Facing extreme risks from natural disasters, as a result of the country’s location on the geological “Ring of Fire”, insurance is a much-needed service in Papua New Guinea. PNG has frequent earthquakes and is home to a number of active volcanoes. The city of Rabaul was destroyed by volcanic eruptions in 1934 and again in 1994. In 2014, one of the volcanoes in the area (Tavurvur) erupted again. The 1998 earthquake and subsequent tsunami near Aitape killed more than 2000 people, and a swarm of earthquakes was experienced in and around the country in early 2015. According to the Global Facility for Disaster Reduction and Relief, PNG has the highest percentage of people exposed to volcanic risk in the world and is in the top six in terms of percentage of the population exposed to earthquake.

The country also experiences devastating storms. Cyclone Guba, which hit the country in 2007, killed an estimated 70 people and caused extensive damage in three outer provinces. More generally, PNG has heavy rains and is exposed to the El Niño Southern Oscillation, which brings extreme weather. Given its mix of rain, drought and steep terrain, it often sees severe flooding, crop damage and landslides.

Cyclone Pam

Overall, though, PNG has been lucky in recent years. In a 2015 Swiss Re report, the country did not have a single entry on the list of the top 40 natural disasters (in terms of physical damage and the human toll) from 1970 to 2014. For various reasons, probably related to low population density and the dearth of tall buildings, it has been spared greater loss of lives, crops and infrastructure. Nevertheless, the country’s position in a seismically active area, combined with urbanisation suggests that overall the risk for natural disasters is relatively high. As a result, it faces insurance needs that may be beyond the capacity of the private sector or of the government.

When Tropical Cyclone Pam hit Vanuatu in early 2015, the issue of insuring against disaster in the Pacific area was highlighted and made more pressing. The storm, said to be one of the most powerful ever, claimed lives and destroyed an estimated 90% of the buildings in the capital of Port Vila. In the wake of the cyclone, the notion of a regional climate insurance scheme started gaining more attention. Already, 13 Caribbean countries have such an arrangement – the Caribbean Catastrophe Risk Insurance Facility (CCRIF). The programme collects premiums from the members, and these funds are used to purchase coverage in international reinsurance markets. Payouts are made when thresholds are broken (in terms of the maximum wind speed of the storm, for example) and the nations receive money that can be used for disaster relief and recovery.

Alternate Plan

Don Polye, PNG’s opposition leader, has remarked in comments to Radio New Zealand that countries like PNG do not have the capacity to fully cover the costs of major natural disasters such as Cyclone Pam. Neither the private insurers nor the governments can be counted upon to fully restore damaged infrastructure. He suggests that international institutions help out and support the private sector so that local insurers could meet claims in the event of a disaster. International insurers have echoed these comments and asked the UN to assist, while the UN is supporting the notion of public-private cooperation to build resilience against natural disasters. The president of Vanuatu has said in public comments that most Pacific island nations are too dependent on handouts from rich economies during times of crisis and that they should begin to develop a more sustainable and long-term solution.

Efforts Being Made

A number of efforts have been made to build the right sort of capacity and the appropriate structures to cover catastrophic natural disaster losses in the Pacific region. The International Finance Corporation, the EU, Japan and the Netherlands have been working to establish an insurance programme to cover livestock and crops. The pre-feasibility study for the “Global Index Insurance Facility in PNG” has been conducted. More generally, PNG was one of the first countries to sign the Hyogo Framework for Action (HFA). The HFA plan makes disaster risk reduction a priority for signatories to reduce certain risks and increase preparedness. It ran from 2005 to 2015. In addition to the HFA, the World Bank is running the Pacific Catastrophe Risk Insurance Pilot Programme (PCRIPP), which was launched in 2013. Under the programme, the World Bank helps Pacific countries develop policies that the bank insures on international markets (with Japan providing premium support). Payouts are based on loss modelling, as is done with CCRIF. The programme paid $1.9m to Vanuatu in 2015, as a result of Cyclone Pam, and made a payout of $1.27m to Tonga in January 2014, due to damage from Cyclone Ian.

Challenges Remain

While the PCRIPP has demonstrated that the design can work, it has also revealed some of the potential limitations of the structure. The payouts to the disaster-hit nations were small compared to the total costs, while no payouts were made at all to some of the affected nations. The Solomon Islands withdrew from the programme in 2014 after earthquake and flooding there were not eligible for coverage. Most of all, the programme lacked the participation of the region’s largest economy, PNG, and remained an experiment involving easily supported countries.

Nevertheless, much was learned in the pilot and recommendations for the future were made. In an assessment published by The Pacific Islands Forum, it was suggested that softer triggers be devised, such as a self declaration of a national emergency, so that payouts can be made even when predetermined parameters are not crossed. They also suggested that similar programmes in the future work in cooperation with other solutions, so that more coverage and support may be offered in a disaster.

Other challenges resulting from low building standards could be addressed to reduce the costs of insurance. Wayne Dorgan, managing director of Pacific MMI Insurance, told OBG, “Poorly maintained buildings and tired infrastructure have been leading to potentially avoidable claims. This is pushing the price of premiums up in like the absence of an efficient fire brigade, for example, meaning that buildings and businesses will be more expensive to insured going forward, if improvements and risks are not managed.” If these problems can be addressed, a greater number of disaster risks can be covered and the resulting costs reduced for the sector overall.