How re/insurance industry risk analysis can help vulnerable communities

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Insurance is all about understanding risk, and insurers rely on a variety of information to determine the level of risk being taken. Historically, this largely involved subjective decision-making based on individual experience, past claims, or general industry know-how. However, in recent decades, risk analysis has moved towards using large quantities of objective, scientific data to reach informed, robust decisions as more data has become available and methods of analysis have become more sophisticated.

The tools and techniques that are now commonplace in the insurance industry, such as catastrophe models, are starting to be applied in other contexts, including being used to better understand natural hazard risk in some of the most vulnerable countries in the world, helping to build resilience through disaster planning, education and financial support. This has been initiated by a number of organisations, including through the work of the Insurance Development Forum and its recent report.

A call to action for better risk understanding

The Insurance Development Forum (IDF) is a collection of re/insurers, brokers, risk modellers, development agencies, humanitarian NGOs and academics with a shared commitment to use the expertise gained in insurance risk analysis over the last 25 years to build capacity in developing countries.

The IDF’s Development Impact of Risk Analytics (DIRA) report is a call to action to further this mission. The DIRA report brings together the perspectives of different stakeholders in the drive to better understand the risks to vulnerable communities and how to manage and mitigate them. The paper advocates public and private collaboration to overcome the barriers to more effective use of insurance risk analytics in disaster risk management. Orchestrated by the IDF, the report makes recommendations in four areas:

  • Apply a strategic approach to tackling risk that makes the most efficient and effective use of the skills and expertise available across all sectors.
  • Empower risk owners – those directly managing or impacted by risk – to develop their own risk analysis capacity.
  • Share knowledge to support this empowerment, fusing global risk analysis expertise and local risk awareness.
  • Support collaboration across sectors and geographies through the use of open modelling principles that encourage consistency, transparency and wider adoption of data and tools.

The recommendations as a whole support the development of a risk analysis ecosystem that builds effectively on existing knowledge and skills whilst incorporating local experience and transferring capability to risk owners at the sharp end of decision making.

The report’s main aim is to raise awareness of the issues and build a consensus for action amongst the risk analysis and donor communities.

Theory in practice: risk analysis in International Development

JBA’s work with international financial institutions, humanitarian organisations and other risk modellers brings to life the successes, challenges and pitfalls of building collaborations between researchers, private sector consultants, government departments and not-for-profit organisations that have both complementary and differing objectives.

JBA supported the ground-breaking IDF report by providing a private sector risk modelling perspective on risk analysis and international development activities.

Here, we explore some JBA projects undertaken in the last few years that demonstrate the report’s four pillars of recommendations.

Working with local partners and knowledge sharing

In 2017, JBA and Arup worked with other technical experts and local specialist partners on a World Bank funded assignment to reduce the risk to the local population in Sierra Leone from flooding and landslides in three key cities. The project demonstrated the importance of placing local knowledge and information at the heart of detailed risk studies and the flexible application of probabilistic modelling to socio-economic impacts, which had historically been used for assessing financial risk for re/insurers. The image shows outputs of modelled fatalities for a city in Sierra Leone. You can read more here.

A strategic approach

We’re currently working with local and global partners on a major risk analysis project for the Asian Development Bank in Central Asia that will establish the foundations for developing disaster risk transfer mechanisms that fit with regional policy and decision making. The project is modelling risk for flood and earthquake, the two most impactful hazards in the region, and presenting the results through a user-friendly tool that enables local stakeholders to consider different scenarios. It is anticipated that this will lead to informed decisions on risk mitigation that deliver the most value for money.

Empowering risk owners and open modelling

Our recent work with Start Network to develop an anticipatory risk financing system for communities in the Indus basin in Pakistan highlights the importance of working closely with local risk owners and providing transparent analytics to empower decision-making. Modelling of the local flood risk demonstrated how risk analytics could be applied for planning anticipatory actions, for example, locating equipment and supplies closer to high risk populations prior to an predicted flood event. The modelling methods that were used needed to be transparent to be of most use, and model results needed to be consolidated into meaningful outputs for decision makers – the ultimate risk owners. Local insights from these same decision makers helped to highlight the exact nature of the risk and the factors that mattered most to them. More here.

This is just a snapshot of JBA's work in this area. Ongoing projects include risk modelling for disaster risk finance in the CAREC region, operating as calculation agent for the SEADRIF risk pool in South East Asia, analysing flood risk to schools in Peru, and working alongside African Risk Capacity to understand flood risk in Africa. Keep an eye out for more details on these projects.

Continuing the risk conversation

Following publication, I joined some of the other authors of the report on a panel session at the Understanding Risk 2020 virtual conference to share the main findings of the report and take questions from a varied audience. We had a great response to the session and look forward to continuing to work with the IDF and the community to drive forward the recommendations.

We’re excited to be involved in this initiative at a very opportune moment when JBA has the tools at its disposal to help develop global insight into flood risk. JBA’s recently launched Global Flood Model is already being used as the basis for flood risk analysis on projects in Peru, Asia and Europe. Our Flood Foresight system offers the capability to forecast flood inundation up to 10 days ahead of an event, and integration with Global Flood Model enables probabilistic estimation of flood impacts to be made worldwide.

And, with the advent of climate change analytics, including climate change flood catastrophe models, private sector tools and insights will continue to play a key role in managing risk - now and in the future.

For more information on our data and services, work in International Development, or the IDF report, please get in touch using the form above.