Climate Risk Management Strategy in the Tropical Low to Medium Income Countries

Abstract:

The market penetration of index insurance sector, posed as an innovative weather risk management and climate change adaptation tool, is growing in the tropical low to medium income countries. Usually the underwriters such as regional, national or international organizations, banks or (re)insurance companies hold these risk portfolios. The micro-level insurance contracts when aggregated at state, country or regional level, could potentially pose significant systemic risk due to tail dependency, micro-correlation and fat-tail nature of the damage, threatening the survival of this micro-financial risk management sector, ultimately impeding the sustainable development goals. Analyzing the observed inter-annual variability of the tropical climate system, this paper identifies the physical mechanisms for heterogeneous climatic response and suggests that diversification opportunity exists across different regions and seasons.

Taking two case studies from tropical Africa, an empirical analysis is done to highlight that El Niño modulates the number of wet days in an opposite way across the two regions and seasons, suggesting the possibility of diversification of the index insurance portfolios across regions and seasons. Specifically, El Niño is associated with drier condition over Sahel, while it is associated with wetter condition over Tropical Eastern Africa (TEA), during their respective Jul-Aug-Sep and Oct-Nov-Dec rainy seasons. Such contrasting modulation in the number of wet days can be understood by the phase relationship between the local rainy season and El Niño evolution stage. The transient phase of El Niño, which is in phase with the rainy season (Jul-Sep) over Sahel, is characterized by tropospheric stability induced by tropospheric warming without regional North Atlantic sea surface temperature (SST) adjustment. In contrast, the mature phase of El Niño is in phase with the short rainy season (Oct-Dec) over TEA, and is characterized by adjusted warmer regional Indian Ocean SST and increased onshore- advection of moisture from the Indian Ocean.