, we’re funding the Coastal Towns Environmental Infrastructure Project by combining ADB loans with grants provided by the Pilot Program for Climate Resilience and the Bill & Melinda Gates Foundation. This $117 million project aims to improve climate and disaster resilience, including severe flooding, through the construction of critical urban infrastructure that [will be designed with long-term climate change projections in mind].

And ADB is also embedding disaster risk reduction and climate change adaptation actions in its ongoing projects, applying a multihazard approach. For instance, a run-of-the-river hydropower plant being constructed under the Second Green Power Development in an earthquake, flood, and landslide-prone area in central Bhutan will incorporate seismic infrastructure design parameters, tree planting to stabilize slopes and reduce risk of landslides, and flood risk management elements, including a flood forecasting and early warning system.

What kind of insurance measures are in place for communities hit by flooding in developing countries?

Benson: [The] levels of disaster insurance penetration are currently very low across much of Asia and the Pacific and, more broadly, governments have limited financing arrangements in place for disaster response. This can delay the speed of post-disaster recovery and reconstruction, exacerbating the social and economic consequences of physical damage to infrastructure such as roads, schools and health centers.

However, there’s widespread recognition of the need to strengthen financial preparedness for disasters, both through sovereign instruments [that would enhance] the capacity of governments to support affected communities, and through growth in homeowner, business, agricultural and microinsurance penetration. Moreover, there’s currently considerable innovation in this area, for instance along the lines of parametric crop insurance, regional insurance pools, and microfinance portfolio insurance.

As an example, ADB and the government of Canada recently supported some analysis by VisionFund International and [its] Philippine microfinance operation [Community Economic Ventures Inc.] focusing on the economic recovery of client households badly affected by the 2013 Typhoon Haiyan. It recommended portfolio insurance of microfinance to fund recovery lending activities, including the restructuring of existing loans and new loans to restore business assets and activities.

How can donors, insurance providers and disaster risk reduction programs better work together in practice?

Benson: Development partners can play an important role in facilitating innovation and increased penetration by helping to address existing demand and supply constraints, including with regard to issues of financial literacy, trust, legal and regulatory gaps, and disaster risk modeling and data gaps.

As part of its work in this area, ADB has launched a new regional technical assistance project precisely to help address some of these constraints, focusing in the first instance on Pakistan and Sri Lanka.

As disaster risk data improve in developing countries, insurance companies will be better able to offer risk-based premiums, incentivizing investments in disaster risk reduction by offering lower premiums to lower risk clients. It is crucial that this link between insurance and disaster risk reduction is realized.

#WaterWindow is an online conversation to amplify the discussion on flood resilience. Devex, together with its partners the Global Resilience Partnership and Zurich Insurance Group, aims to shine a light on innovative solutions to tackle the issues faced by communities worldwide. Join us.