Letters from Sendai – n°7
Incentivising risk reduction?
Incentivising individuals, businesses, organizations or government to consider current and future disaster risk in their decision making remains one of the biggest challenges for the disaster community. Many factors influence our behaviour –there are carrots and sticks, and hitting the right ‘button’ is difficult. Building Codes do only work if they are enforced and if those targeted have the capacity and knowledge to comply – an unlikely scenario in an overcrowded informal settlement at the outskirts of a megacity. In some cases efforts to change the behaviour of individuals can lead to unexpected results: a delegate in Sendai retold the anecdote from a local community where blood donations suddenly dropped when the government introduced cash payments to donors, not recognizing that this clashed with the local tradition and belief of doing something good.
One area where incentives for risk reduction have been considered and tested is insurance. Purchasing an insurance risk transfer product can influence the behaviour of those at risk. This is usually linked to the price signal that insurance can send if the price is set according to risk levels. The anticipation of a premium reduction, or the threat of not finding insurance may convince businesses, individuals and sometimes even governments to invest in preventive measures. This mechanism is well established in commercial insurance, where large corporates undertake risk management processes and often gain reduction in their insurance premiums. Applying this to householders or governments purchasing sovereign risk transfers is far more challenging.
Over the last few years several studies of ENHANCE partners (IVM, IIASA, University of Potsdam, GRI) have analysed the feasibility of this incentive mechanism in different countries. Their findings provide the backdrop to a new ENHANCE working paper: ‘Surminski et.al. : Novel and improved insurance instruments for risk reduction, 2015. The paper proposes a range of methods and approaches to capture the risk reduction potential of insurance. It brings together theoretical work, qualitative and quantitative approaches, and case-study evidence from across Europe, including the Po river basin in Italy; flood insurance in England, wildfire insurance in Chamusca/Portual, disaster insurance in Romania, and flood risk in the Port of Rotterdam in the Netherlands. The paper introduces a range of different methodologies for assessing the linkages between insurance and risk reduction: Stress testing; investigation of flood insurance and moral hazard; estimation of effectiveness of household-level flood risk mitigation measures; assessment of risk based insurance pricing incentives for flood risk mitigation; analysis through a Risk Reduction Framework; and investigation of the design principles of insurance. Together, those can help to inform stakeholders who are considering the design or reform of disaster insurance.
GRI researcher Swenja Surminski presented those methods and approaches here in Sendai at a session on flooding, organized by the German catastrophe prevention forum DKKV as well as at a Public Forum event organized by the industry’s Geneva Associations’ Public Forum Event on 23-24 October 2014.
Her key message to decision makers: determining if and how insurance can influence risk behaviour should be part of the design and operational set-up process. Far too often this question is not considered, or only once a scheme has been implemented. Another key aspect that should be considered at an early stage is the capacity for risk prevention measures: who has the financial means, technical knowledge and information to undertake risk reduction? This may rest with the owner of a house, a farmer, a business but it is also the responsibility of public authorities, national government as well as property developers, land owners, architects and planners. In short all those who determine where, what and how we build homes, infrastructure or other assets. Furthermore surveys can test their risk perceptions, willingness to undertake the measures as well as other behavioural aspects that can influence the success of these incentive mechanisms. If and how insurance could be designed to provide incentives along this broader line of decision makers is an area that should be explored further.
by Swenja Surminski, Grantham Research Institute, London School of Economics
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