The Role of Insurance in Disaster Reduction

Abstract

Insurance is a composite risk treatment – a risk transfer mechanism that reduces the adversity of the financial impact of hazards by (a) directly covering the loss, (b) indirectly reducing vulnerability to disasters by reducing the susceptibility to poverty and (c) ensuring adherence to disaster preparedness and mitigation measures. Insurance has many benefits for the economy as a whole. The most appropriate method of insuring will depend on the needs of the country and its people. Insurance may be organised by the state, private companies or mutuals. It may be mandatory or voluntary. It may be arranged on a macro-scale to cover sectors of the economy or specific catastrophes, or it may be arranged at a micro-level to serve the needs of poor people. It may be formal, enforced by law, or informal – organised on a local level and enforced by social sanctions. The important point to realise is that the principle of insurance remains the same: the many policyholders that do not suffer loss pay for the few that do. If properly managed, insurance can increase the capacity of a person, group or state to deal with disasters.