Disaster Risk Insurance: To reduce the burden on the State budget

The lack of risk management strategies

Currently, Vietnam is a country that suffers many natural disasters. A study by the World Bank estimated that about 60% of the total land area and 71% of the population suffer the risk of storms and floods. Every year, the economic losses caused directly by storms and floods are estimated to be about 0.8% of the gross domestic product (GDP), the third highest in ASEAN.

The latest statistics of the Ministry of Finance also showed that natural disasters have caused damage to the economy, on average, by 1% of GDP per year. Among them, storm and flood are the risks that caused the most damage to the property and people's lives. As for public property, disaster risk affected 40% of welfare and culture structures and 60% of traffic, telecommunications and electricity infrastructures. Thus, when a disaster event happens, the State budget will have many difficulties in supporting to overcome the consequences of the natural disaster by providing funds to finance the activities of response and recovery from disasters. It forces Vietnam to depend on sponsor funds to overcome the consequences.

To overcome the financial difficulties of Vietnam's State budget, at the Financial Solutions and Disaster Risk Insurance in Vietnam Conference organized by the Ministry of Finance, Mr. Olivier Manhul, Global chief expert, Head of delegation, Manager of Financial solutions for disaster risk project of World Bank, said that improving the financial solutions and disaster risk insurances by constructing a disaster risk model for Vietnam particularly, and further developing the disaster risk insurance market in the country are essential.

Citing the success of some countries in the world, Mr. Olivier said: "Colombia is the pioneer country in improving the disaster risk insurance for public property by increasing the infrastructure insurance value to $US 38 billion; as well as using the conditions and terms according to the best standards on the international insurance market to buy disaster insurance for office buildings. It has reduced the redundancy obligations related to disasters in order to support the goal to balance the budget and stabilize the macroeconomic of Colombia".

Disaster risk insurance market is still at its start

In the current context, the construction and development of a new financial solution system for risk management and disaster risk transfer are essential. Of which, the insurance solution is an effective tool that would not only reduce the burden on the State budget, transfer the risks to the international market, but also help raise awareness about disaster risks, planning and disaster prevention. Discussing at the conference, international experts said a that new risk transfer instruments like insurance in Vietnam was still at its start and had a great potential to grow.

According to Mr. Bui Thanh Hai, Deputy Head of Non-life Insurance Supervisory and Management Division, Agency for Insurance Supervisory and Management (MOF), the penetration level of disaster risk insurance in Vietnam remains low for public property, commercial property and residential property, because the clients buying insurance from the insurers are mainly big organizations and enterprises. The value of assets covered only accounts for a very small percentage of the total assets of the entire economy. On the other hand, according to regulations, public properties are not required to buy insurance (besides the civil liability of motor vehicle owners insurance and fire insurance are mandatory), so nearly all public office buildings have not bought property insurance yet.

Mr. Bui Thanh Hai said that, Vietnam should learn the pattern of some countries to extend the list of insured objects (houses and furniture including vehicles, public properties) that are owned by households, businesses and government. Along with that, disaster risks should also be added into the coverage of property insurance policy as some countries e.g. Japan, New Zealand, France; or there should be an insurance policy for disaster risks.

Currently, the Ministry of Finance is continuing to integrate disaster insurance with other insurances oriented by the State and guide the insurance businesses to deploy agricultural insurance as disaster risk insurance for some objects; research and draft guidelines in the field of construction and installation insurance, in which disaster risks are stipulated to be covered.

The representative of the Ministry of Finance also recommended that insurers should continue to implement traditional insurance products with disaster risks being additional risks. However, disaster risks should be closely assessed and evaluated to suit the level and scale of the risks. In addition, financial capacity should be strengthened, reinsurance program for disaster risk, along with the development of risk management processes and disaster risk insurance compensation should be effective.

Mr. Nguyen Huu Chi, Deputy Minister of Finance:

Over the years, the National Assembly and the Government of Vietnam always focus on constructing and deploying the strategies, plans, policies and solutions to prevent and reduce disaster losses. Relating to the financial policies and solutions, the Law on the State budget has stipulated the State budget reserve and financial reserve that need to be used for the prevention and overcoming of consequences of natural disasters. The current financial solution system has basically met the requirements to assist recovery from disaster losses, ensure return to stable production and life of the people quickly. However, movements of natural disasters and climate change are increasingly complicated and unpredictable. Upon the occurrence of damage caused by natural disasters, the State budget will be difficult to support, to overcome the consequences of natural disasters. Therefore, a reasonable financial policy, including the expansion of disaster risk insurance, is needed at this time.