What it's about:
A recent discussion paper from the Overseas Development Institute analyses how the "triple dividend of resilience" framework can be applied to disaster risk insurance, in order to explore the potential contribution insurance can make to building resilience and driving development.
The framework highlights three types of benefits (or dividends) which come from taking a resilience-based approach to disasters:
Dividend 1: Avoiding losses when disasters strike
The most direct benefit of a well-functioning insurance mechanism is to compensate policy holders for economic losses after a disaster. These losses are determined through physical assessment or according to a pre-defined index trigger. Evidence on payouts from agricultural insurance suggests that these can help farmers recover after shocks, but the report warns that this dividend can be undermined by inadequate or flawed insurance designs.
Dividend 2: Stimulating economic activity by reducing disaster risk
The expectation of receiving a payout when an insured disaster or shock occurs can increase risk-taking and drive investment in productive activities, such as agriculture. This has been well-documented in many projects around the world and even occurs in the absence of a disaster, the report found.
Dividend 3: Social, environmental and economic benefits associated with disaster risk management investments
There are also so-called “co-benefits” from taking out disaster risk insurance including subjective well-being, as coverage provides peace of mind. Insurance can also influence voter behaviour and contribute to political accountability. The report acknowledges that these factors have not been empirically proven but do have some impact on decisions to adopt insurance policies for disasters.
The report concludes there is definite evidence that insurance can make a contribution to each of the three dividends, and that the triple dividend framework helps to pinpoint the added value of insurance schemes by highlighting the costs and benefits.
Why it's noteworthy:
The authors of the report found that insurance can present opportunities to improve disaster risk management, adapt to climate change and reduce poverty by generating wider benefits and providing financial security against disasters.
However, financial infrastructure, regulatory frameworks and high-quality risk data are often inadequate or non-existent in developing countries. Insurance programmes, therefore, often struggle to cover the most vulnerable, and insurance policies need to be carefully designed to incentivise disaster risk reduction investments.
While important, insurance is just one component of a larger toolbox of risk financing instruments and of disaster risk management.
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Overseas Development Institute