Assessment of Innovative Approaches for Flood Risk Management

Agriculture and Rural Development Discussion Paper 46

The World Bank

Agriculture & Rural Development DepartmentWorld Bank

1818 H Street, NWWashington, DC 20433

http://www.worldbank.org/rural

Alexander LotschWilliam DickOrnsaran Pomme Manuamorn

Assessment of Innovative Approaches for Flood Risk Management and Financing in Agriculture

Funding generously provided by:

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Assessment of InnovativeApproaches for FloodRisk Management andFinancing in Agriculture

Alexander Lotsch, William Dick,Ornsaran Pomme Manuamorn

Agricultural Risk Management TeamAgriculture and Rural Development Department

The World Bank Group

January 2010

Agriculture and Rural DevelopmentDiscussion Paper 46

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2010 The International Bank for Reconstruction and Development/The World Bank1818 H Street, NWWashington, DC 20433Telephone 202-473-1000Internet www.worldbank.org/ruralE-mail [email protected]

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Cover photo: Edwin Huffman Rice fields, Philippines

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AcknowledgementsThis report was produced with input from background papers produced byRobert Brakenridge (Dartmouth Flood Observatory) and Francesco Holecz(Sarmap), and pilot project feasibility reports by ASDECON (Thailand) andPasco (Japan). The work was funded by the Swiss State Secretariat ofEconomic Affairs, the Netherlands Ministry of Foreign Affairs, the Bank-Netherlands Partnership Program, and the Japanese Consultant Trust Fund.The section on the Vietnam feasibility study is based on work performed byGlobalAgRisk, Inc. (under contract with World Perspectives, Inc.) for theAsian Development Bank under the Development of Agricultural Insurancefor Vietnam Project. Comments provided by Robert Muir-Wood (RiskManagement Solutions), Olivier Mahul (GCMNB), Winston Yu (SASDA), andSteven Jaffee (ARD) helped improve this report and are gratefullyacknowledged.


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Acronyms ..................................................................................................................vii

Executive Summary..................................................................................................ix

1. Floods as a Source of Risk in Agriculture ......................................................11.1. Scope and Objectives ...................................................................................31.2. Sources of Flood Risk...................................................................................4

1.2.1. River flooding and inundation........................................................51.2.2. Flash floods.........................................................................................61.2.3. Storm surge and coastal flooding ...................................................7

1.3. Impact of Floods in Agriculture .................................................................71.4. Current Extent of Flood Insurance ..........................................................11

1.4.1. Property flood insurance ................................................................111.4.2. Agricultural flood insurance..........................................................121.4.3. Flood risk and development..........................................................16

2. Challenges for Flood Risk Insurance in Agriculture ................................172.1. Definitional Challenges .............................................................................17

2.1.1. Direct losses ......................................................................................182.1.2. Indirect losses ..................................................................................19

2.2. Technical Challenges ..................................................................................212.2.1. Modelling flood risk........................................................................212.2.2. Flood zoning ....................................................................................222.2.3. Product design and pricing............................................................23

2.3. Operational Challenges .............................................................................242.3.1. Underwriting....................................................................................242.3.2. Adverse selection ............................................................................252.3.3. Loss adjustment ..............................................................................26

2.4. Financial Challenges ..................................................................................262.4.1. Valuation for insurance purposes ................................................272.4.2. Covariate risk, catastrophe exposure, and reinsurance ............28

3. Flood Risk Assessment and Mapping ..........................................................303.1. Flood Risk Modelling.................................................................................303.2. Wide-area Flood Risk Mapping................................................................333.3. Risk Assessment and the Assumption of Stationarity..........................333.4. Remote Sensing-based Flood Risk Mapping..........................................35

3.4.1. Contemporary satellite remote sensing systems ........................373.4.2. New strategies for flood risk mapping and flood index

development ....................................................................................41

4. Potential Applications of Index Insurance to Agricultural Flood Risks 424.1. Principles of Parametric Insurance ..........................................................42

4.1.1. Advantages and disadvantages ....................................................434.2. Elements of Parametric Flood Insurance Design...................................44

4.2.1. Defining flood-induced crop loss..................................................454.2.2. Modelling flood hazard ..................................................................47

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Agriculture and Rural Development

4.2.3. Designing the flood index..............................................................474.2.4. Insurance operational system........................................................49

4.3. Scale Options of Flood Index Insurance .................................................494.4. Institutional Considerations......................................................................50

4.4.1. Organizational arrangements ........................................................504.4.2. Local institutional capacity ............................................................52

4.5. Underwriting Considerations...................................................................534.5.1. Flood index insurance product......................................................544.5.2. Zoning and client enrollment ........................................................544.5.3. Loss assessment ..............................................................................57

4.6. Financial Considerations ...........................................................................584.6.1. Loss modelling requirements ........................................................584.6.2. Developing premium pricing ........................................................594.6.3. Risk transfer: Insurance and reinsurance ....................................604.6.4. Financial viability of flood index insurance................................62

5. Feasibility Studies ............................................................................................645.1. Vietnam: Risk Identification and Conceptualization of a Flood

Insurance Product.......................................................................................645.1.1. Background ......................................................................................645.1.2. Findings ............................................................................................645.1.3. Index solutions ................................................................................655.1.4. Lessons learned................................................................................66

5.2. Thailand: Challenges in Designing Flood Index Insurance at the Micro Level ..................................................................................................665.2.1. Background ......................................................................................665.2.2. Findings ............................................................................................665.2.3. Lessons learned................................................................................67

5.3. Bangladesh: Assessing the Feasibility of Flood Insurance in a Complex Environment...............................................................................695.3.1. Background ......................................................................................695.3.2. Findings ............................................................................................715.3.3. Lessons learned................................................................................71

5.4. Summary of Feasibility of Flood Index Insurance Schemes at the Micro and Macro Levels ............................................................................72

6. Conclusions and the Way Forward ................................................................77

Annex: Technical Background ..............................................................................81A.1. Floods: A Global Perspective ...................................................................81A.2. Flood Modelling Approaches ..................................................................81A.3. Space-Borne Satellite Sensors Used for Flood Mapping .....................84A.4. Global Flood Monitoring: Dartmouth River Watch.............................86A.5. Three Examples of Remote-Sensing-Based Flood Mapping...............93

A.5.1. Vietnam ..........................................................................................94A.5.2. Thailand ..........................................................................................97A.5.3. Bangladesh ..................................................................................100

References ..............................................................................................................103

Endnotes ..................................................................................................................106

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AcronymsADPC Asian Disaster Preparedness CenterADB Asian Development BankASTER Advanced Spaceborne Thermal Emission and Reflection

RadiometerAVHRR Advanced Very High Resolution RadiometerBAAC Bank for Agriculture and Agricultural CooperativesBARC Bangladesh Agricultural Research CouncilBWDB Bangladesh Water Development BoardDEM Digital Elevation ModelERTS Earth Resources Technology SatelliteESA European Space AgencyFEMA Federal Emergency Management AgencyFIRM Flood Insurance Rate MapsGIS Geographic Information SystemGDP Gross Domestic ProductGPS Geographic Positioning SystemsINPE Instituto Nacional de Pesquisas EspaciaisJAXA Japan Aerospace Exploration AgencyLIDAR Laser Light Detection and RangingMFI Microfinance InstitutionMODIS Moderate Imaging SpectroradiometerMPCI Multi-Peril Crop InsuranceNAIC National Agricultural Insurance CompanyNAIS National Agricultural Insurance SchemeNFF National Flood FrequencyNASA National Aeronautics and Space AdministrationNFIP National Flood Insurance Program, USNOAA National Oceanic and Atmospheric AdministrationOECD Organisation for Economic Co-operation and

DevelopmentPML Probable Maximum LossPMF Probable Maximum FloodPMP Probable Maximum PrecipitationSPOT Satellite Pour lObservation de la TerreSAR Synthetic Aperture RadarSIWRP Southern Institute for Water Resources Planning USGS United States Geological SurveyVAR Value at RiskVBARD Vietnam Bank for Agriculture and Rural Development

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Executive SummaryFloods are a major source of risk for the agricultural sector. Flood risk in theagricultural sector primarily arises from river flooding, flash floods, andcoastal flooding. The impacts of floods can result in sizable agriculturaldamages at the local level. Floods in agricultural zones expose agriculturalproducers, agricultural supply chains, rural financial institutions (such asagricultural banks), and governments to financial risks due to the loss ofcrops, delinquency on seasonal production loans, damage to infrastructureand loss of public revenues. The costs associated with these damages are oftenabsorbed by households directly or governments that provide compensationto agricultural producers in the aftermath of catastrophic flood events. Ruralfinancial institutions also absorb the cost of floods through loan reschedulingor, in catastrophic cases, loan cancellation. In many developing countries,floods are dealt with in a reactive, rather than proactive, manner and little isdone to be financially prepared for a catastrophic outcome of floods.

The penetration of agricultural insurance in developing countries is relativelylow, and flood risk is generally not insured. Recent initiatives by the WorldBank have promoted financial strategies for agricultural weather riskmanagement including protection against severe droughts (e.g., India,Malawi) and livestock mortality risk (e.g., Mongolia). Many of these projectshave used simple index-based insurance products that indemnify farmersbased on loss proxies (such as observation of rainfall or livestock mortalityrates). However, little advance has been made to expand agriculturalinsurance to flood risk and the development of flood insurance products thatare technically, operationally, and financially viable. While in some countries,flood insurance is included in a broader crop insurance program that includescoverage for tropical cyclones and the floods associated with them (e.g., in thePhilippines), there is generally little availability of flood insurance in theagricultural sector.

Providing agricultural flood insurance is inherently challenging for a numberof reasons. First, delineating flood risk is difficult as floods cause agriculturaldamages both directly (e.g., crop and livestock losses) and indirectly (e.g.,interruption of business due to damaged infrastructure). Both thecharacteristics of floods, such as level and duration of inundation, as well astheir associated impacts need to be well delineated and quantifiable to makeflood insurance possible.

Second, the quantification of flood risk requires data and models that produceestimates of the likelihood and severity of flooding in agricultural productionzones. Such modelling requires relatively detailed information about terrainand hydrological characteristics in the region of interest to group agriculturalfarmers into zones of similar risk. Flood risk mapping is further complicated

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as potential agricultural damages vary considerably according to the timing offloods throughout the crop production cycle. The design of flood insuranceprogram depends on the accuracy and precision with which flood risk can bequantified.

Third, flood insurance is difficult to operate. Flood damages are oftenlocalized and can be mitigated to some extent through structural interventionby agricultural producers. Farmers in flood-prone areas are often aware of theflood potential on their land, whereas farmers outside perceived flood zonesmay not be aware of the potential for catastrophic flooding. As a result, avoluntary insurance scheme may only attract farmers in high-risk areas andthere may be little demand in low-risk zones (known as adverse selection).Also, to underwrite flood risk, insurers need to be able to evaluate the risk andexposure of potential clients. To do this, flood risk zones need to be identifiedto group potential clients according to their likelihood and severity ofexperiencing floods. Lastly, loss assessment (the verification of a loss) and lossadjustment (the financial payment made) are the cornerstones of anagricultural insurance program but can be difficult to achieve in a systematicand cost-effective manner with on-the-ground verification.

Fourth, agricultural flood insurance is difficult to manage financially. Unlikein property insurance, in which indemnities are based on the estimated repairor replacement costs, the valuation of crop loss needs to be determined eitheron the basis of the input costs at the date of the loss or the loss of expectedrevenue. Thus, the key challenge in modelling and compensating for floodarises from the timing of flood and the valuation of its impacts at the date ofoccurrence. A further financial challenge arises from catastrophic flooding thataffects many clients simultaneously, resulting in claims that outweighinsurance premiums and capital reserves of insurance. This requires thesupport of reinsurers to protect insurance companies against potentially largefinancial exposure.

Many of these challenges can be overcome by harnessing flood modelling,flood remote sensing, and an index-based insurance approach, therebycreating a potential to increase the feasibility and availability of floodinsurance in the agricultural sector. Provided sufficient data is available, floodmodelling can generate information on the location, likelihood, and severityof flood risk and thereby identify flood risk zones that are critical for insuranceunderwriting, pricing, and loss adjustment. Direct observations of floodedareas derived from satellite remote sensing have become readily available andsupport quantification of flood risk as well as the verification of flood lossesfollowing an event. Lastly, index-based insurance can reduce transaction andoperating costs of a flood insurance program and reduce the financialchallenges associated with loss measurement and valuation and reinsurance.

The technical complexity and the novelty of the approaches described in thisreport require the support and technical assistance from donors to promoteand pilot agricultural insurance in developing countries. The followingconsiderations are to guide any future development of agricultural floodinsurance.

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Institutionally, several stakeholders need to be mobilized, and a pilotarrangement typically requires a phased approach to organizational capacitybuilding. Organizational structures can be guided by the experience indeveloping index-insurance programs for drought, though the complicatednature of flood risk requires more involvement of technical partners andsupporting services. Aside from a technical support unit formed by an insurer(or group of insurers), key technical inputs are required from national floodmanagement agencies, remote sensing centers (national or international), andtechnical experts (e.g., from academic institutions). Challenges in developinga flood insurance program imply that involvement from both the public andprivate sector is needed. Insurance is best operated in the private sector, wheresound insurance principles and needed technical capacity exists. At the sametime, major institutional support, data, and expertise exist in governmentorganizations.

Operationally, insurers and governments need to develop a clear strategy tomanage adverse selection. The main considerations for the design of anagricultural flood insurance program include the feasibility of creatinghomogenous risk zones, whether the insurance is operated on a voluntary orcompulsory basis (the latter would reduce adverse selection, but is politicallymore difficult to implement), and develop clear underwriting rules that definethe types of risk and zones eligible for insurance and the periods and limitscovered by the program. Equally important is the development of a clearstrategy for loss assessment and loss adjustment that is practical, transparent,and fair. If the insurance policyholder is a risk aggregator (such as a bank or agovernment entity), a clear strategy is needed for the utilization of insurancepayments.

Financially, the key considerations relate to loss modelling requirements,premium pricing, and reinsurance. The financial concerns start with anunderstanding of the expected average losses, the volatility of losses andconfidence in loss estimates. Because there is generally little or no experiencein flood insurance in developing countries, loss modelling cannot usehistorical market data and has to rely on primary data (river discharge orrainfall). Loss modelling at the micro (or farm) level is often complex andconstrained by detailed data. Similarly, the pricing of insurance is simplifiedat more aggregate levels and can rely on aggregate indicators such as riverlevel measurements rather than detailed loss modelling at the micro level.Lastly, depending on the expected loss frequency and severity, reinsurance islikely to be required. The research presented here suggests that reinsurancemay be more accessible if catastrophic flood risk is aggregated and indexed ata macro level.

Translating the theory of agricultural flood insurance into practice indeveloping countries is difficult, as evidenced by the initial work documentedin this report. The demand for technical assistance on flood insurance that hasmotivated this work led to feasibility studies in Vietnam, Thailand, andBangladesh that were carried out during the 200608 period. The experiencefrom these studies show that the development of agricultural flood insuranceat the farm level remains challenging largely due to the lack of data to support

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the modelling of flood risk and assessment of potential losses. Many of thetechnical difficulties that characterize the micro level can be reduced bydeveloping insurance products at the meso level or macro level for ruralfinancial institutions or government entities. While still technically complex,the risk modelling performed at that level can be simplified and performedfaster. However, additional procedures would have to be put in place to targetinsurance compensation paid through these risk aggregating entities toaffected agricultural producers after a destructive flood.

Going forward, government and donors can play an important role tofacilitate the development of risk spreading mechanisms in general andagricultural flood insurance in particular. First, this includes investment in thegeneration of public goods to support disaster risk reduction and recovery,risk management, and ultimately insurance applications. Second, awarenessbuilding and risk education are essential for better risk management andinsurance. In that vein, identifying and assessing flood risk are critical firststeps. Third, many of the technologies described here have applicationsbeyond insurance, including for better planning, risk reduction, earlywarning, and disaster response. Insurance can complement such activities, butis only viable if carried out jointly as part of a broader risk managementframework. Fourth, more research and technical assistance is needed todevelop simple and financially viable products for flood risk transfer ataggregate levels; there is increasing demand expressed for such products fromflood-prone countries. Finally, donors and government can supportinternational and regional centers involved in flood modelling and facilitate aplatform that convenes the technical expertise required for flood riskinsurance development. Several of such centers and core expertises wereidentified through this work.

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1. Floods as a Source of Risk in AgricultureFlood plains have traditionally supported high population densities due to theadvantages for agricultural practices, such as deep fertile alluvial soils andwater availability. For instance, the Netherlands and Bangladesh are amongthe most densely populated countries, and the Netherlands has the highestgross domestic product (GDP) per square kilometer in Europe. At the sametime, floods affect more people than any other weather-related perilworldwide (Table 1). Six out of the 10 worst natural disasters in 2007 werefloods.1 While economic damages and loss of life are pronounced in urban andcoastal areas due to the concentration of infrastructure and people, floods inrural areas are both closely linked to agricultural production and a majorunderlying source of systemic risk for farmers.

Table 1 Disasters 19802008. Number of events and economic losses. Floods area large share of total losses due to natural hazards. Note that a portion ofwindstorm loss is due to flooding. (Other combines earthquakes,volcanoes, landslides, and mudslides.)

DISASTER PERIOD LOSSES DEATHS AFFECTED(19802008) EVENTS (billion $) (1000) (millions)

Drought 417 79.9 558.5 1567.3

Flood 2888 397.8 195.9 2740.9

Windstorm 2385 669.2 427.6 684.7

Other 1303 370.9 663.9 123.1

Total 6993 1517.8 1846.0 5116.1

Source: CRED (2009).

Flood risk in agricultural areas emanates from a variety of natural andmanmade causes, including upstream dams, artificial levees, status of soildrainage improvements, conveyance status of the local channels, trends incontributing-watershed land use that affect runoff, the topography of thewatershed, and regional trends in climate that alter runoff frequencies andmagnitudes. Climatic trends may affect flood frequency and severity, whereasdrainage improvements to an agricultural field may reduce flood durationwithout any changes to flood peak discharges. Also, agriculture makespreferential use of level to gently sloping lands. Figure 1 and Figure 2 illustratethe distribution of flood-prone land and agricultural land use, and globalflood mortality and economic loss risk, respectively.

For rural populations, apart from damage to primary assets of crops andlivestock, direct flood damage can affect immovable assets (for example,dwellings, storage and processing buildings, equipment, vehicles, land,

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irrigation facilities, and bridges) and stock (for example, fertilizers, crops inprocessing or in storage, and many other assets). Further, flood impacts can bedirect or indirect. Flood can affect primary producers, or may affect supplychain service or credit providers, and ultimately impact government finances.

While there are ways to manage seasonal flooding through water and cropcycle management, as well as to mitigate (reduce) risk through planning andengineering, the remaining risk, such as the financial losses incurred byfarmers due to extreme flooding, is frequently dealt with in a responsivefashion through ex post interventions. These may include compensatingfarmers for their losses through government programs or rehabilitatinginfrastructure after a flood. However, agricultural producers, rural financialinstitutions, and governments in developing countries have little protectionagainst the financial risks arising from extreme flood.

Source: DFO (2009).

2002 2001 2000 1999 1998 1997No

dataNo

dataNo

dataNo

dataNo accurate dataNo accurate data

1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985

Figure 1 Global distribution of cropland areas (top) and historical flood eventssince 1985 (bottom).


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1.1. Scope and ObjectivesThis paper is concerned with flood and its direct impact on growing crops andlivestock assets. It explores how traditional flood risk mitigation andmanagement could be complemented through innovative ways to providefinancial protection against extreme event using index-based insurance. Suchagricultural insurance products have been tested as a mechanism to provideeffective assistance to developing nations in response to losses arising fromdroughts (e.g., India, Malawi, and Ethiopia). With the work presented here,the World Banks Commodity Risk Management Group has assessed practicaland efficient methods to conceptualize and potentially implement such index-based insurance for agricultural flood losses.

Figure 2 Global Distribution of Relative Flood Risk in Terms of Mortality andEconomic Loss. (red high risk, yellow medium risk, blue low risk).

Source: World Bank (2005a).


To do this, this paper explores technological, institutional, and market-relatedaspects of how flood insurance products can be developed for theagricultural sector in developing countries by harnessing modern technologysuch as satellite remote sensing, flood modelling, and computer-based riskmodelling.

First, the paper gives a typology of flood events relevant for agriculture. Whileshort-lived and localized floods can represent an important source of risk, thetechnologies assessed here are most suitable for widespread river inundationthat affects agriculture in flood plain areas in low-lying deltaic regions. Also,the paper focuses on flood risk at the local scale, i.e., the seasonal productionrisks experienced by farmers and to the financial institutions lending to them.The management of a portfolio of flood risks at the national or regional levelis equally important from the perspective of risk reduction and disasterresponse and provides the framework for effective agricultural floodinsurance. Geographically, the focus is on regions in South and Southeast Asiawhere a relatively large proportion of agriculture is in flood-prone areas.

The findings presented here draw on studies performed in Thailand (Pasak River,Petchaboon Valley), Vietnam (Mekong Delta), and Bangladesh, together with localresearch centers, agricultural banks, and insurance companies, as well asinternational experts and centers of excellence in remote sensing and floodmodelling. These case studies provide insights into the challenges andopportunities to complement flood risk mitigation strategies with flood insurance.

The remainder of this section describes the sources of flood risk in theagricultural domain and the current extent of flood insurance, which iscurrently largely limited to developed countries and property damages. At thesame time, floods cause annual losses that are of concern for agriculturalproducers, financial institutions, and governments in the developing world. Theincreasing need for better flood risk management that has been expressed by awide range of institutions in flood prone countries to the World BanksCommodity Risk Management Group has motivated this work. However, as thepaper shows, there are many challenges to use insurance instruments effectivelyfor flood risk, some of which are general to agricultural insurance and others arespecific to the risks associated with flooding. These challenges are described insection 2. Technologies that can help overcome these challenges are presented insection 3, and innovative ways to insure flood risk are discussed in section 4.Lastly, section 5 documents some recent case studies where these approacheshave been assessed. Technical background is provided in the annex.

1.2. Sources of Flood RiskFlooding occurs in different geographic settings and can be caused by avariety of mechanisms. Floods also occur at various magnitudes (Box 1). Theprimary cause for floods at the global level stems from heavy rain, followedby brief torrential rain, tropical cyclones, and monsoonal rains (Figure 3). Amore detailed global picture is presented in section A.1, including thegeographic distribution by flood-causing processes and their seasonalpatterning. The most important types of flood risk that affect agricultureinclude river flood, flash flood, and coastal flood, which are described here.2


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1.2.1. River flooding and inundationRiver flooding occurs when the capacity of a river system is insufficient tocontain the flow of water in the river, resulting in escape of water from thenormal perimeter and submergence of surrounding low-lying land. Prolongedrainfall results in soil saturation, and may occur at times of increased inflowfrom tributaries. Characteristics of the river flooding are determined by thecapacity of river channel(s), slopes, soil permeability, land cover, land use, andcontrol of water flows by any man-made engineering structures (training walls,dams, drainage, etc.). River floods are often slow moving. Increased tributary

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Figure 3 Global number of floods of various causations, 19852002.

0 200 400 600 800100 300 500 700 900 1000

Heavy rain

Brief torrential rain

Tropical cyclone

Monsoonal rain

Snowmelt

Dam/levy, break/release

Ice jam/break-up

Extra-tropical cyclone

Tidal surge

Avalanche related

1100

Source: DFO (2009).

Box 1 Levels of magnitude of flood

Normal flood (e.g., 1 year flood): Regular inundation of low-lying farmland iscommon in many tropical countries, for example in Southeast Asia. They occuralmost every year and farming practices, especially rice cultivation, are well-adapted. Forecasts can be issued to give advice regarding cropping and sowingtimes to minimize losses.Medium flood (e.g., 1 in 5 year flood): This less frequent flood causes someeconomic loss, but is not extensive or serious. It affects farmers and people livingin low-lying areas and by rivers. Loss of life is unlikely as people are usuallyprepared for these regular events.Severe flood (e.g., 1 in 20 year flood): River levels continue to rise and affect largegeographic areas and people less familiar with this scale of flooding includingthose living in urban areas. Damages and losses to the physical environment andeconomic sector are generally significant.Catastrophic flood (e.g., 1 in 100 year flood): Extreme flooding inundatesextensive areas. It is extremely devastating with multi-fold impacts to life andproperty and the economy.Source: ADPC (2005).


flow can affect flood plains, as a result of land degradation in the catchmentareas. Flood plains are formed from deposits made by earlier floods.

In terms of flood mitigation, river systems range from heavily managed tounmanaged. In practice, although it is possible to take measures to managefloods arising from rivers, it is not possible to control such floods completely.Most river systems have been engineered, for purposes of urban floodprotection, agricultural protection, and irrigation management. Flooddetention areas may be designated, which generally allow controlled floodingof agricultural areas in order to protect urban regions. Further, in many riversystems intentional flooding allows the recharging of soils with nutrient loadand moisture. Such irrigation and intentional flooding has evolved around thenatural seasonality of the river, and adjustment of the cropping calendar so asto allow windows of cropping and flooding.

The deep fertile alluvial flood plains of rivers are favored areas for farming.Many alluvial soils may have been deposited over a long period and no longerare exposed to flood, but by definition, the majority remain potentiallyexposed. The most favorable and populated areas of a country may thereforelie in flood plains. Further, very substantial areas of river flood plain can existin a single country, such as in Bangladesh, or the Mekong Delta of Vietnam;typically, many countries have flood plains exposed to river inundation, butoften only on more restricted areas, due to more marked topography such ashills, valleys, or slopes (e.g., Mexico, Jamaica, Thailand, Romania, Turkey).These flood plains may be the most intensive agricultural production areas.Although essential crops may also occur along floodplain lands within narrowupland valleys, the aggregate of such land, although locally important, issmall compared to the extensive, humid- to semi-arid plains where mostglobal agriculture is practiced.

River flooding at any location may be caused by rainfall, or snowmelt, at longdistances from the affected location. Distant rainfall from snowmelt ormonsoons may be the main drivers of flood on major river systems, ratherthan localized rainfall. The actual extent of flood will be a combination of allcontributing water, whether distant or localized, and is strongly affected byprior waterlogging of soils. By nature of the shallow slopes of a naturalfloodplain, river inundation flood duration can last for days, or weeks.Recession of the floodwaters is a function of floodplain drainage (natural orartificial), slope, permeability, constrictions to water flow, and so on.

1.2.2. Flash floodsFlash floods arise from intense, localized rainfall, and can happen practicallyanywhere. Intense rainfall can be measured over any specific period, typicallybetween one hour and a maximum of six hours in the case of flash flooding.Duration of rainfall is longest in slow-moving or stationary storms. Acharacteristic of flash floods is that flood water rises suddenly, may be fastflowing, may collect in lower lying areas, and normally runs off and pondsrapidly. Residual ponded areas of water (sometimes larger lakes) may betrapped, remaining for long after the flash flood event. The flood impact of


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intensive rainfall is more severe when the ground is already saturated, wheresoils are impermeable or unstable, and in heavily sloped areas. Sequentialintense rainfall events can therefore have a cumulative impact. Where groundis sloping, water is channelled to gullies and temporary watercourses, leadingto erosion or landslides, and washing out bridges, culverts, or roads. Flashfloods may also impact areas downstream of an intense rainfall event. Withina valley, flash floods can affect foothills, and rivers flood the valley bottoms(e.g., Pasak River, Thailand, section A.5.2). Within a country, regions may beaffected by flash flooding (e.g., the northeast region of Bangladesh) whereasriver flooding is the main national flood exposure.3

There is a growing body of evidence that climate change is leading toincreased intensity of rainstorms, and therefore to flash flooding (Box 2).

1.2.3. Storm surge and coastal floodingCoastal zones are subject to flooding as a result of storm surgeincreased sealevels driven by tropical storm systems (cyclones) or by strong windstormsarising from intense offshore low-pressure systems. Coastal areas most at riskare low lying, either river deltas or coastal plains.

The extent of flooding caused by a coastal sea surge will depend on severalfactors, especially the topography of the low-lying inland areas, tidalconditions, wind and wave action, extent of inland river flow at the time ofcoastal surge, and occurrence of localized rainfall associated with the stormevent. Torrential rains associated with monsoons and tropical cyclones are alsoimportant factors adding to the impact of storm surges.

In Asia, severe floods recur during the monsoon and rainy seasons, often withdisastrous consequences. Crop losses are generally severe in affected areas butthe overall impact at the national level varies among countries. The majorcause of the most destructive phenomena is a storm surgea rapid rise of sealevel resulting from strong winds driving the water ashore and causingflooding in low-lying coastal areas. Storm surges often accompany intensetyphoon systems. In India, storm surges account for more than 90 percent ofloss of life and property. Low-lying coastal areas elsewhere, as in CentralAmerica, Venezuela, Mozambique, and Madagascar, have also beendevastated by storm and flood-related disasters in recent years.4

1.3. Impact of Floods in AgricultureThere is no global assessment of agricultural flood losses. The numberspresented in Table 1 and Figure 2 reflect only the overall losses due to floods andthe frequency of floods relative to other disaster types, but do not provide aseparation of losses by sector. However, statistical data at the country levelsuggests that agricultural flood losses can be substantial locally and regionally:

In the Philippines, palay (rice) losses (Figure 5) totaled 3 million tonnesannually between 1994 and 2005, equivalent to 2.1 percent of actualproduction as a consequence of typhoons and floods (for reference, droughtsresulted in further losses, totaling 1 million tonnes or 0.7 percent of actualproduction, over the same period). At the sub-national level, however, relative

7



losses have been much higher in some regions of the country than others.Most notably, two of the three major producing regionsRegions II and IIIwere also in the top three regions ranked according to losses as a proportionof actual production (approximately 5 percent and 3 percent, respectively). Inthe main rice-producing area (Cagayan Province, Region II), losses due to


8

Figure 4 Relative change in runoff (in percent) during the twentieth (a) andtwenty-first (b) centuries. Twentieth-century changes are for the19711998 period, and twenty-first century changes are for the20412060 period. Changes are relative to the 19001970 average.Blue areas indicate relative increase in runoff and flood risk.

Box 2 Historical trends in streamflow and climate change

Streamflow is the temporally lagged and aggregate effect of precipitation over a rivercatchment. Streamflow and precipitation patterns have changed in many river basinsof the world during the twentieth century, which is largely attributed to human-induced climate change. Precipitation is generally projected to increase in highlatitudes and some tropical areas (e.g., Southeast Asia), and to decrease in some mid-latitude regions (the Mediterranean). These changes, together with a generalintensification of rainfall events, are likely to increase the potential for flooding and thefrequency of flash floods and large-area floods in many regions.5 This will beexacerbated or at least seasonally modified in some locations by earlier melting ofsnowpacks and melting of glaciers (e.g., Andes, Himalayas). Regions of constant orreduced precipitation are very likely to experience more frequent and intense droughts,notably in Mediterranean-type climates and in mid-latitude continental interiors.Source: Milly, Weatherald, Dunne, and Delworth, 2002; Milly et al., 2005.

4030201052

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(a)

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floods have exceeded more than 15 percent of annual production in someyears (e.g., 1998). Flood is included within the multiple-peril crop insurancecoverage provided by the Philippines Crop Insurance. Over the period from1981 to 2006, 55 percent of all claims for palay were paid for typhoon andflood, and 13 percent for drought. Typhoon damages typically include thecombined effects of winds, heavy rains, and flood.

In China, between 1982 and 2002, 28 percent of agricultural losses nationallywere attributed to flood, compared to 52 percent by drought and 4 percent by

9


Figure 5 Palay losses due to typhoons, floods and droughts in the Philippines(19942005). The top panel shows losses in the main rice-producing area(Cagayan Valley, Region II). The bottom panel shows the relativeproduction losses in all Philippines regions and country-wide.

19940

1995 1996

Annual drought, flood and typhoon palay losses in CagayanProvince/Philippines as a percentage of actual production

1997 1998 1999 2000 2001 2002 2003 2004 2005

5

10

15

20

25

30

% o

f ac

tual

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CAB

0

Average annual drought, flood and typhoon palay losses by regionas a percentage of actual production (19942005) in the Philippines

8

7

6

5

4

3

2

1

% o

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Typhoon/flood Drought

region

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typhoon. Flood and waterlogging in China occurs mainly as a result of bothtyphoon-induced and seasonal rainfall within the low-lying river basins of theeastern and central provinces.6

In Bangladesh, 30 percent of the country experiences annual flooding, andextreme floods can extend to 60 percent of the national territory. Major floodsoccurred in 1988, 1998, 2004, and 2007, and the main impact is on agriculture,on which the majority of the population are dependent. Examples of thedamage from three floods are shown in Table 2.

In Thailand, the most frequent hazard that affects the country is flood.Compared to other disasters, flood is also associated with the most severeimpact both in terms of economic loss and mortality. Floods mainly occur inthe monsoon seasons between June and September. Many river basins, such asthe Chao Phraya basin in Central Thailand, are sites of intensive agriculturalactivities while being very prone to flooding due to river swelling andoverflow during the rainy seasons. Data from 200206 show that flood is amajor risk for agriculture in Thailand, annually damaging not only largeacreage of crop land but also livestock, poultry, and fishery sectors (Table 3).

In Vietnam, all regions of the country are highly exposed to flooding caused byriver inundation and storm surge; the exception is in the Northeast andNorthwest parts where flash floods are more common. The Mekong RiverDelta is mostly severely affected by both inundation flood and storm surge,followed by the Red River Delta, the North-Central Cost Zone, and the CoastalEconomic Zone. Data from recent flood events demonstrate the magnitude ofimpact on the agricultural sector in Vietnam. In 2003, highly concentratedtorrential rains caused severe inundation in the Northern Delta in the


10

Table 2 Comparison of losses resulting from the 1988, 1998, and 2004 floods inBangladesh.

Loss 1988 1998 2004

No. livestock killed 172,000 26,564 8,318

Crops damaged 2.12 1.74 1.30

Deaths 2,300 1,100 747

Rice production losses 1.65 2.06 1.00(million metric tonnes)

No. of people affected 45 million 31 million 36 million

Roads damaged (km) 13,000 15,927 27,970

Percent of land inundated 60 68 38

No. of homes damaged/ 7.2 million 980,000 4 milliondestroyed

Total losses Tk 82.6 billion Tk 118 billion Tk 134 billion(US$1.4 billion) (US$2 billion) (US$2.3 billion)

Source: 2004 Floods in Bangladesh: Damage and Needs Assessment and Proposed Recovery Program.World Bank/ADB joint report, 2005.


provinces of Thai Binh, Ninh Binh, and Nam Dinh. Over 120,000 hectares ofrice cultivation of the three provinces were affected, of which 60,000 ha was inThai Binh alone; half of this area was totally destroyed. The damage caused toaquatic production was also large. In the Mekong River Delta, consecutivesevere flooding occurred in 2000, 2001, and 2002, resulting in 1,044 peoplekilled (one-tenth of the total number of deaths in 15 years nationwide); 1.6 million houses submerged; and nearly 500,000 hectares of rice inundated.7

1.4. Current Extent of Flood InsuranceGlobally, the insurance industry is most developed for urban and industrialrisks within developed countries. Increasing frequency and financial impact ofmajor flood events have strongly focused the global insurance market onimproving the understanding of flood risk for traditional lines of propertybusiness. Solutions for rural flood insurance can benefit from these insuranceexperiences and research efforts. Agricultural flood differs in the assets at risk,which are normally subject to less flood protection than in urban areas and areseasonal in exposure.

1.4.1. Property flood insuranceFlood insurance availability for property risks affecting industrial orhousehold property and contents is highly diverse in different countries.

Within Europe, this diversity is most marked and ranges from countries whereflood insurance is not available (the Netherlands), to those where it isgenerally included in all fire insurance policies (U.K.).8 In Spain, premium forflood is automatically added to private sector fire insurance policies, but theflood insurance is managed by a government insurance fund, ConsorcioNacional de Seguros. Governments may also be involved in providinginsurance or disaster relief. In France, flood risk as well as other catastrophicrisks are covered under a compulsory catastrophe guarantee provided by thegovernment (triggered by a declared national catastrophe event) and linked tovoluntary property insurance. An example of this diversity between countriesin Europe is shown in insurance coverage of the 2002 Central European floods

11


Table 3 Thailands Agricultural Flood Losses from 2002 to 2006. Data fromDepartment of Disaster Prevention and Mitigation, Ministry of Interior,Thailand.

2002 2003 2004 2005 2006

Agricultural land 1,669,618 255,289 527,797 272,232 896,889(hectares)

Livestock (number 2,955,577 301,343 71,889 222,600 142,211of animals)

Poultry (number n/a n/a n/a 473,523 261,850of animals)

Fish and shrimp 103,533 22,339 12,884 13,664 113,260(number of ponds)


(affecting the Elbe, Danube, and their tributaries). In Germany, 20 percent ofeconomic losses of Euro 15 billion were insured; 20 percent of households inthe Czech Republic had flood cover; and in Austria cover was limited to Euro5,000 to 10,000 per household.9 The diversity of flood insurance solutionsreflects the private sectors concerns over difficulties of insuring flood, therising incidence of natural disasters including flood, as well as stateintervention in some countries. It should be noted that flood is also animportant risk in motor insurance and personal insurance branches.

The case of the United Kingdom is of interest in that increased incidence ofmajor floods (such as in 2000 and 2007) have led the insurance sector toincreasingly question the sustainability of providing flood insurance to allproperty owners. The insurance sector has proposed stricter conditions,including that government expenditure for flood defences is increased, thatbuilding is restricted on flood-prone land, and that other measures areimplemented to cope with a significant increase in major flood events.10,11

In the U.S., property insurance for flood (National Flood Insurance Program)is made available through the Federal Emergency Management Agencies(FEMA). The risk is not carried by the private insurance sector, although isadministered by approved insurers.

In developing countries, property flood insurance is more limited inpenetration, which reflects lower overall insurance penetration, as well asavailability of flood insurance within each market. In 2007, Organisation forEconomic Co-operation and Development (OECD) countries accounted for 89percent of global non-life insurance premiums; per capita non-life premiumswere US$1,435 in industrialized countries, and US$34 in emerging markets.12

Within emerging markets, premiums per capita in Asia are 3.4 times higherthan in Africa. Flood insurance in developing countries is primarily taken outby industrial and commercial entities in urban areas, with generally morelimited insurance by householders, and the insurance sector may not be activein rural areas. In the Philippines, flood insurance is available for businessassets, but policies are often only taken out if it is a requirement of a loan.Countries such as Indonesia, Thailand, and China are typical, with floodinsurance included for industrial risks (especially those with foreignownership), but there is low penetration for domestic insurance. A study byOECD of emerging countries showed that, by 2070, Asian cities woulddominate global flood vulnerability in terms of assets exposed to flood,particularly to coastal flood.13

Flood insurance for property risks often offers more restricted compensationthan for other fire and allied perils in the policy. Deductibles (the first loss bornby the insured) may be higher, and there may be financial limits on themaximum claim payable.

1.4.2. Agricultural flood insuranceThere are different types of crop and livestock insurance schemes (Box 3).Flood is normally included as an insured peril in Multiple Peril CropInsurance (MPCI) together with all other perils, which may cause yield


12


13


Box 3 Different types of crop and livestock insurance schemes

Traditional Crop Insurance

Damage-based Indemnity Insurance (Named Peril Crop Insurance). Damage-based indemnity insurance is crop insurance in which the insurance claim iscalculated by measuring the percentage damage in the field, soon after the damageoccurs. The percentage damage measured in the field, less a deductible expressedas a percentage, is applied to the pre-agreed sum insured. The sum insured may bebased on production costs or on the expected revenue. Where damage cannot bemeasured accurately immediately after the loss, the assessment may be deferreduntil later in the crop season. Damage based indemnity insurance is best known forhail, but is also used for other named peril insurance products (e.g., frost andexcessive rainfall).Yield-based Crop Insurance (Multiple Peril Crop Insurance, MPCI). Yield-basedcrop insurance is insurance where an insured yield (e.g., tonnes/hectare) isestablished, as a percentage of the historical average yield of the insured farmer.The insured yield is typically between 50 percent and 70 percent of the averageyield on the farm. If the realized yield is less than the insured yield, an indemnityis paid equal to the difference between the actual yield and the insured yield,multiplied by a pre-agreed value of sum insured per unit of yield. Yield-based cropinsurance typically protects against multiple perils meaning that it covers manydifferent causes of yield loss. This is because it is generally difficult to determinethe exact cause of loss.

Index-based Crop Insurance

Area Yield Index Insurance. Area yield index insurance is when the indemnity isbased on the realized average yield of an area such as a county or district. Theinsured yield is established as a percentage of the average yield for the area. Anindemnity is paid if the realized yield for the area is less than the insured yieldregardless of the actual yield on a policyholders farm. This type of index insurancerequires historical area yield data.Weather Index Insurance. Weather index insurance is when the indemnity is basedon realizations of a specific weather parameter measured over a pre-specifiedperiod of time at a particular weather station. The insurance can be structured toprotect against index realizations that are either so high or so low that they areexpected to cause crop losses. For example, the insurance can be structured toprotect against either too much rainfall or too little. An indemnity is paidwhenever the realized value of the index exceeds a pre-specified threshold (e.g.,when protecting against too much rainfall) or when the index is less than thethreshold (e.g., when protecting against too little rainfall). The indemnity iscalculated based on a pre-agreed sum insured per unit of the index (e.g.,US$/millimeter of rainfall).

Traditional Livestock Insurance

Mortality insurance for individual animals is the basic traditional product forinsuring livestock. It is very costly for an insurer to provide insurance forindividual animals, especially where herd size is small. Premiums are set based onnormal mortality rates within the permitted age range, plus risk andadministrative margins, and are generally quite expensive. Further, as mortality is,to a considerable extent, influenced by management, the product suffers fromadverse selection by the highest risk farmers.

(continued)


reduction. Flood insurance is not offered as a stand-alone crop or livestockinsurance product. In developed markets, it may sometimes be added as aninsured peril to a named peril policy (e.g., to a hail and fire policy).

In the U.S., the largest MPCI program globally, flood is included universallyas a peril within the Federal Crop Insurance Program, operated by the RiskManagement Agency (RMA). There is only limited differentiation betweenterms and conditions for clients with land that is flood prone (High RiskLand), or not exposed to flood, although a higher premium is payable.Farmers can opt not to insure High Risk Land, in which case they cannotinsure any of land with that crop against flood in a county. Risks areestablished by FEMA and the Natural Resources Conservation Service andthe information is used by RMA for rating. Excessive moisture, rain, or floodaccounted for 30 percent of crop indemnities between 1989 and 2004.14 Excessrain can give rise to several types of loss, for example flood, inability toharvest, crop quality reduction, or disease outbreak.

In Spain, while the insurance program was started in 1980, flood was onlyincluded as an insured peril in 1999, following extensive research (Box 4). Theagricultural insurance system is operated by Agroseguro. In order tominimize adverse selection (i.e., only farmers at high-risk choose to purchaseinsurance), flood is included as an obligatory peril on all crop insuranceproduct lines (torrential rain and persistent rain were only added as perilsin 2002).15

In developing countries, the penetration of agricultural insurance isgenerally very low (Figure 6). However, flood insurance is often included incountries where crop insurance is offered and where typhoon, and floodassociated with typhoon, is a predominant risk. In the Philippines, thePhilippines Crop Insurance Corporation offers MPCI, including flood. InChina, flood is a predominant risk in much of south and central parts of thecountry as a result of high frequency of tropical depressions, tropical storms,and typhoons.16 Flood risk is included as a peril in the fast-expanding,


14

Herd insurance is a variation on individual animal mortality cover for larger herds.A deductible is introduced, where a certain number of animals, or a percentage ofthe animals, must be lost before an indemnity is paid.Epidemic disease insurance is offered in only a few countries, most notablyGermany. Insurance of government ordered slaughter or quarantine is normallyexcluded. Epidemic disease insurance carries major and infrequent catastrophicclaim exposures necessitating a high reliance on reinsurance for risk transfer. Dueto the difficulties of modelling epidemic disease spread and financial exposures, itis difficult to develop this type of insurance and to obtain support frominternational reinsurers.

Index Livestock Insurance

Index insurance for livestock has been applied for mortality risk in Mongolia. Anaggregate livestock mortality index at the district level is used to compensateindividual herders. Weather-based and satellite-based index pasture and rangelandinsurance products exist in Canada and the U.S.


15


Box 4 Agricultural flood insurance in Spain

Spain has one of the most developed agricultural insurance systems in Europe. Itis managed by a specialist agency, Agroseguro, on behalf of private insurers andthe government. Risks are reinsured in the international reinsurance market and, ata catastrophic level, by the government.Features of flood insurance by Agroseguro are:

Even though flood is not considered a major risk in Spain, flood insurance iscompulsory as an addition to any crop or livestock insurance policy.

All clients are eligible for cover.

Policy terms and sums insured are as for other perils covered, although higherdeductibles may apply for flood.

A uniform premium rate is applied per crop type, with no geographicaldifferentiation.

Flood was introduced in 1999, well after crop and livestock insurance waswell established (Agroseguro was formed in 1980).

Flood is one of three catastrophe risks (along with strong winds and persistentrains) handled in a separate catastrophe fund.

Inadequate drainage (evidenced, for example, by highly localized flooddamage) is not covered.

A key point for Agroseguro is that the major penetration of agriculturalinsurance throughout the country, along with compulsory flood insurance,avoids the problem of adverse selection.

Figure 6 Geographical distribution of insurance premium of agricultural insuranceprograms. Estimated global premium in 2008 is Euro 16.5 billion.17

ChinaCanada

Spain

Italia

FranceIndia

ArgentinaMexicoGermanyBrazilAustria

TurkeySouth Africa

South Korea

USA

Other


subsidized, MPCI-based crop insurance market in China. In India, flood is aninsured peril under the National Agricultural Insurance Scheme (NAIS),which is an all-peril, area-based crop insurance. In South Korea, typhoon, andflood associated with typhoon, is covered by the National AgriculturalInsurance Company (NAIC).

1.4.3. Flood risk and developmentFlood insurance is not viable in isolation and requires an institutionalframework for flood risk management. Such a framework establishes thestructure and relationships of governmental and non-governmentalorganizations including government agencies and departments, individuals,and the private sector in assessing and managing flood risk. Key elements of aflood risk management framework include: (1) integration of participations andstakeholders from various sectors; (2) risk-based planning that incorporates riskmitigation, preparedness, response, recovery, and monitoring; (3) integratedwatershed management that considers transboundary relationships of wateruse and flood risk; and (4) a political environment conducive for effectivepolicies and legislation.

Flood risk management needs to be considered within the overalldevelopment framework. In many parts of the developing world, poverty is asignificant contributor to peoples vulnerability to flooding; frequent floodingcan perpetuate poverty. Despite economic opportunities in urban areas, thelivelihoods of many people remain agrarian-based. They live in settlements inlow-lying areas, relying on agriculture and depending on the land for theirfood security. Particularly in Asia, recent decades have also been characterizedby a massive migration of people to urban centers in search of employmentand better access to services, which has resulted in increased urban flood riskas people settle in high-density urban slums on city fringes or next to floodprotection embankments and along riverbanks.

Poverty affects peoples capacity to cope with floods. Factors contributing topoverty and vulnerability to flood disasters are: low income, weakinfrastructure, poor shelter, lack of access to public services, unstable politicalconditions, conflicts and weak economies, and lack of savings and insurance.During medium and severe floods, poor people are particularly vulnerableand incur disproportionate losses and damages.


16


2. Challenges for Flood Risk Insurance in Agriculture

Providing agricultural flood insurance has a number of challenges. Theseinclude:

Delineation of losses caused by flooding; Modelling and quantification of the risk and the impact of floods; Operating flood insurance, including loss adjustment and underwriting;

and Managing financial challenges related to risk transfer and reinsurance.

The extent of these technical and economic challenges in developing floodinsurance is high, illustrating why government is often involved in flooddisaster management and compensation (especially in developing countries)compared to insurance provided by the private sector. These supply-sidechallenges are discussed in more detail in the current section, while the nextsections explore ways of addressing them using technology and innovativeinsurance design. Demand-side challenges for flood insurance are not yettested in developing countriesin particular, the willingness and ability ofstakeholders to pay the necessary premiums. Demand-side issues are beyondthe scope of this paper.

2.1. Definitional ChallengesIrrespective of the underlying causes for floods, the losses associated withflooding can be direct and indirect.

At the micro (farmer) level, direct losses relate to the impact on standing crops,livestock, and aquaculture. Indirect economic losses can arise due to theinterruption of business until full production can be resumed. Flood damageboth at the farm property itself or loss of marketing channels or of transportcan indirectly lead to increased costs of working and lower income receipts.

At the meso (organizational) level, losses are mostly indirect and affectbusinesses operating in the rural areas. Examples are the reduction of supplyof produce to marketing organizations; reduced demand for services fromfarmers; and exposure of financial institutions to farmers unable to repayloans or interest on loans after a flood.

At the macro (public sector) level, indirect costs may be incurred bygovernments, in addition to direct reconstruction costs, in order to restorenormal government operations and support services to the public.Furthermore, there may be loss of tax revenues by government. Forwidespread flooding catastrophe, disruption of national or regional publicfinances can impact future operation or growth of the economy. Shortages of

17



food may lead to increased prices and cost of living. Public sector assets arerarely insured in the private insurance market, with costs of repair born bycentral or regional government. In order to mitigate the potential effect offlood, mitigation measures (for example, river draining) are a major budgetarycost both in capital outlay and annual maintenance. Ex ante expenditures onmitigation should reduce ex post costs of reconstruction and rehabilitation, asa result of both structural improvements, and increased efficiencies as a resultof disaster preparedness.18

The primary concern of this work is flood losses experienced directly orindirectly by agricultural producers and the financial and public institutionsthat provide services to them (e.g., infrastructure and rural lending).

2.1.1. Direct lossesDirect losses refer to the direct physical loss or damage to assets arising fromflood.

(i) Crops: Damage to standing crops from flooding depends on several factors:

crop type, and its vulnerability to immersion; duration of the flooding; growth stage of the crop and cropping calendar; height of the crop and the depth of water; velocity of water flow (potentially causing soil erosion); sediment deposits that are left on the plant surfaces after the water

recedes; sediment deposits burying plants after the water recedes.

The impact of flood in crop production is complex due to the number ofvariables. There may be both a loss of crop volume and/or a loss of cropquality resulting from the flooding. The timing of flood events in relation tocrop calendar is therefore particularly important (Figure 7). Crop cycles formost annual crops are typically 80120 days from sowing to harvest. The mostvulnerable period, depending on crop type, is during flowering and ripening.Furthermore, the crop will only have a value to the farmer if it can be


18

Figure 7 Example of rice crop cycles of the Muang Patchaboon district, PetchaboonProvince, Thailand.

Rice crop cycle 1

June1 2 3 4

July Aug Sep Oct Nov Dec

Rice crop cycle 2 Rice crop cycle 3

Rice crop cycle 4

Avg rice growth stage Seeding02525>3

255025>3

507040>4 >4

110160160>4

160160>4

160160>4

Seeding

Seeding

Seeding

Seeding

21 days 5 days 14 days 21 days depends on available machinesand labors

4970 days

Transplant

Transp

lant

Tillering

Tillering

Tillering

Tillering

Tillering

507070

Growing70110

20

Booting

14 days

Booting

Booting

Booting

Booting

Flowering

Flowering

Flowering

Flowering

Flowering

Grain filling

Grain Filling

Grain Filling

Grain Filling

Grain Filling

Harvest

Harvest

Harvest

Harvest

Harvest

Avg rice height (cm)Critical water depth (cm)Critical flooding time (days)

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Source: ASDECON (2008).


harvested. Although crops may remain in the field, it is a constructive loss if itcannot be harvested if flood prevents the farmers from reaching the field.Flood duration and depth therefore also affect damage, in addition to floodtiming. Turbidity (sediment deposits) also adversely affects post-floodingsurvival of rice plants.

In the case of rice, the dominant crop grown in flood prone areas in SoutheastAsia, the flood water depth and submergence tolerance of the crop is thesubject of ongoing research.19 Varieties suited to growing in deep water havebeen introduced since the 1970s. The new varieties enable rice to betterwithstand the floods and to exploit production potential in deep-waterenvironments. Also, crop management practices are important to avoidperiods of seasonal flooding by adjusting the planting window, the number ofcycles grown per year, and by using fast-maturing varieties. All of thesefactors help reduce direct losses to rice crops from flooding.

(ii) Livestock: Catastrophic floods can cause direct animal deaths, or indirectlyaffect the animals through lack of food or instance of disease during theflood duration. There may be an opportunity to mitigate the impact offlood by moving livestock from flood risk zones, if there is sufficient floodwarning. This will be easier to achieve for grazing livestock. Intensivelyhoused livestock and poultry cannot easily be moved to alternativelocations, and their survival may depend on the housing and associatedequipment for feeding, ventilation, and heating or cooling. The moreintensive and sophisticated the production system, the less readily canemergency actions be taken.

(iii) Aquaculture: Aquaculture production is frequently practiced onfloodplains, in dedicated ponds, or in bunded crop production areas, forwhich controlled water management is required. Flooding of ponds anddamage to bunds from flood are important causes of loss in rural areaswhere inland aquaculture is practiced. Economic loss can be the loss offish (or other aquaculture) and the damage caused to infrastructure, (e.g.,bunds and drainage systems). Costs of reconstruction depend on the typeof production system and vary widely.

2.1.2. Indirect losses(i) Crops: There is a distinction between losses to annual crops and to

perennial crops, in relation to the time frame to restore normalproduction, and therefore the extent of indirect losses. For annual crops,replanting may be possible in the existing crop season if flooding occursearly in the cycle. More normally, flooding results in the loss of a full cropseason, and normal planting is only resumed for the next crop cycle, evenif there are multiple crops that are grown in a single year. In the case ofperennial crops, there is a distinction between loss of the productive asset(for example, the tree) and the annual production of that asset (forexample, fruits of the tree). In the event of loss of the tree itself (which isconsidered as direct loss), there can also be substantial indirect costs,including costs to reestablish the plantation, and loss of income until theasset is productive again, typically 3 to 5 years in the case of fruit trees.

19



For a farmer growing annual crops, the direct costs of flood will includethe loss of crop, considered previously; plus the repair/replacement costsof buildings, stock, machinery, equipment, as well as dwellings. Theindirect costs may include the additional costs of working (e.g., feedstuffs),costs of further disruption (e.g., reduction of future production), loss ofmarkets, or disruption of supplies such as seeds, electricity, or otherservices. Direct loss of land or topsoil through erosion is a further potentiallong-term cause of loss. Farmers growing perennial crops may have costsin addition to those cited for annual cropsnotably, costs to clear andreplant trees and the costs of several years of lost income until the trees areback in production.

For insurance purposes, annual crops are normally valued either in termsof input costs up to the date of loss, or in terms of expected revenue lost(see section 2.5.1). Given the high risk associated with any form of cropinsurance, and the fact that a premium goes up in absolute terms with thesum insured, farmers often find that it is only affordable to insure lostproduction costs, which is a smaller sum insured amount than one basedon lost revenue, which includes an element of consequential loss of profits.For perennial crops, insurance distinguishes between two interests: theloss of the crop (the annual production of the tree) and the loss of the tree.The crop can be valued for insurance in a similar way as for annual crops.If trees are insured, an increasing valuation over time is developed untilthe tree is back in production; the value reflects either the increasing costsof production incurred over time and/or the value of income lost.

(ii) Livestock: The indirect impact of flood on pastoral livestock producers isprimarily seen in increased costs of feeding or re-housing. For grazinglivestock, the flood is likely to lead to loss of grazing for a period;alternative grazing may not be available, depending on the extent of theflood or associated rainfall. For intensive livestock production, flooding islikely to be far more serious, depending on the time period beforeproduction can be resumed and the degree of disruption of input ormarketing supply chains. Housed livestock, particularly intensive poultryand pig production, are normally insured under more conventionalproperty insurance policies in which such insurance is available. It is rarefor flood insurance to be available to intensive livestock producers indeveloping countries.

For a livestock farmer, the direct costs of flood will include the loss ofanimals and repair/replacement costs of buildings, stock, feeds,machinery, equipment, as well as dwellings. The indirect costs may includethe additional costs of working (e.g., feedstuffs) and costs of furtherdisruption (e.g., loss of breeding stock giving rise to delays of followerstock), loss of markets, or disruption of supplies such as electricity.

(iii) Aquaculture: The indirect impacts of flood on aquaculture are similar tothose of livestock and vary according to production system. Additionally,water pollution or water quality following flood may impact the periodbefore production can be resumed.


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2.2. Technical Challenges2.2.1. Modelling flood riskFlood risk modelling is a well-developed methodology and is a fundamentaltool to support flood risk management, flood prevention, and flood warningsystems as well as for hydro-electrical energy, integrated water and floodmanagement in catchments, and many other applications. The increasedconcern of and losses to the global insurance industry has led to majoradvances in integration of flood hazard and vulnerability modelling forinsurance purposes by insurers and reinsurers of property risks. The expertisehas been developed by a few major reinsurers, and by specialist companies,notably Risk Management Solutions (RMS), Eqecat, and AIR Worldwide,whose client base is in the property insurance and reinsurance market. Thekey technical challenges associated with flood risk modelling relate to theestimations and mapping of the physical hazard (the flood)these are furtherdetailed in section 3. Furthermore, remote sensing is a complementarytechnology to flood modelling, which strongly supports many aspects of floodinsurance.

In the case of flood modelling for property insurance, vulnerabilitydistributions for buildings (percentage damage, according to depth andduration of flood) have been developed according to building type, businesstype, contents, and stocks. These vulnerability functions have then beenlinked to the hazard model in order to determine the financial impact of givenflood scenarios. They have been used to allow the development of premiumrates and for accumulation control (a process by which insurers calculate theprudent amount of risk that can be accepted by the insurer in any givenregion).

Loss or damage caused to crops by flooding implies either (1) an inability tocontinue cultivating that crop (i.e., the crop is lost at the time of the flood); or(2) the crop will partially recover if the flood recedes, but there is a loss of yieldat harvest time. Furthermore, the flood might give rise to secondaryconstraints to the final harvest, notably disease as a result of high humidity,loss of quality, contamination by flood residues, or inability to access fieldswith harvesting machinery.

As flood insurance for agriculture is not yet a developed class of business, thissophisticated modelling approach for property insurance, has not been widelyapplied to estimation of damage to crops or livestock within an insurancescheme. However, there is no reason why the same principles cannot be applied.The development of crop vulnerability functions has specific challenges:

Unlike property damage modelling, where fixed assets remain staticthroughout the year, and generally over the long term, crops are onlypresent for part of the year and are likely to change from year to yearaccording to crop rotation;

Damage caused to crops is differentiated according to growth stage.Generally, damage is less at the vegetative stage, but may be high at thereproductive and ripening stages;

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The timing of the flood is critical in relation to the crop cycle. Althoughcrop cycles are known, there is variation according to seasonal factors, suchas onset of planting rains or temperature, and there is also variationbetween individual farmers;

The duration and depth of flood is very important to the actual damagecaused to a crop. Crops adapted to immersion may survive flooding, evenas part of their natural growing cycle, (e.g., certain varieties of rice). Othercrop types may be very vulnerable and survive only for a short period;

Sediment residues on the plant itself, or siltation of the land, may restrictthe ability of the crop to recover after recession of the flood;

An associated effect of flooding and/or excessive rainfall may be to causesoil waterlog for a period after recession, leading to an inability to accessfields with machinery;

Minor floods are beneficial to crop production, if they occur at the expectedtime, bringing nutritious sedimentation and moisture; the impact of floodbenefit or flood damage is related to timing and duration of the floodevent. Cropping systems and crop varieties have evolved in order tomaximize such benefits and to avoid damages caused by flooding.

These points reinforce the need, in any insurance system for agricultural floodinsurance, to create a GIS-based database, which will allow information oncropping and geographical location of crops to be known. This forms a logicalextension of the database of clients that needs to be held by an insurer or byan agricultural bank lending to farmers.

River systems are subject to flood management, and the intervention ofhuman activities can be crucial to insurers, especially if these are not plannedor known in advance. In particular, agricultural areas are frequently floodedpurposefully (flood detention areas) in preference to urban areas beingflooded. Such interventions, often based on political decision, are verydifficult to model.

2.2.2. Flood zoningZoning is an important feature of any flood insurance program and requires amodelling approach that defines the spatial extent of flood relative toagricultural assets. A fundamental advantage of zoningwhich refers togrouping farmers who will be treated identically for premium and claimcalculationis to reduce cost of enrollment and of loss adjustment. Achallenge for any insurance agricultural scheme in developing countries is thesmall economic size of the farmer clients. As a result, high unit administrativecosts can be incurred for farmer enrollment and for loss adjustment.

Conversely, a disadvantage is that there still is a possibility not all farmers willbe equally impacted within the defined zone despite best technical efforts todefine the zones. This situation is referred to as basis risk. The resolution (unitarea) of zones is a critical issue for flood insurance: to strike a balance betweenthe requirements to assess flood risk in localized areas, yet avoid excessivebasis risk. (It is noted that in weather index insurance for drought or excess


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rainfall, where measurements made at specific meteorological stations areused to trigger payouts, all farmers within a given distance of the station havethe same coverwhich is a similar principle as zoning for flood insurance.)

Initial considerations in the background feasibility case studies for this paper(section 5) were that floodplains would need to be zoned, based on floodmodelling outputs, where zonal boundaries would be dictated by elevation orby river training. Such boundaries would be curved. The initial considerationswere that unit areas of between 50 and 100 hectares (identified from floodmodels) could be used as the zoning framework for (1) farmer enrollment; and(2) calculation of payouts, which would be proportional for all farmers withina given zone.

As a result of the flood modelling work in the Pasak River Valley in Thailand(see Figure 16 in Section 5.2 in Chapter 5), where possible boundaries fromflood modelling were indicated, it became apparent that determination offlood zone boundaries (which did not conform to administrative boundaries)was problematic. Therefore, while bunded floodplain areas may provideobvious boundaries, a simplified approach would seem to be the impositionof a grid system (see section 4). In constructing such flood zone grids, farmerswould be enrolled (using GPS measurement from a center point in the farm)into each grid cell. Then, the key issue is the level of resolution of each grid cellthat is most appropriate. This gridded flood zoning system has not yet beenempirically tested but would likely be determined based on: (1) the resolutionof remote sensing imagery to be used (for example, to give a minimum pixelcount within each grid cell); (2) the uniformity of the floodplain; and(3) whether a micro level or aggregated interpretation of flood risk wasneeded.

An additional challenge for zoning is the difference between managedfloodplains (e.g., those with river training walls) and unmanaged (natural)floodplains, as active water management (irrigation, flood detention areas,etc.) affects flood patterns. Flood risk zone boundaries may, however, be

Documents

Assessment of Innovative Approaches for Flood Risk Management