Case Study: The United Nations Development Programme’s risk financing and insurance development support in Vietnam

Summary:

Vietnam faces growing climate related disaster risk. These recurring disaster events impact the lives of the most vulnerable the hardest, damaging their homes and livelihoods.

With rapid economic growth, comes the risk of increased exposure. Economic activity and infrastructure is also impacted. The estimated direct economic loss for disasters in Vietnam between 1989 and 2010 was USD 14.8 billion. Most of these costs are covered through public funds, having a negative impact on sustainable development.

Therefore, disaster and climate risk financing should form part of an integrated disaster risk management strategy in Vietnam. Taking this into account, UNDP is supporting the Government of Vietnam to identify relevant risk transfer mechanisms, including insurance products that would help minimize losses that are covered from the government budget.

 

Country Background:

Vietnam has made significant commitments to disaster risk reduction, these are reflected in the National Strategy as well as the National Law for Disaster Risk Management (DRM). These policies specifically identify “proactive prevention” as a guiding principle, which includes risk financing as one of the key elements of disaster risk management.

Risk is measured using metrics such as Average Annual Loss (AAL) and Probable Maximum Loss (PML). The AAL in the built environment in Vietnam has been calculated at USD 2.3 billion of which 96.5% is associated with flooding. With respect to the agricultural sector, drought risk could have a potential AAL of USD 5.3 billion[1], implying a total AAL of at least USD 8.3 billion.  The indirect losses associated with this AAL could be as high as USD 12.4 billion, equivalent to approximately 4.5 % of the country’s GDP.

While disaster risk financing is acknowledged as a potential tool in both the 2013 law and the national strategy, Vietnam still has an incipient insurance market mainly concentrated in commercial property coverage and life insurance. Awareness of the potential of disaster risk financing to address the financing gaps faced by central and local governments is still relatively weak.

 

Project Description:

Insurance and risk financing has been increasingly recognized as having critical role to play in delivering the SDGs and reducing the impact of climate change and disaster on development in Vietnam. Following the historical floods and storms impacting central Vietnam during September – October 2020, the government is keen to invest resources in identifying practical risk transfer solutions.

To deliver on this vision, UNDP is working with the Government of Vietnam and a number of partners to develop and deploy specific insurance/risk transfer tools and products, which would be relevant to vulnerable communities, with significant investment in long-term market transformation. This work therefore cuts across both supply and demand for insurance, with work in legislation, regulatory and institutional capacity development, matched by investment in advocacy, training and education. UNDP’s five focus areas are as follows: 1) Inclusive Insurance; 2) Sovereign Risk Financing; 3) Natural Capital as a Protective Asset; 4) Insurance and Investment; and 5) Integrating Insurance and Risk Financing into Development.

UNDP is currently discussing with Vietnam’s Insurance Supervisory Authority (ISA) of the Finance Ministry to conduct a diagnostics study, which can then be used to revise the Insurance Business Law of the country.

A number of global insurance companies are working with UNDP to identify opportunities in supporting Government of Vietnam with the development of risk transfer options. Among these insurance companies, AXA Climate, Willis Towers Watson and Guy Carpenter are leading the support role in Vietnam.

This work is being delivered through UNDP’s “Insurance and Risk Finance Facility”, which is supported by BMZ – German Government, and is tied to InsuResilience‘s target of reaching 500 million additional beneficiaries of insurance by 2025. Working together with the Insurance Development Forum (IDF), UNDP intends to deliver a transformative change across both inclusive insurance and sovereign risk finance in Vietnam.

 

Covid-19 Impact and Response:

Government of Vietnam has done an exemplary job in containing the Covid-19 pandemic in the country. Thanks to strict measures enforced throughout the country, community transmission was brought down to zero, allowing local businesses and companies to continue economic activity in the country. Initial lockdowns imposed nation-wide meant that no field trips were allowed, and most of the meetings and trainings were delivered online. Industry partners, from the above-mentioned global companies are not able to visit the country yet, but have been working remotely through UNDP team based in Hanoi.

[1] Agricultural GDP sourced from https://data.worldbank.org/indicator/NV.AGR.TOTL.KD