Video: How disaster risk financing is building resilience in of Hue City, Vietnam
In an effort to build its resilience to climate change impacts and disasters, the city of Hue in Viet Nam is piloting the implementation of a new ‘Law on Management and Use of State Property’ which mandates the procurement of insurance for public assets of high value and are at high-risk from natural disasters. Implemented through the Disaster Risk Financing for Hue City Technical Assistance (TA) this is part of the Asian Development Bank’s wider Secondary Green Cities Development Project. The TA consists of four main components including mapping and analyzing valuable and at-risk public assets; assessing the feasibility of disaster insurance in Vietnam and Hue city; designing disaster risk financial solutions to offer insurance at effective cost and in wide scope in Hue; delivering capacity building and disseminating knowledge for decision-making officials. This TA is financed through the Urban Climate Change Resilience Trust Fund (UCCRTF).
In this video, Christopher Au, Associate Director at Willis Towers Watson’s Climate and Resilience Hub, and an ADB consultant to the TA, explains how the project team is developing implementational guidance for the new law.
As the old imperial city in Viet Nam, Hue has many historic monuments and public assets that support a sizeable and growing population. It is also highly vulnerable to climate change and its impacts, in particular flood risk. For instance, during the summer of 2020 severe flooding caused damage to many public monuments, as well as critical infrastructure such as roads, bridges, schools and medical facilities.
The repeated damage to high-value public assets puts significant strain on municipal and national government finances. Insurance is one way in which to reduce the overall fiscal risk carried by the state. Insurance pay-outs could enable reconstruction of damaged assets immediately following a disaster, and thus ensure business continuity. This was the main reason why the Government of Viet Nam introduced the ‘Law on Management and Use of State Property’. However, one of the challenges for implementing the law is how to define ‘high-value’ and ‘high risk’ assets and how to ensure that the specific type of insurance cover for those assets is the most efficient for Hue City and for the Ministry of Finance at the National level.
“This is where our project… comes in to provide implementational guidance,” says Dr Christopher Au, adding, “We’ve taken an end-to-end approach, including the identification of all public assets in Hue, then we conducted modelling to understand which of those assets are highly exposed to climate risk. We then conducted an evaluation exercise… to understand which assets are high value.”
Led by Alexander Nash, Urban Development Specialist at ADB’s Southeast Asia Regional Department’s Urban and Water Division and in collaboration with Thomas Kessler, Principal Finance Specialist from the Sustainable Development and Climate Change Department, the Hue Disaster Risk Financing Technical Assistance developed a list of assets that are both high value and high-risk, and which would therefore be eligible for insurance under the new law. The team is now at the stage of solution design, working closely with the Insurance Supervising Authority (ISA) and the Department of Finance of Hue, to understand what type of insurance product would be fully compliant with the new law, and meet the needs of the Hue Provincial People’s Committee (PPC).
The 2020 flooding that hit Hue is being used to provide a benchmark against which they can test the insurance product. The project team is now seeking feedback from the insurance market, both domestic and international insurance companies to better understand how cost-effective this insurance could be.
Hue City Stone Dam in Central Floods 2020. Credit: Le Minh Duc, CC BY-SA 4.0
So how can disaster risk financing help build resilience to climate change? Cities are particularly exposed to climate change impacts, as they have a high concentration of valuable assets and are often located in areas that are exposed to climate change impacts, such as those next to rivers or coasts. As Dr Au explains, both the arrangement and the process of disaster risk finance are valuable tools to increase the resilience of the city.
“The arrangement of finance requires that a city understands and places in context its financing needs, and goes out to seek that amount of contingent capital, such that when an event hits, they have the financing ready to meet that need, ” says Dr Au, adding, “The process of a city understanding which assets are high-value and high-risk, in itself supports improved management of climate risk in cities.”
An important complementary part of the Disaster Risk Financing for Hue City technical assistance is to identify measures that can reduce the climate risk to assets. Resilience building measures can reduce the overall risk to the asset and can therefore make financing cheaper.
Participants in Hue City at the October 2019 kick-off workshop for the ADB Disaster Risk Financing project.
Considerations for public officials
As a form of risk transfer insurance is not particularly cheap and could be best suited to covering risk that is very hard to avoid, or that would otherwise overwhelm public finances. According to Dr Au, “By working through the needs for insurance and financing, identifying the risk layer that you would like to transfer, you are identifying a fiscal vulnerability. A risk which is not transferred or managed, is a risk retained. The government is holding that risk in the short term, but in the long term that risk is carried by citizens, households and businesses.”
Governments should identify a specific type of risk that they want to cover with insurance and use other forms of financing to cover other risks – commonly known as risk layering. For example, if a government saves public money to be used for disaster response and recovery in the form of a national disaster response fund, it should be able to cover most events that affect a city on a regular basis. Insurance is best used to help in exceptional circumstances to protect against a particularly severe event or multiple repeat events that might happen in quick succession that could overwhelm the national savings pot.
The role of technology in disaster risk financing instruments is also key. Parametric insurance for instance is opening up a wider range of product options for more types of risks. In fact, the project team is proposing the use of a parametric insurance product in Hue, which would trigger payments based on the severity of wind speeds experienced during a tropical cyclone event. By streamlining the operational costs, and monitoring costs the product can enable a very fast pay-out in the event of a disaster, helping to quickly provide funds that can be used for disaster recovery.
Hue is one of cities under the Secondary Green Cities Development Project. In addition to this disaster risk financing project, UCCRTF supports Hue City in implementing a community-led projects to buill resilience at the local level.. The city is also a pilot city under the Spatial Data Analysis Explorer (SPADE) platform, a geospatial data repository led by ADB and UCCRTF.