Does Livelihood Diversification support affordability for flood insurance?

मंगलवार, मार्च 28, 2023

Bikram Rana- Project Manager, Practical Action Nepal

Communities in lower Karnali (Western Nepal) have faced late monsoon and October floods two years in a row (2021 and 2022). It is a result of changing rainfall patterns which bring floods in harvest time that causes losses and damages and hampers the livelihood of local people. This is but one example of how climate-induced loss and damage hampers communities in Nepal, and these cases of loss and damage are expected to increase more frequently and intensely. 

Disasters are becoming a major impediment to development, undermining sustainable development, threatening earlier achievements in poverty alleviation, and leading to loss of lives and livelihoods. The situation sought innovative solutions for risk transfer for catastrophic events. 

Co-funded by InsuResilience Solutions fund and Z-Zurich Foundation, Practical Action in partnership with Shikhar insurance company, Global Parametric and Stone Step designed Index based Flood Insurance (IBFI) targeting flood as the peril and standing paddy as an asset to be protected. The product got approval from the Nepal Insurance Authority, albeit failed to get the subsidy in the premiums. The approved IBFI product was rolled out by the insurance company to the cooperatives, as an aggregator holding the group policies on behalf of the farmers.

Our livelihood diversification trainee showing her vegetables . She also purchased IBFI policy with the additional skill generated from livelihood skill. (Photo: Krity / Practical Action)

In the facilitation of project partners, Shikhar insurance company rolled out the product in the monsoon of 2022. Cooperatives act as the aggregator holding the group policy on behalf of individual farmers who choose to enrol on the scheme. 12 cooperatives held 27 group policies protecting 935 farmers in 2022. About 198 bighas (134 Ha) of land with paddy rice cultivation was insured with a sum insured of approx. NPR 14,254,000. The flood hit the second trigger for which payout to the farmer was made, which was 25% of the insured amount which was approximately NPR 3,563,500.

As the approved IBFI product failed to get the government subsidy in premiums, the question of affordability by the poor arises. We tested our livelihood diversification intervention to see if it helps in answering the question of affordability by the poor.

Zurich Flood Resilience Alliance, Practical Action Nepal team, conducted a survey focusing on “Does Livelihood Diversification build Flood Resilience and support affordability for flood Insurance?”

The survey aimed to investigate if people who received training in different livelihood skills through the Nepal Flood Resilience Project (NFRP) were able to use their new income to buy flood insurance, specifically, Index Based Flood Insurance (IBFI). Out of the 31 households surveyed, 28 paid insurance premiums of around NPR 2,000. 21 households saved up to NPR 100,000 per year thanks to their new skills, and 10 households saved even more. 

The results indicate investing in livelihood skills and diversifying livelihoods improved their financial capital by increasing savings. People also highlighted the strengthened skills and income also supported improved food security, improved health access, access to education, reduced forced migration, and reduced negative coping mechanisms (forced selling of assets, loans), indicating strengthened capacity to cope with flood-induced losses. The strengthening of financial capital has also helped communities adopt and invest in other mechanisms that can transfer their flood risk regarding extreme climate events.

In Summary:

Livelihood diversification strengthens skill sets (human capital) to become a last-mile entrepreneur to generate more income (strengthens financial capital) and the ability to contain loss from low to moderate flood risks. 

In absence of government subsidies people can access insurance products to recover from extreme flood risks. Livelihood diversification can help the poor to access insurance products they trust like Index-based flood insurance.

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