Five steps to insure a safer future for climate-vulnerable communities in APAC

Climate change threatens growth, infrastructure, and livelihoods in Asia and the Pacific.

By addressing gaps in insurance affordability, accessibility, and awareness, the region can improve financial protection against catastrophic climate risks and support sustainable development.

There is no question that Asia and the Pacific are bearing the brunt of the impacts of climate change and the situation does not look to improve in the near future.

The region could lose 26.5% of its GDP by 2050 if no climate-mitigating actions are taken, according to the Swiss Re Institute.    

Take flooding for example, 75% of the global annual damage to capital stock from riverine flooding is likely to occur in Asia and the Pacific, threatening buildings, machinery, and infrastructure.

Lethal heat waves also loom: 600 million to 1 billion people in the region may live in areas with the possibility of lethal heat waves if no adaptation and mitigation measures are taken.  

The increased strain of heat and humidity on healthcare and labour productivity could put $2.8 trillion to $4.7 trillion of regional GDP at risk, notes McKinsey & Company.  

These higher temperatures increase energy demand for cooling, leaving the energy sector more susceptible to climate-related disruptions amid a heavy reliance on fossil fuels for electricity generation.  

Meanwhile, crop and livestock production losses — averaging $123 billion annually in Asia and the Pacific, or 5% of global agricultural GDP — threaten food security and the livelihoods of farmers and fishermen (according to the FAO).

Finally, 63% of the region’s GDP, equivalent to $19 trillion is at risk due to biodiversity and nature-related losses, according to the World Economic Forum.

A wide protection gap

A key element of protection against these climate impacts is insurance. Yet our region suffers a wide insurance and pensions protection gap — the difference between what would be optimal financial protection and actual uptake among people and governments. 

The protection gap in Asia and the Pacific is estimated at $886 billion in premium terms, up 38% from 2017 and now nearly half the global gap. Only 9% of its economic losses, or $6 billion, are covered by insurance.

The catastrophe protection gap is also prominent. For instance, the impact of risks from natural hazards alone is estimated at around $280 billion, with only $120 billion insured. The need for action is critical.

Other gaps underscore the point. Three in four of the region’s households are in financial danger if a breadwinner dies, for example. This "mortality protection gap" was $83 trillion in 2019 and could reach $119 trillion by 2030, say some estimates.  

The 'health protection gap', or the shortfall between peoples’ healthcare needs and the services they can afford, was $1.8 trillion in 2019, or 10% of the average annual household income. This is an important consideration as Asia rapidly ages.

Crop insurance is an effective risk management tool that can reduce price volatility, stabilize income for farmers, improve resilience against weather hazards, and ease access to agricultural finance.

About 60% of insurable crops globally are not protected by insurance (according to Swiss Re).  Asia and the Pacific face a significant agriculture protection gap with only 15% of economic losses in the region insured.

Lacking robust social protection

Many countries lack robust social protection systems, and their pension coverage ratios are very low. People aged over 60 are expected to make up 25% of the region’s population by 2050, up from 14% in 2020.  The region will face a pension savings shortfall of $3.8 trillion per year.

When accessible to all, especially vulnerable communities, insurance brings stability and hope. By closing insurance gaps, we can support development and tackle climate challenges.

Insurance also helps governments manage shocks, acting as a countercyclical tool to stabilize economies during crises.

It provides liquidity after disasters and eases fiscal burdens. Life insurance and pensions play a key role in mobilizing savings for sustainable development, incentivising risk-reducing behaviours, and contributing to long-term economic growth.

Addressing Asia’s insurance protection gap is crucial to mitigating the region’s vulnerability to climate and economic shocks.

To address this gap, we should adopt measures that concentrate on affordability, accessibility, awareness, administration, and trust.

Affordability:

Vulnerable people cannot afford insurance premiums. The cost of life insurance is often beyond reach, with many people without financial protection when a family breadwinner dies. Even in jurisdictions with universal health coverage, premiums for supplementary private health insurance are prohibitively high.

Many people instead delay or forgo medical treatment. Farmers already working on thin margins face high crop and livestock insurance premiums, often unaffordable without government subsidies.

In countries exposed to frequent exposure to severe weather events, the high cost of earthquake, typhoon and flood insurance means many residents do not use it.

And yet, these economic barriers are not insurmountable. With targeted interventions such as subsidies to make insurance more affordable, tailored microinsurance products and innovative distribution models, we can ensure that vulnerable populations have the protection they need.

Accessibility:

Insurance agents struggle to reach potential clients on many remote islands and regions in mountainous terrain, leaving many people without coverage. Even as digital platforms proliferate, many rural residents still lack internet or smartphones or the digital literacy they need to tap into digital insurance platforms.

However, accessibility can be improved with better infrastructure, more digital literacy, transparent practices, and more trust through community engagement.

Awareness: 

Many people still rely on informal insurance mechanisms during crises, such as family networks, rather than formal insurance products.  Traditional beliefs and poor knowledge of how insurance works only worsen enrollment rates and hinder broader coverage.

Addressing these awareness gaps requires collective effort. By leveraging our positions as local leaders, community organizations, and policymakers, we can effectively disseminate information and increase awareness about the benefits of insurance and how to access it.

Administrative Complexity: 

Extensive paperwork and multiple visits to insurance offices discourage eligible individuals from signing up. Language barriers and slow and inefficient procedures for claiming insurance benefits can also deter potential clients.

Addressing administrative complexities require simpler procedures, less paperwork, and more use of technology to streamline processes. By making insurance more user-friendly, we can increase uptake in vulnerable populations.

Trust: 

Many people believe that insurance companies are more interested in profits than in providing genuine support. Stories of denied and delayed claims and complicated claim processes exacerbate this distrust.

Insurance providers must therefore improve transparency, simplify their claim processes, and build stronger relationships with communities through consistent and reliable service and enhancing insurance literacy.

Addressing insurance protection gap in Asia and the Pacific is crucial to mitigating its vulnerability to climate and economic shocks. By improving affordability, accessibility, and trust, insurance systems can protect vulnerable populations and foster long-term stability.

This article first appeared on the Asia Development Bank Blog Page and is reproduced here with permission.