flood insurance as a flood management tool: an economic perspective

8/22/2019 Flood Insurance as a Flood Management Tool: An Economic Perspective

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August 2007

ERDECONOMICS AND RESEARCH DEPARTMENT

Working PapeSERIESNo.

Tun Lin, Franklin D. De Guzman,and Maria Cita Cuevas

Flood Insurance as a FloodManagement Tool:

An Economic Perspective

Flood Insurance as a FloodManagement Tool:

An Economic Perspective

99


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ERD Workin Paper No. 99

FLOODINSURANCE AS A FLOOD MANAGEMENTTOOL:AN ECONOMIC PERSPECTIVE

TUN LIN, FRANkLIN D. DE GUzMAN, AND MARIA CITA CUEVAS

AUGUST2007

Tun Lin and Franklin D. De Guzman are Economist and Economics Ocer, respectively, at the Economic Analysis and

Operations Support Division, Economics and Research Department; Maria Cita Cuevas is a Board Operations Assistant

at the Oce o the Secretary, Asian Development Bank. The authors thank Juzhong Zhuang or his helpul suggestionsin nalizing this paper.


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Asian Deeopment Bank6 ADB Aenue, Mandauyon City1550 Metro Mania, Piippines

www.adb.or/economics

2007 by Asian Deeopment BankAuust 2007

ISSN 1655-5252

Te iews expressed in tis paper

are tose o te autor(s) and do notnecessariy reect te iews or poicies

o te Asian Deeopment Bank.


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FOREWORD

Te ERD Workin Paper Series is a orum or onoin and recenty competedresearc and poicy studies undertaken in te Asian Deeopment Bank or on

its bea. Te Series is a quick-disseminatin, inorma pubication meant tostimuate discussion and eicit eedback. Papers pubised under tis Seriescoud subsequenty be reised or pubication as artices in proessiona journasor capters in books.


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CONtENts

Abstract ii

I. INTRODUCTION 1

II.II. OvERvIEW O lOOD DAMAgE 2

III.III. lOOD MANAgEMENT: STRUCTURAl AND NONSTRUCTURAl MEASURES 4

A. ood Manaement Measures in AsiaA. ood Manaement Measures in Asia 4 B. inancia Considerations 5 C. Distributiona Considerations 8 D. Risk Mitiation 8 E. Popuation Cane and land Use 9

Iv.Iv. lOOD INSURANCE AS A NONSTRUCTURAl MEASURE: ChAllENgES 11

A. Potentia Caenes 1A. Potentia Caenes 12 B. Some Country Experiences 16

v.v. ECONOMIC ISSUES IN ThE DESIgN O lOOD INSURANCE 19

A. Assess Existin Structura and Oter ood Manaement Measures 1A. Assess Existin Structura and Oter ood Manaement Measures 19 B. Assess State o Priate Insurance Industry 20 C. Assess Peopes Capacity and Wiinness to Pay, and Attitudes

Toward and Knowede o ood Risk 20 D. Assess Partnersip between Priate Sector and goernment

in Adoptin ood Insurance 21 E. Assess Specifc Roes o goernment in ood Insurance Scemes 22

v. OPERATIONAl IMPlICATIONS ORv. OPERATIONAl IMPlICATIONS OR ADB 25

vI. CONClUSIONS 2vI. CONClUSIONS 27

Appendix A:Appendix A: how Popuation Canes lead to Construction o Oersized Dikein a oodpain: A Teoretica Mode 29

Reerences Reerences 4


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AbstRACt

ood insurance is an insurance contract tat coers osses to propertiescaused by oodin. Atou oods aect Asia more tan any oter continentin te word, ood insurance is sti at its nascent stae in te reion. Tispaper expores te potentias and caenes o adaptin ood insurance to te

Asian settin. Due to te need to expore aternatie ood manaement scemesand te context-specifcity o oodin, country-specifc desin and testin o aeasibe ood insurance is deemed necessary. Tis paper presents key aspects o

ood insurance incudin economic desin issues.


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I. INtRODUCtION

Perennial ooding1 has resulted in human casualties, damage to properties, and disruption oeconomic activities in the aected areas. loods exacerbate poverty since the impact o ooding allsdisproportionately on the poor. Countries have adopted both structural and nonstructural measures

as ood management tools to address ooding and its associated risks. Structural measures includeengineering interventions, such as construction o dams or dikes,2 river levees, and embankments;river diversion; widening and deepening o river beds; and setting up o ood detention basins. On

the other hand, nonstructural measures consist o ood insurance, ood orecasting and warningsystems, restriction development planning, water proofng, and other nonengineering actions.

lood insurance is an insurance contract sold to individuals whose properties are exposed toood risk. It seeks to compensate or losses caused by ooding. In developing countries, a typicalood management scheme ocuses mostly on structural measures. lood insurance, in particular,is practically nonexistent. One province in the Peoples Republic o China (PRC) piloted a oodinsurance scheme in the 1980s. The program was suspended years ater it was introduced, and

since then, no progress has been made on ood insurance in the country.

Traditional responses to ooding problems (ood prevention, disaster relie, and reconstruction)in Asia have been constrained by the governments generally weak fscal position. This necessitates

examination o alternative ood management tools that allow cost sharing between the governmentand the communities at risk to ooding. This paper seeks to assess the potentials o ood insurance.It ocuses on exploring the possibilities o adapting a ood insurance scheme that suits country-

specifc conditions, given various inormational limitations. The paper puts orward a theoreticalmodel showing that a policy, which places a user-charge to both existing residents and migrants,would result in a smaller population and dike size in the oodplain. Consequently, the potentialeconomic losses and government spending or ood management decreases. Three key messages emerge

rom the discussions. irst, a careully designed ood insurance scheme may have the potential tocounter the adverse incentives created by structural measures or ood management. It can providethe mechanism or transerring benefts rom nonaected persons to aected individuals. Second,

a ew economic issues and challenges need to be careully considered in the design and adoptiono ood insurance. Third, given the need to explore alternative responses to ooding, the AsianDevelopment Bank (ADB) can play a role beyond what it has enunciated in its water policy, Waterfor All (ADB 200). Relevant and value-adding country-specifc advisory assistance would be needed

or designing and testing a easible ood insurance scheme.

1 There is no clear-cut defnition o ooding. The Center or Research on the Epidemiology o Disasters (CRED) defnes ood as anysignifcant rise o water level in a stream, lake, reservoir or coastal region. Other terms such as river ooding, dike ailure, stormsurge, ash ood, tsunami, or ice jam are closely related to ooding.

2 Dams and dikes are used interchangeably throughout this paper.


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Te paper is oranized as oows. Section II proides an oeriew o ood damae wordwide,

specifcay te Asian reion. Section III examines bot structura and nonstructura measures orood manaement usin perspecties reatin to fnancia and distributiona considerations, riskmitiation, and popuation cane and and use. A uman beaior mode is drawn up, wic

proides tat peope decide to sette in a particuar area based on te cost o iin in tat area.Section Iv describes te caenes (incudin some country experiences) and economic issues indesinin and impementin ood insurance. Section v outines operationa impications or ADBand Section vI draws some concusions.

II. OvERvIEW OF FLOOD DAmAgE

oods are te most requent and deastatin o natura disasters tat ae occurred wordwidedurin te past century. Te number o reported natura disasters in te word reaced 9,62 durinte period 19052004, wit oods accountin or about 28% o te tota (iure 1). Damae toinrastructure, crops, ousin, etc. ae been paced at undreds o biions o doars, accountin

or about 40% o te economic damae brout about by a types o natura disasters. Miions oies are ost in te process. Te ast centurys oods kied neary te same number o peope asa oter natura disasters combined. As business operations are disrupted and decreased earnins

are transated into ower tax reenue coections, socia prorams aso suer because tax moneyspent on reie and recoery eorts crowd out expenditures intended or eat and education.ood disasters aso indirecty cause transportation deays, spread o diseases, power outaes, andwater contamination (ADRC 2002 and Myers 1997).

10,000

1,000

100

10

1

FIGURE 1

NUMBER OF NATURAL DISASTERS WORLDWIDE, 19052004

5376 83

170270 292

476

805 944 975

2571 2647

Wave/surge Famine InsectinfestationVolcano Extremetemperature Wildfires Slides Drought Epidemic Earth-quake Wind-storm Flood

Source: CRED (2006).

Datasets used in tis reiew are rom CRED (2006), wic were compied rom arious sources incudin te United Nations, oernmentand nonoernment aencies, insurance companies, researc institutes, and press aencies. Disasters incuded in te CRED databasecompied wit at east one o te oowin criteria: (i) 10 or more peope reported kied; (ii) 100 [or more] peope reported to be

aected; (iii) state o emerency decared in te area; and (i) disaster entaied a ca or internationa assistance.

August2007

Flood InsurAnceAsA Flood MAnAgeMent tool: AneconoMIc PersPectIve

tunlIn, FrAnklIn d deguzMAn, And MArIA cItA cuevAs


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sectIon II

overvIewoF Flood dAMAAge

oods aect Asia more tan any oter continent. Asia experienced a tota o 1,229 ood

disasters, or 41% o te word tota durin te ast 100 years (Tabe 1). Statistics or 20002004sowed tat te requency o oods in Asia increased rapidy, wit an annua aerae o 58 ooddisasters. Sout Asia is te most aected reion in Asia (and obay) wit a reported incidence

o 427 ood disasters. India is te most aected country in Asia, oowed cosey by te PeopesRepubic o Cina (PRC).4 Te increasin trend o ood disasters in Asia as been accompaniedby mass deastation in uman ies (Tabe 1). Durin te 100-year period, te PRC aone reported6.6 miion deats and US$118 biion wort o damae. Te PRCs aerae oss rom oods was

RMB110 biion eac year since 1990, wic is equiaent to 1% o te countrys ross domesticproduct (gDP). howeer, te extent o deastation may not be proportiona to te requency oood disasters. or instance, viet Nam as ess tan a te number o oods tan Indonesia, butte cost o its damae is reater tan tat o Indonesia.

TAbLE 1HUMAN CASUALTIESAND COSTOF FLOOD DAMAGE WORLDWIDE, 19002006

NUMbEROF

EVENTS kILLED INjURED HOMELESS AFFECTEDTOTAL

AFFECTEDDAMAGE

(US$ 000)

Asia 1,229 6,765,544 1,199,680 99,497,89 2,695,78,959 2,796,076,52 205,047,004

Aerae per eent 5,505 976 80,958 2,19,148 2,275,08 166,841

Aerica 749 100,768 41,805 ,16,54 49,94,42 5,292,771 61,59,14

Aerae per eent 15 56 4,428 66,668 71,152 82,162

Arica 526 20,186 22,66 4,665,522 5,14,801 9,822,959 ,941,585

Aerae per eent 8 4 8,870 66,796 75,709 7,494

Europe 422 9,244 21,775 1,969,976 12,615,62 14,607,74 80,805,760

Aerae per eent 22 52 4,668 29,895 4,615 191,48

Oceania 99 70 91 107,400 465,785 57,276 2,84,911

Aerae per eent 4 1 1,085 4,705 5,791 24,090

Source: CRED database.

iure 2 sows te economic osses in Asia caused by oods since 1965. Economic osses aeone up exponentiay oer te past our decades. Te oss durin 19952004 was more tan 60

times ier tan te oss durin 19651974. Te case o te PRC party expains tis, wereinte arabe ands aected and destroyed by oods amost doubed in te 1990s compared to te1950s, despite ain constructed 277,000 kiometers o rier dikes and 85,000 reseroirs (Yon

2005). houses destroyed by oods aso increased rom 2. miion in te 1950s to 2.7 miion inte 1990s.

4 Competin te top ten are Indonesia, Banades, Piippines, Iran, Taiand, Pakistan, Japan, and viet Nam, respectiey .

erd workIngPAPer serIesno. 99


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III. FLOOD mANAgEmENt: stRUCtURAL AND NONstRUCtURAL mEAsUREs

Structura measures or enineerin interentions are desined to keep oodwaters away rompeope. Tecnicay speakin, tere is no ood risk tat cannot be mitiated by structura or enineerinmeasures, oweer, te cost may be proibitie.5 On te oter and, nonstructura measures aim to

keep peope away rom oodwaters or to teac tem to ie rationay amid te treats o oodintrou prudent and manaement and disaster preparedness. I structura measures are te boneso a ood manaement proram, nonstructura mitiation is considered as its es (UNESCO 2001).As wi be sown in te succeedin sections, major dierences between structura and nonstructura

measures can be iited by ookin at te fnancia and distributiona considerations, teir riskmitiation eectieness, and impacts on popuation rowt and and use.

A. Flood manaeen meaure in Aia

In Asia, structura measures remain as te ocus o ood preention. Inestin on preentie

or enineerin measures is perceied to be ceaper and more eectie in te on term due tote are number o peope aected by oodin. gobay, Asia is te most proifc in terms o tenumber o dams in operation and under construction, ain about 65% o te words dam tota.6Around 80% o Asian reseroirs ae oumes reater tan 100 miion cubic meters. Aso, about

40% o dams in Asia are ier tan 0 meters. Bot percentaes are aboe te word aerae(iure ).

5 Wordwide inestments in dam constructions reaced $2 triion durin te ast century, wit an aerae rate o one are dam beinbuit per day (Word Commission on Dams 2000). Oer 80% o are dams in te word were buit ater te 1950s. Dams are constructedor many purposes incudin irriation, ydropower, water suppy, ood manaement, etc. ood manaement dams are aso used orpower eneration and irriation because tey are usuay needed or ony a ew days or weeks in a particuar year.

6 Peopes Repubic o Cina, India, Japan, Repubic o Korea, and Turkey are amon te most actie dam-buidin countries.

160,000,000

140,000,000

120,000,000

100,000,000

80,000,000

60,000,000

40,000,000

20,000,000

FIGURE 2

ECONOMIC LOSSES DUE TO FLOOD DISASTERS, 19652004

19651974 19751984 19851994 19952001

Source: CRED (2006).

Period

EstimateddamageinUSdollars(000)

12,385,1687,826,531

55,548,673

122,703,104

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sectIon III

Flood MAnAgeMent: structurAlAnd nonstructurAl MeAsures

Te PRC as ood-prone areas tat are inabited by more tan 66% o its tota popuation.

Tese areas produce two tirds o te countrys tota aricuture and industria production. Te PRCcurrenty as 45% o te words dams and sti as ery actie construction prorams. India is temost ood-aected country in te word in terms o number o disasters and ood-prone areas,

wic are estimated at 40 miion ectares or 12% o te countrys tota eorapica area. Damsin India account or 9% o te tota number o dams in te word. In te case o Japan, 50% oits popuation ie in ood-prone areas, and oods ae aected 80% o its municipaities in te1990s. Japan as tus become one o te top fe dam-buidin countries in te word and accounts

or about 6% o te words tota.

FIGURE 3

GLOBAL DISTRIBUTION OF DAMS, 2000

Oceania 1%

Source: World Commission on Dams (2000).

Eastern Europe 3%

North and CentralAmerica 17%

South America 2%

Western Europe 9%

Africa 3%

PRC 45%

Asia 65%

Others 2%Turkey 1%

Republic of Korea 2%

Japan 6%

India 9%

b. Financial Conideraion

Impementation o ood manaement measures contributes to a oernments fsca burden.Wit te increasin requency o ood disasters, te cost o disaster preention, reie, andreconstruction, incudin te consequent economic osses o oodin ae rown concomitanty.

In te United States (US), te edera oernment spent $8 biion on ood manaement, mostyon structura measures, between 1960 and 1985. Yet, aerae annua ood damae, adjusted orination, continued to increase, and in act, more tan doubed rom te preious period inestiated

(Sciden 1999).7 In te PRC, te Cina Ministry o inance and Word Bank (WB) statistics sowedan 18.2% aerae annua rowt rate o oernment reie unds or natura disaster rom 1962to 200, as compared to an aerae rowt rate o 6.9% in te countrys gDP durin te sameperiod. Wordwide, disaster reie expense cimbs up wen ood damae increases at a rate aster

tan oernment reenues do.8

Construction o dams is not ony fnanciay proibitie. It is aso subject to sinifcantuncertainties, suc as eotecnica conditions at te site and quaity o te construction materias,

7 Ination-adjusted aerae o ood damae was estimated at $1.7 biion durin 19019, $2.7 biion durin 194196, $4.6biion in 1964199, and $5.1 biion durin te period 19941997.

8 Comparin two 1-year periods (19801992 and 1992005), te oernment reenue income or g-7 countries increased 89% onaerae, but te recorded aerae economic osses due to oods went up by more tan 50 times. A seen countries ae sinifcantyier rowt in ood osses tan in oernment reenues.



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wic oten cannot be determined precisey unti construction is under way. Te Word Commission

on Dams (WCD) estimates tat wordwide, more tan a (54%) o dams ae incurred cost oerruns(2000). Moreoer, increased sedimentation and te continuous rowt in popuation and te ocaeconomy ae made it imperatie to inest in additiona structura measures, suc as raisin te

eit o dikes. Tis increase in fsca burden as become te oremost incentie or oernments toconsider nonstructura measures, suc as ood insurance, wic entais a cost-sarin arranementamon property and business owners, insurance and re-insurance industry, and oernment.

Box 1 discusses te nexus o dams, insurance, and popuation rowt rom a budetaryperspectie. Oer time, tese actors contribute to te decrease in te dams eectieness, resutinin anoter round o dam construction or raisin o te dike eit.9

bOx 1DAMS, INSURANCE, AND POPULATION GROWTH: A bUDGETARy PERSPECTIVE

ood insurance and enineerin measures ae dierent eects on popuation rowt in ood-

prone areas. Structura ood protection measures ower te costs o iin and inestments in te ood-prone areas, and tereore tend to increase te popuation and economic actiities in tese areas. As

popuation increases and economic rowt occur, potentia ood damae aso increases, necessitatinurter enineerin interentions. ood insurance can work te opposite way by addin (part o) teinsurance premium back to te indiiduas cacuation o costs o iin and inestments.

let us assume te oernment as a fxed budet or ood disaster reie and wi undertakemitiation measures wen te areated expected oss (AEl) exceeds tis budet. Te AEl depends

on te popuation iin in te oodpain. Te popuation canes wen te cost o iin in teoodpain aso canes. I te oodpain popuation exceeds te critica ee, te AEl woud be

reater tan te oernmenta reie budet, and tereore certain ood mitiation measures woudbe required. In suc a case, two mitiation options may be considered: buidin a dam (or improinexistin structures) or initiatin ood insurance. Buidin a dam owers te ood azard probabiity,

and ence, owers te AEl. Aternatiey, ood insurance acts as a mecanism or te oernment andte priate sector to sare te expected defcit in ood disaster reie and reconstruction. Buidin a

dam is ceaper on a per capita basis, i.e., te reater te number o peope in te oodpain, te esserte cost o construction per indiidua. howeer, tis ony ods true in te sort term. In te on run,

dam construction encouraes te popuation to row wie ood insurance possiby discouraes it. Temore peope moe into and reside in te oodpain, te ier te need or mitiatin ood risk and

te reater te potentia economic osses become.Atou no orma economic mode is ound, iure 4 sufces in demonstratin te idea. In

te fure, te orizonta axis is te number o peope iin in te ood-prone area, denoted by n,

wic can be broady interpreted as any asset under te treat o ood. or ease o iustration, weassume it as te number o peope at a point in time. Te ertica axis is te AEl, wic is a unction

o bot te number o potentia ictims and te disaster probabiity. Ceary, AEl increases wit n,wic is represented by an upward cure in te fure, as we as disaster probabiity. goernment, as

te disaster reie aent, aces a budet constraint represented by a orizonta ine. Box iure 1 sowstat tere is a critica ee o popuation n*, beow wic te AEl is witin te oernment budet

ine. Tis means tat wit existin ood preention measures, te oernment expects, ex ante, to beabe to proide disaster reie.

continued next page.

9 or centuries, dikes in viet Nam ae been proressiey increased in eit as te rier bed as raduay risen due to accumuatinsediments deposited by oods. Te same situation preais in te PRC, were te eit o dikes on te Yantze Rier as onebeyond 16 meters aboe te oodpain.

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bOx 1. continued.

BOX FIGURE 1

INTERACTION BETWEEN FLOOD MANAGEMENT POLICIESAND POPULATION CHANGE: AN ILLUSTRATION

Loss

($)

n* n3 n1 n2

A

AEL AEL with dam

Budget

n

AEL means aggregated expected loss.

howeer, i te popuation exceeds te critica een* to n1 ee, te oernment, expectininsufcient money to proide te disaster reie, needs to take some actions. One option is to construct

a dam. Tis woud decrease te probabiity o oodin. Ater te dam as been constructed, oodinwoud become ess probabe. Wit te same popuation size, te expected disaster reie woud be

esser. Tis is sown by a sit o AEl cure toward a souteast direction in te fure (te dottedcure). Now wit popuation n1, te AEl is witin te budet.

Tere is a potentia serious probem wit tis option i one takes into account popuation increase

as a resut o buidin o te dam. Dam construction decreases te probabiity o oods, and consequentyte cost o iin in te ood-prone area. Tis woud encourae miration and business deeopment

in te area, and probaby een ier ertiity rate. Popuation rowt depends on te specifcationand assumptions o te mode. or te moment, et us assume tat te popuation increases rom n1 to

n2. Wat oows is tat te AEl exceeds te budet aain. Tis situation woud necessitate more damconstruction (new or improements).

One o te aternatie options is ood insurance. Instead o workin on te ood probabiity aswat structura measures do, ood insurance estabises a pubicpriate partnersip or sarin tedisaster cost. Wen te popuation is n1, te oernment can initiate suc a proram to sare te

part o AEl tat exceeds te budet ine (ine AB in te fure). Tis option becomes more attractiewen peopes ocation or ertiity decision is taken into account. Instead o encourain inward

miration and ier ertiity rate, ood insurance can ae te opposite eect because te insurance

premium increases te cost o iin in te area. or iustration purposes, et us assume tat wit teimpementation o ood insurance, te popuation decreases rom n1 to n3. Te saded area in tefure represents te pubic und saed.

sectIon III




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C. Diriuional Conideraion

An upstream dike can beneft communities ocated ery ar at te downstream. howeer, noteeryone equay sares te benefts o enanced saety. Aso, in rare cases were a dike breaksdurin eay storms, popuations downstream may be subjected to extreme oodin. Dacy and

Kunreuter (1969) criticize te inefciency o society in bearin te cost o ood protection inte orm o structura ood manaement measures were benefts accrue to ony a ew indiiduas.A study on dams distribution o irriation benefts in India concuded tat tere was a aiure o

state-ee redistributie institutions. Dams increase rura poerty in districts were tey are ocated,wie poerty decines in districts downstream rom te dam (Duo and Pande 2006).

Aderse enironmenta and eat consequences o structura measures are aso borne uneeny

by te aected popuation. lare dams, or exampe, enerate opposition in most cases due to teperceied associated socia and enironmenta costs. To date, an estimated 4080 miion peopeae been inountariy resetted, mosty trou orced eiction, in aor o dam constructions.Preention o oods by dams as entaied ier cost to armers, fserok, and tose dependent

on oodpain resources (Internationa Riers Network 2000). In addition, are dams contribute

to cimate cane because tey reease 104 miion metric tons o metane eac year (lima eta. 2007). heat probems aso ensue since reseroirs oten proide abitat or ector breedin,causin diseases suc as maaria and fariasis (Sarma 2006).

Identifcation o benefciaries o ood manaement measures is difcut. And een wen tebenefciaries are identifabe, tere is rarey any eectie redistributie mecanism tat aows or

benefciaries to compensate te popuation wo suers rom te dam construction. Weneer adisaster occurs, te oernment oten as to decide on weter to aow oodin o certain paces inorder to protect oter areas. Tis practice is compounded by te absence o an eectie mecanismtat aows residents o protected or benefciary areas to pay or damae in te ood detention

areas, except or some impicit and indirect transers between te benefciaries and te ictimstat are manaed by te oernment. In a edera oernment system, it is extremey difcut to

make an intermediate sacrifce-A-to-sae-B decision beore or durin te disaster, and arranecompensatory transers rom B to A ater te disaster. A ood insurance sceme as te potentia

to estabis an automatic mecanism tat enabes benefciaries to pay ood ictims, i bot arecoered by te same insurance proram or proider. Premiums paid by benefciaries wi orm parto te beneft caims fed by te ood ictims.

D. Rik miiaion

Bot structura and nonstructura measures entai expendin scarce pubic resources. Teormua beow can ep determine wic o tem is more eectie in risk mitiation:

Risk = Hazard Probability x Vulnerability x Exposure

were azard probabiity is te ikeiood o ood, unerabiity is te ikeiood o damae toproperties and oter inrastructure, and exposure is te economic and socia impact o oodin.

A simpe way to determine cost eectieness o dierent ood manaement measures isto compare teir respectie unit cost impacts on te risk. or exampe, tere are two optionsproposed or ood manaement in reion X: an embankment tat costs Y; and a community-based

ood-warnin system (e.., obseration points and warnin bes), wic costs Z. irst, eauate

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te risk impacts o bot options. In te case o embankment, in addition to reduction in azard

probabiity, possibe increases in unerabiity and exposure to oods due to property deeopmentand increase in popuation in te aected area aso need to be taken into consideration. Next, terisk impacts o eac option must be weied aainst te cost. Te preerred option soud be te

one wit ier risk mitiation impact per unit cost.Dams reduce te azard probabiity by manain te peak ows and reducin te probabiity

o water breacin wic endaner ies and properties. howeer, risk impacts o dams are rarey

studied and quantifed (een more rarey or nonstructura measures), as pointed out by an ADBstudy (2002). Countries tat ae constructed more dams do not necessariy ae ewer ooddisasters and economic osses. Data rom 12 countries on te number o dams and te ooddisasters ater te 1960s was examined. Countries were cateorized by te number o dams into

six roups: 14 dams, 59 dams, 1049 dams, 5099 dams, 100499 dams, and more tan 500dams. Compared to witin-te-roup ariation, ery minima across-roup ariation was ound inte rowt rate o ood disasters durin te period. On aerae te incidence o ood disasters

as not decreased in countries tat ae more dams durin te periods inestiated. In act, tereerse arumenttat countries ain more dams aso ae ier rowt rate o disastersissupported by some subsampe data. Amon 2 OECD countries,10 10 countries ae more tan 500dams. howeer, te number o reported ood disasters in tese 10 countries, on aerae, increased

by 22% rom te period 1980199 to 19942006, as compared to 4% in te oter 1 countries.Te dierence is statisticay sinifcant at 5% ee.11 gien tis, i structura measures woudencourae popuation, property, or business deeopment in te ood-prone areas, unerabiityand exposure mit increase.

E. Populaion Cane and Land Ue

Tree actors expain te cose correation between te structura measures or ood mitiationand te economic osses due to ood disasters, as discussed preiousy in Box 1. irst, economic

rowt enabes more construction works, but at te same time, it makes ood disasters more costy.Dams or dikes, or exampe, draw more peope and encourae business deeopment in te oodpaindue to te perceied sense o security rom ood disasters. Trou time, tis deeopment andpopuation rowt justiy urter increase in te size and scae o dams or dikes. Second, i

economic osses due to oods, or expectation o urter osses in te uture, encourae constructiono more dams and dikes. Tird, te reerse causaity is aso possibe, wic points to dike constructionas a contributin actor to te increasin economic osses. More dams and dikes coud unwittinyencourae economic and popuation rowt in te oodpain, wic may ead to reater economic

osses in te eent o oodin.12

Tese aruments tat support te cose correation between structura measures and economicosses proide some caution on te sustainabiity o usin dikes or dams to mitiate ood risks

witout considerin possibe canes in popuation and and uses. In many countries rapid popuationrowt is te primary reason or te continued recamation and resettement aon te main riers.Inappropriate and use in tese areas sinifcanty reduces te storae and detention capacities

10ood data or Czec Repubic, Denmark, inand, greece, hunary, Norway, and Soakia were not incuded because tey are eiter

missin or incompete.11One imitation o te data is tat ony a sma raction o te dams were constructed soey or ood mitiation purposes.12or exampe, ater te Mississippi ood in 199, a US conressiona testimony pointed out tat dams and eees exacerbate te

oodin probem (Sciden 1999).

sectIon III


erd workIngPAPer serIesno. 99 9


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o te rier basins, tereby increasin ood ows aon te cannes. lands intended or ood

reuation are bein used or aricuture and uman settement purposes. Structura measures canaso raise rier beds, wic create additiona risks or te inabitants.

Conentiona wisdom arues tat tere is notin wron or indiiduas to ree ride in te

positie externaities proided by structura measures. Increases in conestion and property prices inte oodpain wi eentuay be curbed by market orces. Tis paper arues dierenty. Indiiduasincur moin costsbroady defned to incude cost o transportation, settin in te new pace,

and fndin a jobwen tey resette in a oodpain. Mirants actor in moin costs wen teycompare te dierence in expected incomes in and out o te ood-prone area. I mirants areaowed to ree ride te additiona security brout about by structura measures wie ain teexistin residents o te oodpain pay or it, moin costs woud not deter miration, een by

tose iin urter rom te oodpain, because part o te moin costs, woud be oset by teree additiona saety. A mode in Appendix A sows tat peope make decisions to sette in aparticuar area based on te cost o iin.1

Conentiona wisdom ikewise suests tat te positie externaities o pubic oods ead to

undersuppy o te oods. Tis paper sows oterwise, tat is, te pubic ood nature o te dikeeads to te oersuppy o te dike oer time. Witout considerin te eects on uture miration

into te oodpain, arer dikes are constructed. As more peope moe into te oodpain and teoca economy rows, te ear o incurrin arer economic osses rom oodin justifes an eenbier or ier dike. Suc a icious circe is iustrated in Box 2.

Nonstructura measures proide dierent ocatie incenties or canin popuation andand uses. ood insurance, or instance, coud eiter increase or decrease te costs o iin andinestments in te ood prone areas, dependin on te poicy desin and te expectations o tepeope prior to te introduction o ood insurance. Te eects on te cost o iin aso depend

on weter te ood insurance substitutes or te pubic uarantee proided by te oernment.I te poicy and peopes expectation are or te oernment to souder te cost o disaster

preention and disaster reie, te introduction o ood insurance can increase te costs o iinand inestments by substitutin te pubic uarantee wit priate insurance. howeer, i te poicyand peopes expectation is tat te communities and indiiduas are oin to bear te consequenceso a ood disaster witout muc ep rom te oernment, introduction o ood insurance mitdecrease te cost o iin and inestments by pooin te risks o communities and proidin a ess

costy option or risk mitiation. Eatt (2000) reiews 2 studies o te Nationa ood InsuranceProram (NIP) in te US and concudes tat tere is insufcient empirica eidence to support teiew tat NIP spurs oodpain rowt. A mandatory ood insurance, dependin on its desin, aste potentia to oset te impacts o structura ood protection measures on increased popuation

and economic actiities in te ood-prone areas by addin part o te insurance premium back topeopes cacuation o costs o iin and inestments.

1 To iustrate our idea in te sarpest possibe way, we inore a te tecnica compications o dam construction and assume asimpe reationsip between te construction cost and te reduced probabiity o te ood disaster, i.e., te ier te cost is, tebier/ier te dam becomes. Tis essens te probabiity o oodin.

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sectIon Iv

Flood InsurAnceAsA nonstructurAl MeAsure: chAllengesAnd Issues

BOX 2

HOW POPULATION CHANGES SPUR CONSTRUCTION COSTS

OF AN OVERSIZED DIKE IN A FLOODPLAIN

Monetaryvalue

($)

Total social benefit withoptimal population size NS

T-period floodplainresidents benefit curve

with population NT

T-period floodplainresidents benefit curvewith population NT-1

Cost curve of the dikeconstruction

qT+1 qS qT q (flood probability and dike size)

Construction cost increases as te size o te dike oes up (smaer q). Te net benefts ote oodpain inabitants are represented by te distance between te beneft cure and te cost

cure. Te ine to te et represents te beneft cure o te oodpain inabitants at T-1 periodien te popuation size nT-1. In te next period T, te oodpain inabitants coectiey decide

on te size o te dike qT to maximize teir net benefts. howeer, qT attracts more mirantsand te popuation size canes to nT, so te beneft cure moes te ine to te rit. In teoowin period T+1, a dike wit te size oqT+1 wi be constructed to maximize te net beneft

o oodpain inabitants. Tis dynamic process can o on and on. Te dotted ine in te fure

represents te socia benefts ien te optima size o te popuation and dike in te oodpain.Tis is ony possibe i te oernment can crediby imit miration or business deeopment inte oodpain ater te dike as been constructed.

Iv. FLOOD INsURANCE As A NONstRUCtURAL mEAsURE:ChALLENgEs

ood insurance as been reconized in recent years as a compementary too in te oeraood manaement sceme. As an insurance contract sod to indiiduas wose properties are exposed

to ood risks, ood insurance is desined to compensate osses caused by oodin. It as beenarued tat te best time to consider ood insurance is wen appropriate structura and oternonstructura measures are aready in pace (Andjekoic 2001). Te potentia adantaes are mainytwo-od. irst, ood insurance can ep ease a oernments fsca burden or disaster preention and

reie by inoin indiiduas and priate insurance proiders. It aso aows or a more automatedtranser o payments rom te nonaected persons to ood ictims wo are coered by te sameinsurance proram. Second, ood insurance aso as te potentia to inuence an indiiduas ocatie

decision, wic can counter te aderse incenties created by structura measures or peope to



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mirate into or estabis businesses in ood-prone areas. Te succeedin pararaps discuss te

caenes to ood insurance, some country experiences, and economic issues pertainin to oodinsurance. A ramework o anaysis or adoptin ood insurance is aso presented.

A. Poenial CalleneTe iabiity o an insurance sceme centers on cost. Metods o osettin risk inoe

some cost in te orm o insurance premiums or oreone income opportunities. Wen indiiduasattempt to obtain insurance, tey impicity cacuate weter te ikeiood and scae o an eentwoud be serious enou to justiy te cost o te insurance. Simiary, an insurer is aso aced

wit te difcuty o cacuatin te attendant costs o proidin insurance. It as to assess teikeiood and cost o damae aainst te premiums set at a rate tat te market wi bear. Teinsurer aso takes into consideration a oernments response to te caamity. A oernment orinternationa communitys action tat readiy comes in to coer te costs o a catastrope reduces

te attractieness o insurance (DID 2004).

Tere are serious caenesi.e., suppy, demand, and oernment and market actorsor ood

insurance to unction we. On te suppy side, insurers may fnd it ard to desin insurance productsbecause o te difcuties in assessin ood risk and peopes unerabiity, incudin estimatinte potentia damae o te ood. Aso, i administratie costs in certain areas (especiay ruraareas), ack o access to reinsurance markets, and oba cimate cane tat causes extreme weaterdisturbances tend to adersey aect te commercia iabiity o tese products. On te demand

side, ow demand or ood insurance, especiay ountary insurance, as been obsered around teword. Tis is a resut o a combination o ack o inormation, imited risk coectie (te peopewo poo te risks), compreensie oernment rescue or expectation o it, and ow income. On

te market and oernment side, reeant eisations and poicies, as we as partnersip scemesin ood manaement between te oernment and te priate sector, ae yet to be estabisedin most deeopin countries. Tabe 2 summarizes tese potentia caenes. Some o te suppy

side and demand side actors are eaborated in te succeedin pararaps.TAbLE 2

POTENTIAL CHALLENGESIN ADOPTING FLOOD INSURANCEFOR DEVELOPING COUNTRIES

Suppy Side actors

Difcuty in assessin risk and unerabiity beore te disaster

Difcuty in estimatin damae ater te disasterhi administratie costs

limited access to reinsurance markets goba cimate cane

Demand Side actors

hi premium due to imited risk coectie

limited awareness and inormation

Mora azard probem (reyin on oernments disaster reie) low income

Market and goernmentactors

lack o reeant eisations and poicies lack o cear partnersip sceme between te oernment and te

priate sector

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1. supply side Facor

(i) Assessing risk and vulnerability presents a big challenge or insurers. Demand orood insurance is ier in areas tat are repeatedy aected by oods and areceary at risk. Wen insurers ae difcuty assessin te risk o ood disaster

or a particuar area, it is ony rationa or tem to assume i disaster riskand care i premiums. hi premiums, in return, dampen te demand orinsurance rom medium or ow-risk roups o peope. Tis resuts in a typica

aderse seection or anti-seection probem.

Anti-seection probem is uniersa to amost a insurance products weretere is inormation asymmetry between te insurers and te insured. or some

reasons, ood insurance promotes aderse seection. irst, at te communityee, many deeopin countries wit no ood insurance do not ae oodmaps tat are based on ydro-meteorooica inormation. Witout ood maps,insurers woud fnd it extremey difcut to assess te ood risk o a property.

As suc, eents tat woud trier indemnity become ard to defne. Second,

at te indiidua property ee, tere is usuay a ack o inormation onood-proofn eatures o properties, wic preent an accurate assessment orisk. Te ast source o inormation defciencies comes rom te unobserabe

caracteristics at te indiidua person ee, suc as te caution and eortput in to preent te disaster and to sae te property durin te disaster.Teoreticay, te unobserabe indiidua caracteristics are te main actors

driin te anti-seection probem. howeer, te irst two actors at tecommunity ee and te property ee tend to present bier constraints tote deeopment o ood insurance in Asia.

(ii) Estimating food damage can be dicult or insurers. Apart rom te difcutyo assessin ood risk, damae assessment presents anoter caene. ood

insurance contracts are usuay desined in suc a way tat ood ictims arepaid out accordin to teir osses, subject to a certain cap. I te osses are

se-reported, tere are incenties or te poicyoders to proide insurerswit wron or miseadin inormation reardin te damae, and expecttransers commensurate to teir caims. veriyin damae coud present ue

inormationa constraints to te insurers. Te NIP estimates ood ossesbased on a ypotetica acre composed o te proportion o eac and use.lacewe and Eidman (1972) criticize te procedure o deeopin inequitabeand owner assessments and propose a more enera mode or estimatin ood

osses and insurance premiums based on a point sampe. Moreoer, in poointoeter oodin risks across iaes o dierent rier basins, ood insurance,

by desin, as to coer are anonymous roups and spatia distance, wicurter compicates te job o eriyin osses and damae.

A recent deeopment in te fnancia market, incudin te catastrope bondsor cat bonds and weater deriaties, points to a possibe new direction o

sectIon Iv

Flood InsurAnceAsA nonstructurAl MeAsure: chAllenges



23/58

basin te compensation on more measurabe and objectie indices, suc as

raina or rier ow eocity. Tis is a promisin area or urter study. Box introduces te concept o ood-deried contracts tat stipuate ow paymentwi be excaned between te parties, dependin on certain meteorooica

conditions durin te contract period. Tis can be a useu instrument tomodiy or suppement conentiona ood insurance contracts.

bOx 3FLOOD DERIVATIVE CONTRACTS

or conentiona ood insurance, defnin oods, assessin teir risks, and eriyin te

osses tey entai present serious caenes. An aternatie orm o ood insurance contract is oodderiatie, wic may be abe to address tese caenes. ood deriatie is a concept borrowed rom

te increasiny popuar markets o weater deriaties. Te concept is introduced ere, and it is upto te readers to decide on its desirabiity and easibiity as a ood risk mitiation instrument or as asuppementary instrument to conentiona ood insurance or peope wose properties need additiona

coerae.A ood deriatie is a contract between two parties tat stipuates ow payment wi be excaned

between te parties dependin on certain meteorooica conditions durin te contract period. Aeneric ood deriatie contract can be ormed by speciyin te oowin parameters:

1. Contract type (ca, put, or swap)2. Contract period. An ofcia weater station rom wic te meteorooica record is obtained

4. Defnition o ood index (F) underyin te contract5. Strike (S)

6. Tick (k) or constant payment (P0) or a inear or binary payment sceme7. Premium payment (P)

Te parameters aboe determine te amount o payment (P) tat te seer is obied to make tote buyer. or a inear payment sceme,

Pput= k.max (S-F, 0) and Pca= k

.max (F-S, 0)

or a binary payment sceme,

Pput = P0 i F S0; Pca= 0 i F S0.

or exampe, te oernment is sein a ca contract at price Pca, wic entites eac contractoder P0 i te peak rier ow (F) obsered in certain station is reater tan a strike ee (S) durin

certain period (contract period). Te introduction o purcases o suc contracts proides a certainderee o assurance to peope, wose properties are exposed to ood risks, i.e., i oods destroy teir

properties, tey wi be abe to et some money back rom teir ca contract.A ood deriatie can be a useu instrument or mitiatin ood risks. Te type and ee o

protection wi be decided by eac indiidua buyersubject to teir incomes, risk attitude, and teextent o oodin tat woud aect teir properties and ieioods. Tere are two premises or suc asystem to work: (i) a trustworty ood index Fincudin its probabiistic state, and (ii) te air price

estabised trou careu studies. It is possibe tat tere wi ony be a imited number o suppiersand consumers o tese contracts because oca market is unikey to be iquid enou. Te traditiona

ood reie proided by te oernment can be iewed as a specia orm o ood deriatie contractwit price equa to zero or some impicit taxes.

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(iii) Limited access to reinsurance market and global climate change tends toincrease the cost o providing food insurance. In deeopin countries ormaweater-reated insurance markets are eneray weak. Te imited access toinsurance markets tends to increase te cost o proidin ood insurance and

eads oernments to attempt to meet disaster costs trou tax reenuesor borrowin. At te same time, oba cimate cane tat induces oodincan aso increase te insurance cost (DID 2004). or exampe, durin te19971998 E Nino penomenon, wic is te stronest episode o drout

in istory, costy oods occurred more requenty tan norma in te souternpart o te US. Concerns reated to cimate cane ae been sared by anincreasin number o insurers since te past tree to our decades witnessedsinifcant increases in oba oodin.

. Deand side Facor

(i) Limited risk-sharing pool dampens demand or food insurance. Insurers usuay

care premiums tat are commensurate wit te ood risk and administratiecosts, uness competition orces tem to cross-subsidize ood insurance wit

oter insurance products. Tere are two important consequences o oerin oodinsurance to a imited popuation on risk sarin poo. irst, mutua insurancecaracteristics are ost. Insurance mecanism works better wen potentia

risks are spread across a bier popuation. Tis expains wy existin oodinsurance prorams tend to ae nationa-ee coerae. Second, i te ossburden is distributed oer a sma popuation, te premiums become considerabymore expensie. Tus, imited risk coectie resuts in eac indiidua payin

a i premium. Bot consequences, in turn, dampen te demand or oodinsurance.

(ii) Flood insurance will not improve economic eciency, i people do not ullyunderstand the risks involved in building or purchasing properties in food-proneareas. Krutia (1966) noted tat a compusory nationa ood insurance proramcoud reaty improe te economic efciency o oodpain occupancy in te

US. howeer, in order to reaize te efciency ains suested by Krutia andby te aruments in te preious sections o tis paper, property owners mustae sufcient inormation about ood risk and insurance premiums in order tomake we-inormed ome purcase decisions. Ciers and ores (2002) used

surey data to sow tat tere is a enera market aiure on inormationmajority o te oodpain residents do not uy understand te deree o oodrisk or te cost o insurin aainst tis risk wen neotiatin te purcase oteir properties.

(iii) Individuals at risk may not be prepared to pay premiums or food insurance

due to moral hazard problem. Peope wi ae a ier tendency to stay inood-prone areas wen tey know tat tey wi be baied out in case o

a disaster. Tus, tey ae ess incentie to purcase ood insurance orse-protection. I indiiduas at risk expect te state to compensate teiross trou disaster reie, te mora azard probem discouraes tem rom

sectIon Iv




25/58

exercisin due caution and aoidin unnecessary risks. Tis is actuay ery

common in many deeopin countries in wic peope buid teir dweinsin ood-prone areas and expect te oernment to proide ood protectionand disaster reie.

(i) The poor usually have a greater need or food insurance, but cannot aordit without substantial government subsidy. Amost a ood-prone areas inAsia are in te deeopin countries, except Japan. howeer, te oera ow

income ee presents a serious aordabiity constraint in promotin oodinsurance. Paradoxicay, witin te oodpain, poorer ouseods need oodinsurance te most. Poor ouseods are usuay more unerabe to oodstan te ric. Poor ouseods ae insufcient resources to inest in ood-

proofn measures or teir ouses and ae ewer coices in diersiyin terisk (e.., by dispersin ouseod members eorapicay). In addition, tepoor eneray ae ess access to sains and credit aciities needed to cope

wit difcuties in te atermat o a disaster. Te bi caene is ow oodinsurance can be desined in suc a way tat wi make premiums aordabeto poor ouseods.

b. soe Counry Eperience

Experience o some countries tat ae attempted to initiate ood insurance prorams proide

auabe essons. Te oowin briey indicates country experiences in fe countries: Austraia,PRC, rance, United Kindom, and United States.14

1. Unied sae: goernen a a Proider o suidized Flood Inurance

Eit out o te ten costy disasters in US istory were caused by urricanes tat resuted in

widespread oodin. It is estimated tat oodin causes more tan $2 biion in property damaeyeary. Te edera oernment-run NIP was initiated as a response to priate markets aiure toproide adequate ood insurance. On te suppy side, American insurance industry is we deeoped

and capabe o assessin risks and estimatin damae. ood maps ae been deeoped trououtte country by te oernment. howeer, te cost o proidin ood insurance sti remains i,wic as been iited especiay ater te onsaut o hurricane Katrina. On te demandside, property owners are not incined to purcase ood insurance uness damae is expected in

te near uture. In tis context, te edera oernment acts bot as a reie aency and a proidero subsidized ood insurance.

Tese twin unctions inder te deeopment o priatey proided ood insurance. Assured

fnancia assistance rom te edera oernment in te eent o oodin as made property ownersess incined to inest in ood insurance. Aso, te subsidized actuaria rates eectiey discouraeproision o market-based ood insurance. Under tis ee o inoement, te edera oernment

as aso to contend wit attendant issues, suc as te need to reduce te fsca burden resutinrom sustained oodin osses and te impicit subsidy on i-risk properties tat encouraesproperty deeopment in azardous areas.

14 More inormation on te experience o eac country is aaiabe rom te autors upon request.More inormation on te experience o eac country is aaiabe rom te autors upon request.

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Key experiences and eements o ood insurance in te US incude te oowin: (i) insurance

coerae is resered or communities tat ae undertaken oodpain manaement prorams (incudinconstruction icensin, impementation o ood proofn, introduction o aws proibitin buidinsin oodways, etc.); (ii) premium rates are determined to proide incenties or appropriate ees and

types o deeopment in oodpains; (iii) subsidy o premiums is ony proided or ouse insurance;and (i) participation o a aected persons and entities is compusory.

. Unied Kindo: Inoral Parnerip eween goernen andInurance Copanie

In te United Kindom (UK), an estimated 1.8 miion omes and 10,000 commercia propertiesare at risk rom bot inand and coasta oodin. Te Britis insurance industry is we deeoped inproidin insurance products. An inorma partnersip as eoed between te insurance industryand te oernment tat is based on diision o responsibiities. Initiay, insurance companies

ad to proide reatiey ceap ood insurance reardess o te risk ee under tis institutionaarranement. Te oernment, or its part, ad to undertake adequate ood deenses and contro

oer deeopments in ood azard areas.heay oodin in 2000 triered a reassessment o tis institutiona arranement, especiay on

te insurabiity o ood osses and te roe o oernment in ood manaement. Cimatic canes,ain ood protection structures, and property deeopments in ood-prone areas were consideredas contributin actors to te widespread oodin. It was arued tat reater requency o suc

oodin occurrences coud pose serious impications on te soency o te insurance industry.Anoter issue was te aiure to reect in te premiums te increased cost o insurance coerae.In 2002 amendments to te inorma partnersip were made, wic incude reorms in te areas o

and use pannin, administratie reorms in ood protection, increased budetary outay or oodprotection, and modifcation o and use reuations. or te insurance industry, te main ocus oreorm was on insurabiity. Now insurabiity is conditiona and premiums are dierentiated accordin

to ees o risks and exposure.

. France: goernen Ipoe mandaory Inurance, Decide e Leelo Era Care, and Declare sae o Naural Caarope atrier Copenaion

Te renc pariament enacted a aw in 1982 estabisin te Catastropes Naturees (CatNat)

insurance system or natura disasters as a response to seera incidents o eay oodin. Tis systemis mandatory and coers uninsurabe eents suc as eartquake, ood, drout, aaance, tidawae, and andside. Te sceme proides increased insurance to coer economic osses rom teseuninsurabe disasters. Wen a state o natura catastrope is decared, oca communities and te

priate sector can appy or damae compensation. Te ee o te extra care is decided by te

oernment and is uniormy appied to a priate insurance contracts. losses are distributed betweenbot te caamity ictims and tose tat are not aected by te eent. Insurance companies protect

temsees rom insoency under tis pan by purcasin reinsurance. howeer, tis reinsurancesceme is optiona and can be purcased in te priate market or rom te oernment-ownedreinsurer. It is arued tat te compusory nature o CatNat, ien te standard premium rates,proides no incentie or te poicyoder to reduce te ee o risk.

sectIon Iv




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A parae indemnifcation system caed storm uaranty aso exists, wic coers insurabe

natura eents suc as windstorm, ice, and snow. Under tis sceme, storms are not considered ascatastrope. hence, suc occurrence is coered excusiey by priate insurance. howeer, i a stormresuts in oodin, CatNat and storm uaranty can operate at te same time to aocate caims.

. Auralia: hand-o Policy Doe no Work oo Well

In Austraia oods ae accounted or 29% o te tota cost o natura disaster oer te past 0years. Te oernment proides assistance in disaster manaement, incudin disaster mitiation andreie. howeer, it as adopted a ands-o poicy on ood insurance proision. generay, insurance

coer is not readiy aaiabe, atou some insurance protection is proided by priate insurancecompanies to residentia properties or damae due to storm and as oodin. Compreensie oodinsurance is deemed not fnanciay easibe because o weak demand. Tis is urter araated bysome defnitiona probems on wat constitutes oods, wic aect actuaria cacuations incudin

assessments o causes, costs, and damae and risks to be coered. Insufciency o reiabe oodrisk data as aso been cited as a major contributin actor to te imited aaiabiity o ood

insurance products.Oter issues are sti considered unresoed. Tese incude (i) aderse seection probem;

(ii) aordabiity o premiums, particuary in i-risk areas; (iii) perception tat insurance maydiscourae ood damae reduction actiities; (i) uneen distribution o risk and caims tat canaect most poicyoders at te same time; and () nonimposition o tax on te reseres ed by

insurance companies.

. People Repulic o Cina: Pilo Prora Failed due o InadequaeUnderandin o e Naure o Flood Rik o y e goernenand e general Pulic

In 1984 a piot project o ood insurance in a ood diersion passae area o Yin SanCounty, Anui Proince, was initiated by huaie Rier Basin Commission, Proincia Bureau o WaterResources, Proincia Insurance Company, and oter concerned aencies. On aerae, oodin in

te area occurs once eery 10 years durin summer, and once eery years durin autumn. Tepremium was based on ood requency and on te economic osses o crops, wic ary by season.Some 0% o te premium was paid by te peasants, wie te oernment subsidized te remainin70 percent. Aricuture was exempted rom tax. Te poicy required certain ee o maintenance o

te eee o te ood diersion passae so tat oodwaters coud pass trou. Te project wassuspended wen no ood took pace years ater te project was initiated. Te peope and teoca oernment decided to witdraw te premium, wic totaed RMB4.8 miion. Unortunatey,te area was eaiy damaed by a 1991 ood wen compensation was no oner aaiabe.

Since ten, ood insurance as made itte proress in te PRC, mainy or te oowin reasons.irst, te eee systems in ood-prone areas are ery weak, and tese pose i risk o payment

on te part o te insurance company in case o damae to te eee system. Second, it is difcutto ormuate cear uideines or identiyin ood risks in ood-prone areas. Tis, in turn, makes itdifcut to estabis an appropriate premium or ood insurance. Unike te natura rier system,oodpains are protected by ood-contro cii works. Tus, te risks depend on many actors and,

to some extent, are uncertain. Tird, residents in ood-prone areas are reatiey poor and are

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reuctant to pay insurance premiums. Tis reuctance is reinorced by te traditiona perception tat

reie rom te oernment wi aways be aaiabe wen a ood disaster occurs.

v. ECONOmIC IssUEs IN thE DEsIgN OF FLOOD INsURANCE

Reeant desin issues pertain to te extent to wic ood insurance eatures can be ormuatedin ways tat are compatibe to te country settin. Tis paper proposes a ramework o anaysis to

better assess te appicabiity o a ood insurance sceme and ep minimize practica difcutiesin its impementation. iure 5 suests anaytica considerations in deeopin an aordabe andan efcient ood insurance sceme.

FIGURE 5

ANALYTICAL FRAMEWORK IN ADOPTING FLOOD INSURANCE

Assess existing structural and

other flood management measures

Assess state of private insurance

industry

Assess affordability, risk, and

information issues

Assess government roles in

Arranging partnership with the

private sector

Providing information

Imposing mandatory scheme

Providing compensation and

subsidy

Flood

Insurance Design

A. Ae Eiin srucural and Oer Flood manaeen meaure

Te eectieness and desirabiity o existin structura and oter ood manaement measures

proide an important context or determinin te potentia or and appropriate desin o a oodinsurance sceme. goernments usuay fnance enineerin soutions suc as te construction andrestoration o ood deenses.

oowin te anaysis in Section III, our aspects o structura ood manaement measuresneed to be careuy reiewed. Te frst as to do wit fsca impacts. Current and panned structura

measures need to be assessed in terms o teir soundness and te oernments capabiity to souderconstruction, operation, and maintenance costs. Anayzin te fsca impact o ood mitiation

measures, tereore, inoes assessin te past, current, and projected ees o oernmentexpenditures in ood deenses. In some cases, a precondition or te proision o ood insuranceby te insurance industry depends on te oernments commitment to proide eectie ood

deenses. In te UK, budetary aocations and inestments were deemed to be sinifcanty beow

sectIon v

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te ees necessary to meet te standards o serice o te Department o Enironment, ood and

Rura Aairs. Tese arey contributed to te decision in 2002 o te priate insurance industry toimpose a moratorium in ood insurance. Stroner commitment by te state in te area o preentionwas iewed as a means o deterrin te ier requency o oodin, wic coud pose serious

impications on te soency o te insurance industry.Te second aspect is distributionaow dierent peope ae been or wi be aected by

te structura ood manaement measures and weter tere is a need or a transer mecanism

rom te benefciaries to te ood ictims.

Te ast two aspects ae to do wit te oera risk mitiation, and popuation and and usecanes. Te oera risk ee is not ony aected by te reduction in azard probabiity, but aso

by te peopes unerabiity and teir exposure to risk. In order to assess potentia popuation,property and business deeopment induced by te structura measures in te ood-prone areas, tetari settins o suc structura measures ae to be reiewed careuy aon wit te popuationand property rowt data in te area.

b. Ae sae o Priae Inurance Indury

On te suppy side, an assessment soud be made on te current state o te insurance industryto determine te proision and coerae o ood insurance products. In deeopin countries,most priate insurance companies do not proide ood insurance. In cases were ood insurance

is oered, extent o coerae needs to be reiewed. In Austraia, insurance coer or oter ormso ood damae does not appear to be readiy aaiabe, atou some insurance protection isproided or damae to residentia properties rom storm and as oodin. Ony a ew speciaized

insurers oer imited coer. In cases were insurance coer is aaiabe, it is oten considered onyas a suppement and is subsumed or idden in te poicy or specia industria risks. hence, teanaysis soud assess te extent to wic iabe ood insurance products are bein oered in temarket.

I tere is indeed an underproision o ood insurance by priate insurers, te reasons needto be careuy examined. Te insurance industry wi ony proide a uniersa coerae i oodinsurance enture is proftabe. gien te catastropic nature o oods, ood risks coud be ery

i i tere are insufcient ood protection structura measures and ue popuation density inte ood-prone areas. Tese residents woud ae requent or repeated caims, ence te cost osuppyin or proidin ood insurance coud be proibitiey i. Te cost coud aso be idue to priate insurance industrys imited capacity, ow operationa efciency, insufcient risk

inormation, and imited access to reinsurance markets. actors contributin to te ack o priateood insurance need to be careuy assessed not ony or te cost estimates o suppyin oodinsurance by te priate sector in a sustainabe and proftabe way, but aso or ways o improin

priate insurance sector efciency and owerin te cost o suppy o ood insurance.

C. Ae People Capaciy and Willinne o Pay, and Aiude towardand Knowlede o Flood Rik

Ideay, te priate insurance industry soud proide u access to ood insurance by te ast

majority o te taret popuation at aordabe rates. As suc, it is important to study potentiaood ictims capacity and wiinness-to-pay, incudin attitudes toward and knowede o ood

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risk. An indiiduas wiinness to pay or ood insurance is aected by actors suc as income, risk

awareness, and expectation o ood reie. Insufcient demand or ood disaster insurance can beattributed to ow income ees o potentia ood ictims. Wen certain indiiduas cannot aordte insurance, cost may ae to be subsidized by te oernment, or coectiey, by communities.

Aternatiey, as te PRC experience sows, an insurance sceme may ae to be compemented byoter ow-risk sarin mecanisms in poorer communities, suc as kinsip networks, microfnance,and pubic works prorams to increase copin capacities (UN/ISDR 2004).

low demand can aso be attributed to inormationa actors, incudin underestimation oood risk, ase sense o security, and myopic ision toward te uture. Peope at risk can aedrasticay dierent derees o risk awareness and estimates o risk azard. In addition, ack opriate sector insurance can aso resut rom te unwiinness o property owners to purcase ood

insurance uness damae is expected in te near uture, tus eadin to aderse seection probem.It is tereore imperatie to assess te amount o inormation tat potentia poicyoders mitae and te way tey process tis inormation.

Simiary, a ood insurance sceme soud ceary estabis ow it woud be abe to distribute

te expected on-term oss burden eorapicay and oer time, so tat te indiidua bears onya sma fnancia burden per unit o time. Tis is a difcut proposition to pursue since it requires

consensus and poitica acceptabiity, especiay or tose peope wo (tink tey) woud not bedirecty aected by oodin. Spreadin risk and fnancia burden entais impicit subsidy rom toseess aected to tose wo are directy aected by oodin. rances ood insurance sceme appearsto be successu because o te soidarity principe under wic osses are distributed between

bot te caamity ictims and tose wo do not suer rom te disaster. Tereore, reater pubicawareness and support or te proram is important.

D. Ae Parnerip eween Priae secor and goernen in AdopinFlood Inurance

Some country experience sows tat oernments are inoed in amost a te countries tatae ood insurance prorams. None o tese countries soey reies on market orces to encouraeindiidua responsibiity or reducin osses and insurin aainst tese osses. Tereore, te successo a ood insurance depends on te cose partnersip amon te oernment, te priate insurance

industry, and te pubic or poicyoders. Tere are tree types o ood insurance dependin onte ee o oernment inoement:

1. marke-led Flood Inurance scee

Te priate insurance industry is te main proider o ood coerae, wie te oernment

proides appropriate conditions or insurance coer, suc as efcienty protectin te popuation atrisk and reducin damae by means o mitiation reuations or protection measures, iitinte treat and enancin risk awareness amon te popuation, mappin iy exposed reions,

and proidin ood deense inrastructure. A market-based ood insurance system tat operateswitin a ramework o ood deense proision by te oernment may be estabised tou apartnersip areement amon te concerned parties. In tis case, a deineation o responsibiitiesmust be we defned. or exampe, tere is a need to speciy te roe o te oernment in terms

o proidin adequate ee o capita and current expenditures on ood manaement actiities, assown in te case o te UK.

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. goernen-led Flood Inurance scee

Te oernment operates an insurance proram and subsidizes or souders a are sare ote insurance cost. At te same time, te oernment continues to buid, operate, and maintainstructura measures; proide compensation to ood ictims; and contro property deeopment

in ood-prone areas trou strinent zonin reuations. Tis woud ikey ead to a worsenino te budet defcit. rances ood compusory insurance proram or socia soidarity aainstood damae is cose to tis sceme. Anoter exampe is a oernment disaster und tat acts as

insurance system, simiar to te one proposed in hunary. Tis can be uy pubic, but priateyadministered and fnanced trou mandatory contributions rom a property owners. Contributionswi not be based on ood risk and te oernment wi continue to subsidize te purcase oinsurance premiums or ow-income ouseods (linneroot-Bayer and vari 200).

. mied Flood Inurance scee

A ood insurance proram is operated by te priate sector wit substantia inoement rom te

oernment, suc as imposin restrictions, proidin inormation, subsidizin te premiums, and/orreinsurin te proram. or exampe, te oernment commits to proidin accurate inormation on

ood damae and risks, and compensatin ood ictims by assurin teir subsistence. Te pubic roecan be suppemented by a two-ee priate insurance proram: mandatory (but bunded) insurancebased on a at-rate premium and, soud ouseods wis reater coerae, ountary risk-basedinsurance, wit te insurance premiums subsidized by te taxpayer.

Especiay or a mixed ood insurance sceme, te oernments roe is rater compicated andentais careu assessment o some issues reatin to (i) inormation on ood risks and damae; (ii)membersip or participation in te ood insurance; (iii) predisaster and postdisaster assistance,

and reinsurance; and (i) reinsurance and institutiona arranements.

E. Ae specifc Role o goernen in Flood Inurance scee

1. Iproin Accuracy o Inoraion on Flood Rik and Daae

goernments pay an important roe in improin inormation and awareness on risks anddamae caused by oods. ood mappin is usuay undertaken to identiy te risk. Te cost is

eneray borne by te oernment. Drawin up o azard zonin maps soud inoe stakeoderparticipation. Minima oca participation may create resentment, as wat appened in rance.Partnersip wit te academic community and researc institutions can aso aciitate sarin oresearc resuts on oods.

ood mappin proides a ood indication o demand or ood insurance. or exampe, demand

or ood insurance in Austraias urban areas may be weak since te risk o urban ood is quitesma, wit ony about 1% o te popuation considered at risk rom rier oodin (Pakina 200).

In contrast, as oods, rier oodin, and storm sures occur requenty, wic make rancestoporapy eneray prone to oodin.15 In te US, around 10 miion ouseods are estimated tobe ocated in areas o sinifcant ood risk. ood mappin and te associated risk assessment may

aso proide insits on weter certain areas can sti be coered by ood insurance. In te UK,

15Te Ie de rance area is a reion o 11 miion inabitants, 800,000 o wic are directy at risk rom oods wie anoter 2 miioncoud be indirecty aected. Deeopments ae sprouted in recent years tat coud increase te risk o oodin.

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ood risk is becomin uninsurabe in some areas due to a combination o arious actors, suc as

increased requency o eay rains, poor maintenance o ood deenses, and inadequate inestmentin protectin properties tat are buit in ood-risk areas. In Austraia insufciency o reiabe oodrisk data was raised by te insurance industry as a major contributin actor to te scarcity o ood

insurance products. Een in deeoped countries, te cimate/ood insurance market is constrainedby poor inormation and understandin o risks. Insurance companies are fndin tat past cimateariabiity is a poor predictor o uture risks, eadin to oatie markets and cost o insurance.

goernments aso need to promote ood risk awareness amon te popuation iin in oodazard zones. Tis coud be acieed by means o education, trainin, inormation coection,and dissemination o accurate ood data pubicy; in particuar, undin o researc prorams andstudies (Pakina 200). Te Austraian oernment stands as a ood exampe o soid commitment

to pubic awareness. It as undertaken a are number o reports and studies to improe inormationaterin and dissemination. low awareness aso means tat een tose at risk, but can aordweater-reated insurance, do not consider buyin a poicy. A oernment-sponsored inormation

proram can inorm te pubic o teir exposure to ood risks and te persona benefts o ainan insurance poicy. Tese benefts are in te orm o fnancia security tat ad oc emerency aiddoes not proide (Scwarze and Waner 2004).

Moreoer, oerestimation o te extent o damae in te atermat o a natura disaster otenresuts in te disaster area bein abeed as risk-prone, eadin to witdrawa by priate insurers.A riorous azard anaysis woud improe te accuracy o inormation on ood damae.

. Ipoin mandaory or Opional Flood Inurance scee

Te anaysis soud assess te easibiity o a mandatory ood insurance ien te socioeconomiccontext in a deeopin country. Wen oodin presents an imminent daner, a oernment mayimpose a compusory ood and storm insurance. Aternatiey, ood insurance can be combinedor bunded wit oter insurance coers suc as fre, storm, tet, eartquake, etc. In suc a case,

a major natura disasters (wind storms, oods, eartquakes, etc.) woud be coered by a sineinsurance poicy. Tis pooin approac increases te efciency o risk coerae. By pooin preiousydistinct risk eents, indiidua risk exposure can be uaranteed. A mandatory insurance can actike a tax/subsidy sceme tat is continent on te occurrence o a disaster. I we-desined, it

can proide fnancia reie to aected poicyoders and discourae popuation rowt and anddeeopment in te oodpain. A standard arument aainst mandatory insurance, oweer, is tatnonexposed omeowners are orced to purcase insurance tat tey do not need.

Under te optiona insurance system, insurers aree to extend teir poicy to incude ood uponpayment o an additiona premium. howeer, tere are a number o probems wit optiona coer.Apart rom te difcuty o defnin oods, te biest probem is aderse seection. Insurers tend

to seect aainst customers by makin te coer aaiabe ony in areas tey consider to be sae,

wie customers seect aainst insurers by ony buyin it in areas tey deem to be risky.

. Proidin Podiaer Relie and Copenaion, or suidizinPrediaer Inurance Preiu

goernments earmark fnancia resources or disaster reie to ood ictims. goernmenta riskmanaement usuay incudes oranization o fnancia and umanitarian aid, wic coud be canneed

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trou arious oernment aencies, and subsequent repairs o damaed properties and proision o

ieines. Compensation is aso proided to ood ictims in some countries. Compensation mecanismsand azard mitiation strateies ary consideraby rom one country to anoter because o dierinnationa priorities and oca cutures. Tese dierse nationa ood reie prorams incude: (i) systems

wit no state compensation or citizens (germany, Japan, Portua, UK); (ii) oernment poiciesproidin or compensation durin extreme ardsips (Austraia, Canada, Mexico, Soak Repubic,Turkey); and (iii) oernment catastrope prorams wen a nationa disaster is decared (Beium,rance, Iceand, Itay, Neterands, Norway, Poand, Spain, Switzerand, and US) (Pakina 200).

Aside rom postdisaster assistance, oernments can subsidize predisaster insurance premiums,as wat te US does. howeer, tere are two issues tat need to be assessed ere: (i) te extentto wic insurance premium soud be subsidized in order to proide sufcient and aordabe

insurance coerae to te intended roup, and (ii) weter te oernment can aord sucsubsidy. Te ormer concerns te ouseods capacity to buy a ood insurance wie te atterinoes te oernments fsca capabiity in proidin ood insurance subsidies. One soud take

conizance o te fsca impact o runnin te proram. In te US, NIP was initiated to addresste increasin costs o oernment-unded ood manaement and disaster reie or ood ictims.howeer, operatin osses were experienced or some years because proram costs were reatertan te prorams income. Tis occurred because osses rom ood caims were reater tan wat

coud be paid by premium incomes coected rom poicyoders.

Tus, a panned ood insurance sceme soud not be iewed as a direct repacement oroernment expenditures on ood manaement and disaster reie prorams. A ood understandin

o its net fsca impact in reation to te oera fsca situation is needed, especiay wen suc aproram entais subsidies. Tis can be done trou assessment o a countrys present and medium-term budet ramework, wic indicates oernment capacity to fnance panned ood insurancesceme and subsequent recurrent spendin.

. Proidin Reinurance and Underakin Analyi o IniuionalArraneen

Oter options open to oernments incude conentiona insurance and reinsurance in internationamarkets, roup insurance wit oter unerabe countries, or se-insurance trou nationa unds

underwritten wit noe fnancia instruments (DID 2004). Ater cariyin te ee o oernmentinoement in insurance proision, institutiona anaysis needs to be undertaken to assess teperormance o oernment institutions in te areas o deierin timey and reeant inormation on

ood risks, disaster warnin, reie operations, poitica and administratie responsibiities, amonoter tins. In many instances, ood protection inoes a myriad o aencies and institutionsrom te nationa, to reiona, and down to te oca ee. Simpe and streamined institutionaarranements or decisionmakin coud ep reduce exposure to ood risks o poicyoders and

te insurance industry.

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v. OPERAtIONAL ImPLICAtIONs FOR ADb

In te preious decades ADB operations pertainin to ood manaement empoyed a top-down,enineerin approac, wic was predominant in are-scae inestments. Dams ae sinifcantyfured in ADBs deeopment eorts, wit 65 dam projects approed rom 1970 unti mid-2005.

Recent ADB projects on ood manaement ear toward a combination o structura and nonstructurameasures, suc as embankments, ood zonin, orecastin and warnin systems, and institutionacapacity buidin. ADB as aso been encourain interated ood manaement as a way to reduce

te economic and socia costs associated wit extreme oodin. ADB as approed 17 oans onood manaement amountin to US$1.2 biion durin te period 19682006. It adopted its waterpoicy, Water or All (ADB 2001), wic aims to adopt a proactie approac to reduce te seereeconomic and socia costs o natura disasters by promotin te use o combined structura and

nonstructura approaces to ood protection, incudin ood risk insurance. Between 2001 and2006, ADB impemented 11 tecnica assistance rants (TA) totain about US$7 miion (fnancedtrou arious sources), and approed six oans amountin to US$57 miion, a o wic deatwit ood manaement and risk mitiation.

ADBs water poicy proides or a cautious approac to are water resource projects, especiaytose inoin dams. Wie ADB as been enaed in a number o dam-reated reiews anddiscussions, tese orums rarey scrutinize te correation between structura measures and on-

term popuation canes. Borrower proposas or structura ood measures need to be eauatedmore cautiousy because tese may we be sociay suboptima ien teir imited time orizon.Box 4 sows some considerations or ADB inoement in ood manaement measures.

bOx 4CONSIDERATIONSFOR ADb INVOLVEMENTIN FLOOD MANAGEMENT

Eauation o borrower proposas or structura ood measures needs to take into considerationarious actors, suc as fsca burden, redistributie eature, risk mitiation, and popuation and and

use. Cost recoery mecanisms must be abe to proide a disincentie or miration and businessdeeopment in te oodpains.

least-cost anaysis o structura measures or ood manaement must be undertaken in comparison

wit nonstructura measures. ADB coud assist in exporin and enancin te desirabiity and easibiity o adoptin ood

insurance in its deeopin member countries (DMCs), particuary trou:

opromotion o knowede and inormation sarin

oassistance in institution buidin

oenancement o risk-pooin measures and product desins

opiot testin or possibe scain up or repication Tecnica assistance resources can be mobiized to enerate and sare knowede in risk mappin,

awareness promotion, institution buidin, easibiity studies, etc. Once sufcient experience and

knowede ae been accumuated, ADB mit be in a position to consider some reiona initiaties.One exampe is te issuance o reiona cat bonds, wic ae increasiny receied attention since

te Asian tsunami and bird u outbreak.

Despite te proision o ADBs water poicy on ood protection, ood insurance is rareydiscussed in ADBs ood manaement operations. Muc needs to be done to uy expore te

potentias o ood insurance as a mitiation measure. One possibe option or ADB is to identiy

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oPerAtIonAl IMPlIcAtIonsFor AdB



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innoatie approaces or makin ood insurance aordabe and to assist deeopin member

countries (DMCs) in sort-term recoeries in te eent o are-scae oodin. In particuar, ADBcan consider te oowin.

(i) Promotion o knowledge and inormation sharing. ADB coud ep inorm

te desin o ood insurance prorams trou promotion o earnin andknowede sarin. Tis can be done by undertakin appropriate speciastudies and proidin tecnica assistance tat expore te potentias o ood

insurance in Asia and te Pacifc reion as an aternatie to structura orenineerin interentions. ADB can aso encourae better practices on oodinsurance desin trou seminars, symposia, and oter ora or ADB sta, DMCoernment ofcias, priate insurance frms, consutants, and practitioners.

uture initiaties tat deepen understandin on ood insurance sceme canocus on (i) examinin te inkae between oodpoerty reduction and oodmanaement/reabiitation in te Asian context; (ii) assessin te state o

te priate insurance industry and extent o underproision; (iii) addressinaordabiity issues and inormation aps; (i) exporin oernmentpriateinsurance and poicyoders/community partnersips; and () assessin modeso ood insurance participation (e.., mandatory or optiona system). Poitica

economy considerations in desinin ood insurance and te possibe impacto ood insurance in reducin a oernments fsca burden coud aso be tesubject o uture inquiries.

(ii) Assistance in institution building. ADB can promote adoption o oistic disastermanaement poicies or strentenin o existin institutiona ramework inits DMCs. Some countries in Asia ae considerabe acieements in tis fed.In Sout Asia or instance, disaster pannin and reie are institutionaized

in most countriesDisaster Manaement Bureau in Banades, edera oodCommission in Pakistan, Disaster Reie Committees in Nepa, and NationaDisaster Manaement Center in Sri lanka. howeer, institutiona capacities to

address oodin probems eneray remain weak. Some institutions (e.., teoca ee Disaster Reie Committees in Nepa) ae yet to operate on a reuarand u-time basis. Anoter aspect in wic ADBs expertise may be neededin te uture is on assistin DMCs in settin up eisatie rameworks and

poicies or te deeopment and operation o te priate insurance industry.

(iii) Enhancing risk-pooling measures and other innovative approaches. Poor ouseodscannot recoer rom te impact o a are disaster uness te size o te risk

poo is correspondiny enared. I te unerabe ouseods ae access toadequate risk-pooin measures, te outcome and impact o oodin coudbe mitiated. ADB can actiey promote or enance risk-pooin measures

to eectiey mitiate consequences o oodin, especiay amon te poorroups. or exampe, ADB can expore te possibiity o supportin roup se-insurance oranized by nonoernment oranizations (NgOs). A cas poo canbe estabised trou contributions by ouseods iin in ood-prone areas.

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Cas poo unds may be used or on-endin to members aected by oods.

ADB coud support suc initiaties trou measures tat enare te caspoo and strenten te institutiona mecanisms tat extend insurabiity tounerabe roups.

ADB can aso promote te use o catastrope fnancin instruments. Catastropebonds work trou te creation o a trust account by an insurance companytat enters into a reinsurance contract wit te insured entity (e.., risk-prone

oernment). Te company ten issues te bonds to inestors. I tere is nocatastrope and no oss occurs, inestors receie a return o principa and aow o interest payments tat compensate tem or te use o teir undsand teir risk exposure. howeer, soud a predefned catastropic eent occur,

inestors ose teir principa, interest, or bot, and tese unds o to pay ote insured entity (DID 2004).

(i) Pilot testing or possible scaling up or replication. ADB coud support te piot

testin o innoatie ood insurance scemes to assess teir aordabiity to

unerabe roups. In addition to its adisory roe in te piot testin, ADBcoud aso consider inoement in underwritin desin costs, coordination o

oernments and priate insurance companies, subsidizin insurance premiums,and inestin in an equity ayer o te sceme. Insits rom tese piottestins woud aciitate scain up or repication esewere, incudin possibeink-ups wit internationa insurance markets. Tis can be undertaken trou

a tecnica assistance aciity tat woud systematicay eauate te outcomes,impacts, and easibiity o a ood insurance sceme. In tis case, te scopeo te Asian Tsunami und may be broadened to fnance suc actiities.

vI. CONCLUsIONs

Sustainin traditiona responses to oodin (e.., enineerin interentions, disaster reieprorams, or compensation to ood ictims) ae become difcut or many oernments becauseo te increasin fnancia impications brout about by repeated occurrences o ood disasters.Moreoer, structura measures aor te inte

flood insurance as a flood management tool: an economic perspective

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