Greater insurance coverage to mitigate natural disaster risks in Papua New Guinea

Insurance has an important role to play in disaster and climate risk management in Papua New Guinea, helping to ease the fiscal burden of extreme events such as earthquakes and floods. Timely and predictable payouts after such events can be highly beneficial in terms of improving investor security; however, current insurance penetration rates remain low.

Ring of Fire 

Given PNG’s location within the Pacific Ring of Fire – where shifting tectonic plates give rise to volcanic eruptions and earthquakes – its propensity for natural disasters is among the highest in the world. In recent years the country has been hit by numerous disasters. For example, in February 2018 a 7.5-magnitude earthquake struck the Nipa-Kutubu district in the Southern Highlands Province, affecting 544,000 people. Prior to this, in 2015 the country faced the El Niño climate cycle and significant floods, following a tropical cyclone in 2014, a landslide in 2012, and major flooding and a volcanic eruption in 2010. Indeed, in 2017 PNG was ranked 10th-most disaster-prone country globally by the UN University. Developing a long-term disaster risk-management strategy that incorporates insurance is therefore of critical importance.

PNG’s current institutional capacity is designed to respond to, rather than mitigate the risk of, natural disasters. Following the February 2018 earthquake, a state of emergency was declared in the Southern Highlands and surrounding provinces. Amid major disruptions to both water and power supply, the government approved PGK450m ($136.5m) to re-establish essential public services, and a restoration authority was established to manage long-term reconstruction efforts. Additionally, $43m was mobilised by the private sector to assist with earthquake response and recovery.

The earthquake created significant economic disruption at both the national and local levels. Real GDP growth experienced a significant downward adjustment to 0.3% in 2018, compared to projected growth of 3.9%, according to the Department of Treasury. This impact was in part due to significant disruptions in production at the country’s first major liquefied natural gas (LNG) facility, PNG LNG, along with mines operated by domestic firms Ok Tedi and Porgera. Interestingly, the local insurance industry was largely unaffected, due to low insurance penetration among the population, and the fact that large-scale extractive industry facilities and related infrastructure are generally insured offshore. According to one regional insurer, about 75% of the business for local insurers is in Port Moresby, close to 25% is in Lae and the remaining micro-percentages are in other parts of PNG, often in building insurance.

Coordinated Response 

With more than 80% of PNG’s population based in rural areas affected by extreme climate-related hazards, the recent earthquake highlights the country’s vulnerability to natural disasters. As part of an effort to address this challenge, the country’s third five-year medium-term development plan for the period 2018-22 outlines a coordinated approach for the government to mitigate the risk that is associated with natural disasters. This development plan involves the establishment of a reformed legal framework to deal with such events, improved capacity to deal with impact on populations and infrastructure, and the expansion of automated weather stations in strategic locations. However, these plans alone do little to boost insurance penetration.

While there is a pressing need to cover communities in disaster prone areas in PNG, insurers remain reluctant to offer insurance products as the risks are perceived to outweigh the benefits. This means that support from development partners offers the most likely avenue for mitigating risk in these areas for the foreseeable future. Opportunities for such development funding are available – for example, in 2016 the World Bank held the sixth round of the Pacific Catastrophic Risk Assessment and Financing Initiative, which provides insurance support for natural disasters. However, PNG did not directly participate in that round.