Bikram Rana, Project Manager
16 December 2021
As a part of Zurich Flood Resilience project, we are continuously striving to improve lives of communities living in flood prone areas. One of the key objectives of the program is to increase investments for flood resilience and introduce innovative financing in flood resilience. Practical Action as a part of Zurich Flood Resilience Alliance (ZFRA) is introducing Index based flood Insurance (IBFI) under this pathway through an initiative “Introducing Index based Flood Insurance in Lower Karnali” This initiative is co-funded by Insuresilience Solutions fund and Zurich Flood Resilience Alliance.
Many literatures indicate (flood) insurance as a risk transfer mechanism that will help flood prone communities to improve their resilience against residual risks. However, in Nepal, this is an innovative concept that will require clarity for both policy holders and insurers. This IBFI initiative will work with eleven local cooperatives as the group policy holders on behalf of flood affected small holder’ farmers from project areas lying in Lower Karnali River Basin, where Practical Action works through Zurich Flood resilience Alliance.
IBFI as a concept
Parametric insurance is a subset of insurance products that provides compensation when hazard-related parameters, such as rainfall, flood, surpass a predetermined threshold. In Parametric Insurance payments are based on the intensity of an event rather than actual loss, and when compared to traditional indemnity-based insurance, parametric insurance products offer a scientific and more transparent determination of payments.
Index-based flood insurance (IBFI)/parametric insurance is an innovative approach of risk transfer which could help developing an effective payout schemes for poor and flood vulnerable flood-prone communities. The project aims to integrate hi-tech modelling and satellite imagery with other data to for the determination of flood thresholds. Based on the agreed threshold a speedy compensation payout can be made, which is one of the important aspects of the project. Effective end-to-end solutions will be developed in collaboration with Shikhar Insurance, Stonestep, Global Parametrics, and with local cooperatives together with other concerned agencies at local, and federal level.
Index Based Flood Insurance (IBFI) contributes to the development of the local insurance market by building consumer awareness and education of the importance of risk transfer mechanisms, ultimately increasing willingness to buy diverse insurance products as a means of risk transfer. Hence, the overall objective(s) of the IBFI is to develop risk transfer mechanism for climate vulnerable smallholder farmers and marginalized people in Western Nepal in partnership with private sector actors, local government and local institutions.
Index-based flood insurance, as risk transfer instrument for the flood prone communities of lower Karnali, Nepal is a step towards contributing to one of the objectives of ZFRA on increment of funding for flood resilience, aligned with the pathway to create or pilot innovative private sector or public- private finance opportunity.
IBFI component of the ZFRP will develop and roll out IBFI index-based insurance product that uses a proxy measurement to pay for economic losses, particularly, damage on property and agriculture production. IBFI model is reliant on the accurate modelling (both hydrodynamic and socio-economic model) of river flooding. It will develop a method for setting flood premiums and post flood payments. This will be based on evaluating risk of flooding, categorizing the project communities as per the designated flood risk zones, establishing local thresholds and exposure levels.
Unlike traditional insurance policies, customers often don’t receive a payout until a loss adjustor assesses the damage to the property and its contents. A parametric insurance policy uses a pre-agreed payout based on defined threshold. Therefore, there is no haggling or other bureaucratic process when a claim is made. Provided the insurer and insured agree that the trigger has been met, the payout is made. This makes the claims process quicker, and far more transparent in comparison to other traditional types of insurances claim.
Progress so far
In this consortium, Practical Action is working closely with StoneStep, Global Parametrics and Shikhar Insurance. The consortium has selected Ujjyalo Multipurpose Cooperative as the lead cooperative and will work with ten other cooperatives from these flood prone areas. The cooperatives will be the group policy holders of the IBFI product and sell the product in their constituencies. As it is a relatively new concept for all, we have organized series of meetings with these local cooperatives.
All of the eleven cooperatives work with farmers of flood prone communities; so, they understand their need very clearly. In these meetings; these cooperatives put forth queries related to best interest of these small holder farmers. Even though Index based Flood Insurance is a new concept for them; some of these cooperatives have worked in various livestock related insurance. So, the lessons from implementing these livestock insurance are also valuable checkpoints for implementing IBFI. The cooperatives are our key link and greatest strength while working with flood prone communities.
Practical Action with support from Center for Social Development and Research (CSDR) has completed baseline study in our communities. The baseline study is crucial as it provides detailed baseline information of the communities, risk & vulnerabilities, capacity of local institutions such as cooperatives, MFI and local governments on overall delivery of the IBFI project. Information for more understanding of the communities, their needs and scenario helping to expected result of the project in conducting risk modelling.
Based on hydrological data and baseline survey, our colleagues from Global parametric have developed a Flood depth index covering with reference to Chisapani station. The information from baseline study will help us assess the policy premium range, location of possible stations, capacity of the cooperatives to facilitate the IBFI at community level and understand landscaping at national and local level to roll out IBFI. Collaborating partners are working on the features of IBFI product in a manner to present to national insurance board for its approval and the product is in the hands of small holders by 2022 monsoon.
Bottlenecks and way ahead
The IBFI intends to develop disaster insurance product, however affordability is key in reaching to small holders. In Nepali context, policy exists provisioning 80% subsidy in premium for agricultural insurance products. In order to capitalize on this opportunity, we are focusing on agriculture insurance product. When this pilot is successful, we can think of disaster insurance product as next step.
Parametric insurance is heralded as a good option against indemnity insurance however it requires data-intensive methodologies, technologies for accessing data, and capabilities to design flood indices that enable accurate prediction of inundation and timings of stage of crop growth to pinpoint trigger levels. Within our consortium, Global Parametrics is dealing with data requirements and trigger points for IBFI with freely available data, data from Department of hydrology and meteorology (DHM), data from baseline survey from field. Shikhar Insurance , who is an expert in weather index insurance within the consortium, will help the project to design and approval of the IBFI product.
Indemnity agriculture insurance exists in Nepal and in the project area, however smallholders experience the process of pay-out as cumbersome and almost null are enrolled in the insurance schemes. Hence, we are partnering with local government, nongovernmental organization (NGO) / cooperatives in order to build trust in IBFI, reduce the cost of implementation and ensure inclusivity. We are also investing sufficiently in social mobilizers to educate the community about the complex IBFI product and prioritizing inclusiveness of all sectors of society. We are also striving to make science of indices accessible for all- by ensuring access to field-level data on rainfall, floodwater levels, river water levels, to increase the transparency of IBFI to general public. We are also investing on EIGER system to make it easier for our local partners to receive and make payments to smallholder farmers easily, in our quest to make IBFI system digital and accessible to all.