Sze Won Tan and Kin Hoe Lee explain the innovative insurance solution they proposed for the problem of flood damage to crops, which won the SCI ASEAN Green Research Hackathon
In October 2021, we won the top prize at the SCI ASEAN Green Research Hackathon for the idea of using an insurer-managed trust fund to provide large-scale crop insurance and investment into flood defences and sustainable farming.
Floods can have a devastating impact on food production. For smallholder farming households, they have an impact through loss of agricultural assets, damaged infrastructure, and ruined crops and livestock. Estimates suggest that up to 22% of the economic impact of medium and large-scale natural disasters in Malaysia materialise through agriculture. According to a study in 2019, crop insurance is almost non-existent, with only 4% of farmers having any at all. The Malaysian government picks up the cost but also continually approves development projects that could cause more climate events and economic losses. Clearly, there are opportunities for insurance companies to serve more customers, and an opportunity to empower the behavioural change that could terminate this vicious cycle.
“Instead of the government paying compensation for flood damage, the money is used for flood mitigation and sustainable farming”
The proposal
Our solution brought together three cutting edge ideas from initiatives around the world: I
- Integrated landscape management – a collaborative, multi-stakeholder process for sustainable landscapes.
- A case study in Thailand in which the Sustainable Rice Landscapes Initiative was implemented. The initiative’s objective is to increase resource use efficiency and reduce climate change and environmental impacts through sustainable landscape transformation.
- Innovative insurance solutions such as the Restoration Insurance Service Company, which attracted investment to conserve mangroves and reduce insurance premium due to the resulting reduction in flood risk.
In the proposed solution, governments, the private sector and the public would invest in a trust fund that is managed by an insurer. The trust fund would purchase crop insurance and fund flood mitigation initiatives such as sustainable farming that work across several smallholder farms.
A number of sustainable farming practices can increase crop yields while reducing flood risk. In the event of losses caused by flooding, farmers would be compensated with money from the fund.
The additional profit generated from higher crop yields and lower claims could be channelled back to the fund. The fund would then distribute the profit back to the government, private sector and public.
A portion of the profit could be retained in the fund so that more initiatives could be undertaken.
A win-win solution?
This solution could be a win-win solution for stakeholders. Instead of the government paying compensation for flood damage, the money is used for flood mitigation and sustainable farming. The private sector gets access to investments in true environmental, social and governance assets. Concurrently, insurers could also expand into an underserved market by cross-selling more typical protection products.
While the idea may make sense on paper, there are critics who argue it isn’t right to capitalise ecosystem services because nature is supposed to serve everyone, not just asset owners. As with many things linked to sustainability, the issue is complex, so one must consider not just environmental or economic benefits, but also social and governance responsibilities. For example, when taking up land for reforestation, are the owners and communities living on the land being compensated for any land-use change? Would the solution widen wealth inequality and worsen social problems?
Actuaries should not maintain the status quo, waiting for others to solve climate change and its problems. Instead, they should apply their unique skillsets to create a more viable, sustainable and better future for all of us.
Sze Won Tan is chairperson of the Actuarial Society of Malaysia Climate Risk Working Group
Kin Hoe Lee is a member of the Actuarial Society of Malaysia Climate Risk Working Group
