CANBERRA, Australia, April 14 (IPS) – The World Bank lists Fiji, Kiribati, Marshall Islands, Federated States of Micronesia, Nauru, Palau, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu as Developing Countries Pacific Small Islands Development (PSIDS). Some of the listings also include the Cook Islands, Niue and Tokelau. As of September 2019, these countries have a combined population of 2.3 million, spread across hundreds of islands over an area roughly equivalent to 15% of the earth’s surface. Of these, the most populous – Fiji – with a population of 900,000. The World Bank’s World Development Indicators revealed that the annual GDP per capita of these islands fell from $4,340 in 2018 to $3,768 in 2020. It could have fallen further. during the pandemic.
At the same time, poverty rates per capita in these countries are consistently high and may have increased during the pandemic. PSIDS face deep structural reasons why, unlike many developing countries in the world, they cannot grow rapidly and reduce poverty rapidly. These reasons include the economy’s small size, remoteness, inability to access large markets and a highly skilled workforce, and vulnerability to external shocks.
Almost all PSIDS have been subjected to extreme weather shocks including hurricanes and other climate change related disasters, with the exception of earthquakes, volcanic eruptions and the like. PSIDS faces a disproportionately large number of external shocks. It is estimated that the cost of climate-induced disasters can be as high as 30% of GDP. In some cases, the threat of climate change may be present. For example, climate change is particularly threatening to the long-term habitability of the island of Tuvalu. This is because the average elevation of the islands is less than 2 meters above sea level, with Niulakita’s highest point being about 4.6 meters above sea level. Indeed, PSIDS ranks among the most vulnerable regions in the world.
When risk and vulnerability are so high, it’s natural to look to insurance as an antidote. However, just as there are tight structural reasons why economic growth and poverty reduction cannot accelerate in PSIDS, there are also compelling structural reasons why insurance cannot be widely used in PSIDS. PSIDS. Most of the citizens of PSIDS are part of the informal economy.
The informal rate of economic activity is about 60 to 85% in Melanesia and Micronesia and is increasing in Polynesian countries. More than half of all workers work in the informal sector. The majority of these are women and/or have low levels of education. Therefore, it will be difficult for them to negotiate complex insurance contracts. Furthermore, most climate insurance disasters are quite debilitating, so the longer the delay in fulfilling an insurance obligation, the greater the loss for individuals. This will result in individuals not being able to save to meet their consumption needs. This will then reduce the resources available for investment and growth. Thus, even a single climate disaster can have effects far beyond the immediate effects on people and property.
One measure to complement individual insurance is to aggregate risks with coverage carried out by higher-level entities. For example, tripartite partnerships can be created between insurance companies, aid agencies and governments that can create a country-specific risk pool. This requires payment triggers to be clearly defined.
There are clear advantages to making comprehensive home insurance mandatory for all income groups. Policy participants may also be encouraged to pool risks through cooperatives, credit unions and the like. Finally, insurance policies can be held by governments or other national or international agencies. Payments can be used to meet government services and maintain disaster programs.
If these terms are accepted, then a sizable portion of the premiums will have to be covered by international aid. Multilateral aid will take precedence over bilateral aid as multiple insurers may be located in donor countries creating complex moral hazard problems. On the contrary, the use of multilateral aid will become more difficult.
The case for providing coverage quickly remains strong. With this in mind, UNDP has designed a climate risk insurance product for six PSIDS. However, there is still much work to be done. It is clear that any insurance policy with long-term implications should not be considered in isolation but should be integrated into a broader policy of providing climate change relief for PSIDS.
Raghbendra Jha is Professor of Economics and Executive Director, Center for Australian South Asian Studies, Australian National University.
[1] This article is based on my paper co-authored with D. Jain, A. Chida, RD Pathak and S.Russell “Climate Hedging in Small Pacific Island Developing Countries: Possibility, Challenges and Vulnerabilities – a Comprehensive Review”. See https://link.springer.com/article/10.1007/s11027-022-10002-z
[3] See https://info.undp.org/docs/pdc/Documents/PSC/PC%20%20Prodoc%20Final%2017%20Dec%20(signed%20copy).pdf
[4] This further supports the general case of increased multilateral aid. See https://onlinelibrary.wiley.com/doi/10.1111/j.1467-9701.2004.00596.x
[5] https://www.preventionweb.net/news/new-insurance-product-aid-fight-against-climate-change-pacific
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