Floods are increasingly impacting people, businesses and economies globally. In 2021, floods caused an estimated $82bn (Swiss Re, 2021a) of damage, one third of the total economic losses from all disasters due to natural hazards. Economic losses from flooding in Asia have averaged over $30bn (Swiss Re, 2021b) annually during the last decade, putting the region second behind Europe in terms of losses attributed to flooding. Focusing on the countries of Central Asia, floods and earthquakes are the natural hazards that result in the greatest impacts.
Around 75% of global flood losses are uninsured. This protection gap means that the financial burden of recovery mostly falls on governments. Where budgets are insufficient to cover the full costs of disasters, international donors provide emergency assistance, but this can result in delays to the distribution of funds and support that can cost lives and livelihoods.
Ex-ante* disaster risk financing aims to set in place funds to cover a proportion of disaster recovery and resilience costs up front. The scale of funds is pre-determined based on a model that quantifies the impacts of a disaster and analyses the appropriate level of risk for which immediate payments released will be most effective.
The Central Asia Regional Economic Cooperation (CAREC) Program is a partnership of 11 countries** and development partners collaborating to implement policy initiatives and results-based regional projects to promote sustainable economic growth in the region. Under the CAREC Program, the Asian Development Bank (ADB) is supporting countries to better assess the level of climate and disaster risk across the region and develop solutions for transferring a proportion of this financial risk to global reinsurance and/or capital markets. Each country is exposed to significant flood risks and a major disaster could overwhelm the capacity of any one country’s fiscal budget. By 'pooling' this risk across the region, the impacts can be assessed in a more diversified context, similar to country-level risk pooling schemes in other parts of the world that operate based on the principle of insurance to share risk across a wider set of policyholders.
Structuring suitable and viable financial mechanisms for transferring risk requires a detailed understanding of the level and impact of flood risk in the region. To support the development of risk transfer solutions, the risk analysis needs to quantify the expected frequency and intensity of events. This information enables an estimation of the scale, probability and cost of financial support required. JBA has flood models and data for every location worldwide and its team of flood risk science experts is well placed to deliver this essential intelligence.
The risk from flooding is calculated based on three main factors: 1) the extent, depth and frequency of flooding (hazard); 2) the location and value of the elements at risk (exposure), which could be people and their livelihood or buildings; and 3) the amount of damage that is caused for a given intensity of flooding (vulnerability). As each of these components is changing, so the level of risk is changing. As a result of climate change impacts, the severity and frequency of flooding is increasing in some parts of the world. At the same time, risk is increasing due to changes in exposure such as the higher value of property and expanding urbanisation.
Probabilistic catastrophe models like those provided by JBA bring these three components together to assess impacts from flooding. The statistical outputs from the model (Average Annual Losses, Exceedance Probabilities***) can then be used by public and private stakeholders with the support of actuaries to decide on the level of cover and pricing for risk transfer solutions.
As part of the ADB-funded CAREC project, JBA, WTW, GEM Foundation, the Overseas Development Institute and an independent consultant undertook an analysis of flood and earthquake risk for the region.
JBA’s global flood modelling coverage meant that it was the ideal partner to provide flood risk analysis for the entire region. Using exposure data for population and buildings developed by GEM, estimates of economic and social impacts were made. It was important to share the results and implications of the analysis with local government stakeholders to support the transfer of knowledge, enabling the countries to make risk-informed decisions now and for the future. Risk profile reports were produced for each country to summarise the findings of the analysis, and a summary report was produced to highlight the protection gap and how it might be addressed: https://www.adb.org/sites/default/files/publication/839971/disaster-risk-protection-gap-central-asia.pdf
Alongside the reports, a user interface was developed to enable stakeholders to visualize the risk information in different ways and to test and price alternative risk transfer options. The interface also allows users to perform cost-benefit analyses for the implementation of different risk reduction and adaptation measures (e.g. flood defences, natural flood management, building code changes), linking JBA’s flood modelling with the climate risk assessment tool, CLIMADA, developed by ETH Zurich. Workshops were held to introduce stakeholders to the data and help gain familiarity with the use of the interface.
With an increased awareness of the risks and better information on the opportunities for risk transfer, the next stage will be the detailed design of relevant financial mechanisms for the region. As well as forming the basis for disaster risk finance, the flood risk analyses undertaken for the countries also forms the basis for enhanced climate risk planning and preparedness in Central Asia at sovereign level.
CAREC - https://www.carecprogram.org/
Swiss Re, 2021: https://www.swissre.com/press-release/Extreme-flood-events-once-again-drive-high-losses-in-2021-yet-75-of-flood-risks-remain-uninsured-Swiss-Re-Institute-reveals/3269ad99-b743-4398-82e3-534a87783910
Swiss Re, 2021: https://www.swissre.com/institute/research/sigma-research/sigma-2022-01/five-charts.html
NOTES
*Ex-ante disaster risk financing is where the level of risk is understood and appropriate finances are reserved in advance of the event occurring.
** CAREC member countries are Afghanistan, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Mongolia, Pakistan, the People’s Republic of China (Inner Mongolia Autonomous Region [IMAR], and Xinjiang Uygur Autonomous Region [XUAR]), Tajikistan, Turkmenistan, and Uzbekistan. ADB placed on hold its assistance to Afghanistan effective 15 August 2021.
*** Average Annual Loss (AAL) is the long term expected average number of people affected or economic loss caused by flooding per year.
Annual Exceedance Probability (AEP) is the probability of the average number of people affected or economic loss aggregated over all flood events within any given year, expressed as a return period. Return period is the reciprocal of exceedance probability: for example, a return period of 100 years (often termed a 1 in 100-year event) has an exceedance probability of 1%.
Occurrence Exceedance Probability (OEP) is the probability of the average number of people affected or economic loss for the largest event in any given year.
