Climate change could slash South Asian economy by 9% a year

A recent report has stressed the impact that climate change and an expected increase in severity and frequency of natural disasters will have on Asia, claiming it could slash almost 9% off the South Asian economy each year.

The report, titled ‘Assessing the Costs of Climate Change and Adaptation in South Asia’ was published by the Asian Development Bank (ADB), and focuses on economic predictions for six regions up to the year 2050 and an even broader scope to 2100.

Between Bangladesh, Bhutan, India, Nepal, Sri Lanka and the Maldives, the groundbreaking ADB report states that each country stands to lose roughly 1.8% of its annual gross domestic product (GDP), and this figure could reach 8.8% by the year 2100.

ADB’s Vice President for Knowledge Management and Sustainable Development, Bindu Lohani, explained; “South Asia’s economy is under serious threat and the lives and livelihoods of millions of South Asians inhabiting the region’s many mountains, deltas and atolls are on a knife-edge.” Later adding that; “Countries must respond individually and collectively to cope with rising sea levels, disrupted water, food, and energy supply and increased disease.”

The general message from the bulk of the report is that almost all areas of Asia will suffer due to rising sea levels, more frequent and longer lasting droughts, harsher flooding, and more severe tropical storms, all as a result of climate change. The impact on agriculture will be negative as droughts and flooding impact the livelihoods of Asia’s important rural economy, while those inhabiting the coast are likely to become more vulnerable to typhoons and other extreme weather events.

Climate change and warming temperatures can actually provide some positives for certain specific areas, but as you’d expect the negative always offsets this, and this is again the case in South Asia. Nepal’s mountains and hills annual rice production is expected to increase by as much as 16% by 2080, but at the same time in Bangladesh, Bhutan, India and Sri Lanka it’s expected to decrease by 23%. And things don’t seem too dissimilar when considering the effect of rising sea levels. A single meter rise in sea levels would affect roughly 95 million people across South Asia’s coasts, and almost double that when a storm surge occurs.

So it’s clear that something needs to be done to protect the economy, companies and livelihoods of the 1.43 billion South Asians from the negative impact of climate change, an area where the re/insurance and insurance-linked securities (ILS) industry can have a positive impact.

In many parts of South Asia insurance penetration is still relatively low, an issue which becomes more apparent when you consider the extremely populous coastlines which are at risk of catastrophe events such as severe and frequent tropical storms.

Within the ILS and re/insurance industry the expectation is that insurance penetration will grow in Asia, but this study highlights the urgency that is required and the role insurance, reinsurance and other ILS instruments such as catastrophe bonds, could play in protecting the Asian economy.

The protection and funds made available from contingent disaster risk financing through catastrophe bonds and ILS funds could provide civilians and the Asian economy with a backbone to survive a disaster. As climate change brings stronger and more frequent storms to Asian shores, as well as other negative weather effects, the necessity for financial reserves to call on becomes a must.

Examples of other countries who have taken action against these perils can be seen with the Turkish Catastrophe Insurance Pool (TCIP), a fund specifically reserved for reconstruction and protection against the damages of natural disasters. Crop insurance is another sector of the market that is in its early stages but which, alongside weather index cover or parametric triggers, could be utilised to protect the Asian agriculture industry, a vital part of their economic structure.

Greater insurance and reinsurance penetration and the use of ILS related instruments would in turn develop the market in the region, creating more opportunities for investors and reinsurers. And the higher the flow of capacity available to Asia via the use of capital market tools, the more secure the economy and the livelihoods of millions would become.

The ADB report can be downloaded from its website here.

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