Climate Risk Management and Risk Transfer in Sri Lanka’s Fisheries Sector

Introduction to the Fisheries Sector

The development of the fisheries sector serves to address the global, national, and regional need for food security for human consumption and nutrition, support trade and livelihoods, and provide employment. Fish and fisheries products are recognised as one of the healthiest foods on the planet as well as arguably being less impactful on the natural environment compared to other sources of nutrition.

Driven by an increase in marine capture fisheries, the total global capture fisheries production reached 96.4 million tonnes in 2018, increasing by 5.4 percent compared to the average of the three preceding years. Similarly, in 2018, approximately 59.51 million people were engaged in the primary sector of fisheries and aquaculture, with the highest number of workers (85 percent of the total global fisheries and aquaculture workers) being in Asia. Therefore, efficient management of risks in the fisheries sector is essential to secure livelihoods and ensure food and nutritional security.

Importance of Risk Transfer in the Fisheries Sector

Small-scale fishers face major risks and endure severe consequences during their fishing operations. Risks include fire on board of vessels, capsizing, grounding, collision and sinking of vessels, injury or death of crews, damage to ecosystems, storms, hurricanes, typhoons, and tsunamis. Consequences that follow on from these risks include damage or loss of vessels and gear, loss of life, disability, loss of income and employment, and destruction of fish habitats such as reefs.

Climate change impacts and extreme weather events have increased both in frequency and severity. Insurance can be an important tool for adaptation to climate change in the fisheries sector. It can work alongside other risk management mechanisms such as the implementation of early warning systems for fishermen or risk reduction through safer equipment and fishing practices. This is possible if the insurance is also designed and promoted to reward responsible and precautionary practices.

Risk Transfer Mechanisms and the Fisheries Sector

Successful fisheries management requires economic and biological sustainability. Risk transfer mechanisms such as insurance can play a crucial role to deal with uncertainty, losses, and damages in the fisheries sector as a business-oriented component in transferring economic and environmental vulnerability away from individual fishermen.. Risk is transferred from one party to another in return for an insurance premium payment for providing the risk bearing services. Insurance is a financial arrangement that redistributes the costs of unexpected losses across a larger pool of individuals facing losses or transfers it to someone who can bear it better.

Risk management through risk transfer via insurance has not been commonly used in the fisheries sector, especially in small-scale fisheries. Although production and market insurance for fisheries exist, most insurance programmes have either been policies for personal health and safety for individuals and the protection of assets for fisheries in developed countries. Asset insurance is often provided by private companies which offer protection for assets like hulls.

In addition to providing financial compensation for loss and damage incurred by fishermen due to disaster events, insurance can also offer protection against natural hazards, coverage for third-party liability, and increase their access to institutional credit and investment. Insurance can also help fishermen gain better access to financial services by reducing the risk for creditors and investors involved in the small-scale fisheries sector. This, in turn, will help to enhance the social and economic stability of fishing communities and increase the prospect of fishermen being able to secure incomes.

The prevalence of insurance products for fisheries in developing countries is not as high. A global review conducted by the Food and Agriculture Organisation of the United Nations (FAO) on the current state of world capture fisheries insurance highlighted reasons for the limited interest of large composite international insurers to provide insurance for small-scale fisheries, including high costs involved in providing insurance for remote fishing villages, relatively small premiums that could be collected from individual fishermen, and a generally low level of education among small-scale fishermen.

In many cases, small-scale fishermen are not aware of existing insurance services nor do they see the value and need for insurance, except for life and health insurance. Moreover, the general low income level of small-scale fishermen means that insurance takes lesser priority compared to the use of income to sustain their livelihoods and provide food for their families. However, the review also found that there was a considerable demand for insurance in countries with a high level of organisation amongst small-scale fishermen, for example through cooperatives and associations. In some cases such as China, India, and Chile, the review pointed to evidence of insurance being supplied to fishermen in countries with organised small-scale producers where there is considerably high demand for insurance.

The Fisheries Sector in Sri Lanka

In Sri Lanka, the fisheries sector plays an important role for economic and social development, providing direct and indirect employment opportunities for approximately 583,000 people and providing livelihoods for over 2.7 million people in coastal communities. The fisheries sector in Sri Lanka is comprised of inland, coastal, and offshore/deep-sea sub sectors. It is responsible for providing its citizens with over 60% of their animal protein requirement. The sector’s share of Sri Lanka’s Gross Domestic Product (GDP) was 1.2% in 2018.

In 2017, a series of events in the national and international fisheries landscape resulted in a positive outlook for Sri Lanka’s fisheries sector in the long-term. One such event was the European Union (EU) granting Sri Lanka better access to the EU for its exports through the EU’s Generalised Scheme of Preferences Plus (GSP+), thereby boosting the economy and reviving the fishing industry in the Eastern and Northern regions of Sri Lanka. Hence, the fisheries sector is expected to continue to attract more labour such as unemployed or displaced persons or those whose traditional livelihoods have been impacted by climate change.

The increase in Sri Lanka’s fisheries labour force means that a greater number of livelihoods will be affected by the increase in frequency and severity of natural hazards and rapid and slow onset events. This includes floods, rising sea levels, and ocean acidification as a direct result of climate change. Consequently, there is a growing need for climate and disaster risk management such as risk transfer mechanisms to reduce and adapt to the impacts of climate change.

Risk Transfer in Sri Lanka’s Fisheries Sector

Fisheries is often classified as part of Sri Lanka’s agriculture or food security sector. Although there are some risk transfer mechanisms including disaster risk transfer instruments in this sector, they are limited, and those that are currently in place have been identified to have some gaps and challenges.

For the first time in 2016, the government used insurance, reinsurance, and capital market solutions as tools to finance disaster response costs. The National Natural Disaster Insurance Scheme (NNDIS) was set up in accordance with a decision made for the 2016 budget for uninsured persons. However, the budgetary allocation for the purchase of insurance was dependent on the funding available, not on an assessment of disaster risk.

The NNDIS is essentially free insurance protection provided by the government which can be enjoyed by all citizens regardless of their income level. Its coverage encompasses the lives and properties of all uninsured households and small businesses up to 2.5 million Sri Lankan Rupees for damage caused by natural hazards like storms, floods, landslides, earthquakes, and tropical cyclones. However, it does not include droughts.

This scheme covers damage to properties and contents of uninsured homes and small business establishments up to 2.5 million Rupees per disaster event. Small business establishments are any business with an annual turnover which does not exceed 10 million Rupees. Furthermore, it provides cover up to 100,000 Rupees per person for all victims of disasters caused by natural hazards. Accidental deaths of fishers registered under the Department of Fisheries are covered up to one million Rupees.

The Agricultural and Agrarian Insurance Board (AAIB), which is the main agricultural insurer in Sri Lanka, was founded under the Agricultural and Agrarian Insurance Act №20 of 1999. The AAIB was established with two objectives under the Act, one of which was “to launch an insurance scheme and a social security benefit scheme covering the farming and the fisheries sectors and providing old age benefits through principal activities such as granting pensions and social security benefits for the farmers and the fishermen.”

According to the 2019 Country Diagnostic Assessment prepared by the Asian Development Bank (ADB), the AAIB has a network of 26 district offices and 550 individual service centres which cater to approximately 15,000 villages. The importance of the AAIB extends to its role as a pension provider to farmers and fishermen.

The pension scheme covers approximately 68,000 fishermen and 965,000 farmers. In relation to fishers in 2014, 0.42 billion Sri Lankan Rupees were paid out as pension to approximately 3,000 fishers, with families of the deceased also receiving a ‘gratuity’.

In Sri Lanka, there is a wide range of insurance products made available to individuals and companies by the insurance sector. Some of these traditional insurance products in relation to marine assets include insurance for fishing boats, marine hulls and machinery, and imports and exports. According to the ADB, cover for natural perils can be obtained as an add-on to basic fire and motor coverages. The ADB also points to the fact that almost all fire policies and most motor policies are extended to cover natural perils.

A multi-peril indemnity insurance product is offered by Ceylinco General Insurance Company. In addition to providing coverage for farmers’ crop, livestock insurance is also offered, and fishers can avail of a personal accident policy that covers being lost at sea.

Gaps, Needs and Recommendations

In the country diagnostics assessment, ADB suggests that farmers’ and fishers’ pension scheme liabilities need to be valued at the current date, recognised in the financial statements, and provided for in the national budget with their various parameters.

Another suggestion was to separate AAIB’s activities relating to agricultural insurance from its role as farmers’ and fishers’ pension provider, since the pension operations impede the capital assessment of their agricultural insurance operations.

Furthermore, gaps and needs for credibility in the insurance sector and the capital markets in Sri Lanka include:

• Low awareness and understanding of the concept of insurance
• The need for an updated assessment of regulation and supervision by international bodies
• The need for a level playing field in the insurance and reinsurance sectors
• The need for better risk management by the National Insurance Trust Fund to ensure solvency in the insurance sector and to protect the public sector and uninsured population
• The need to supervise AAIB’s insurance activities by the insurance regulator
• The challenge of AAIB’s conflicting roles as an agriculture insurance provider and a provider of pensions to farmers and fishers

The Way Forward

In order to successfully introduce fisheries insurance services, there are many key stakeholders in small-scale fisheries programmes who need to work together. Key stakeholders include private and public sector insurance companies, insurance brokers and underwriters, risk assessors, marine surveyors, reinsurance companies, regulators, fishermen’s associations, non-governmental organisations, and government authorities.

Some of the climate smart and precautionary practices that can be promoted to reduce the risk to the fisheries sector include putting into place flexible and transparent disaster management plans for the fisheries sector, ensuring that fisheries infrastructure is located in safe and suitable places, ensuring safety at sea training for fishing vessel operators, and promoting proper use of fishing vessels, gear, and equipment to ensure that they are properly serviced and maintained.

The establishment of risk funds for the case of natural disasters for insurance providers via a proposed legal arrangement with the government. The insurance providers participating in this scheme would be eligible for pay-outs from a government-run risk fund. Once a natural disaster event occurs, there will be an assessment conducted to determine the magnitude of financial damage incurred by the fisheries sector.

As suggested by the review conducted by FAO and other sources, there are a number of insurance-based solutions that could fill the gap of risk transfer mechanisms in the fisheries sector: traditional insurance, parametric insurance, the partner-agent model, community/cooperative based insurance, and making insurance mandatory for vessel registration.

Traditional insurance is effective where small-scale fishing communities operate close to insurance providers such as in small island countries like Sri Lanka. Although premium costs may be higher in general, benefits include:

• Easier access to reinsurance and claim settlements
• More control and flexibility over the terms of insurance policies
• Better communication between insurers and fishermen due to close proximity and existing social networks

Parametric risk insurance (weather index-based insurance) is a type of insurance where a predetermined index (e.g. level of rainfall) provides the basis for pay-outs for losses resulting from weather and disaster events. Claims are paid out faster than traditional insurance since the amount payable is determined before an individual purchases the insurance policy by trying to mirror the actual damage on the ground to eliminate the need to assess the actual damage after the event. However, some disadvantages include:

• Inaccurate reflection of the actual loss and damage after an event on the pay-outs based on the predetermined index, resulting in over or under compensation
• Coverage is provided in the case of natural disasters and not on a day-to-day basis meaning that the majority of risks faced by small-scale fisheries are not covered
• The lack of incentives for fisheries to practice sustainable fishing and market operations to better prepare for natural disasters since compensation does not rely on actual loss or damage suffered

In the partner-agent model, agents like NGOs facilitate the distribution of insurance service along their network of representations in fishing villages. Although this model relies heavily on the capacity of the agent and their link with the local small-scale fisheries sector, risk management can improve and gaps in information can reduce if these networks are well-established and functioning smoothly.

Community/cooperative based insurance are more suitable in the context of small-scale fishing communities if information about members of the fishing communities’ programmes and activities are easily accessible. This lowers premium and transaction costs, and the level of social control under this type of insurance is high. However, it faces the same downfall as the partner-agent model, where the fishing community organisation or association needs to be well organised and have the capacity to provide insurance services.

Mandatory insurance for vessel registration can be effective If insurance is affordable and meets the needs of small-scale fisheries. It would help mitigate and spread out risks faced by fisheries sector faces and ensure more affordable premiums for as a result of the large pool of insured fishermen.

To improve risk transfer mechanisms in Sri Lanka, more awareness programmes are needed to increase the understanding and awareness of insurance of stakeholders in the fisheries sector. The AAIB’s role as a provider of agriculture insurance and pensions for farmers and fishers should be separated. Furthermore, the aforementioned insurance mechanisms should also be encouraged to ensure that there are a variety of options of risk transfer mechanisms available for fishermen in Sri Lanka.

‍This article was first published on slycantrust.org

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