Modelling demand for catastrophic flood index-based insurance in Da Nang City, Vietnam: Using Choice Experiments

Insurance for catastrophic disasters, despite being in the interest of policy makers
and private insurers in the context of climate change, has not achieved significant
penetration and suffers low financial performance due to a lack of well-designed
insurance products. Index-based insurance is one measure to bridge that gap and to cope
with weather-related risks, especially in developing countries lacking mechanisms like
risk-sharing and pooling programmes. This paper presents the results from modelling
demand for catastrophic flood index-based insurance for Da Nang City, Vietnam, by
using choice experiments. Da Nang is very vulnerable to climate change-induced
disasters, particularly typhoons and floods. Using a combination of qualitative and
quantitative methods, the results show that households have taken adaptive measures
to minimise the impacts of annual floods, such as moving their a ssets to safer places,
evacuation and building houses with higher foundations, but not for catastrophic floods.
The situation has been exacerbated by rapid urbanisation and water discharge from
upstream hydropower plants. Annual flood damage costs has reached about VN$ 8.2
million (about US$ 400) /household) in which about 50 per cent of total costs is from
damage to houses. The costs for damage caused by extreme floods now reach about
VN$ 20 million/household, in which damage to properties is VN$ 12 million/household.
The results from the choice experiment show that households living in Da Nang have
a high demand for flood index-based insurance. About 87 per cent of total respondents
are willing to pay for index-based insurance, and expect reasonable insurance premiums
to be VN$ 10,000–20,000/household/month and insurance payouts for damages to be
VN$ 10–20 million. Based on the study results, developing and piloting flood index based
insurance for households living in the city are strongly recommended. This will
reduce households’ exposure to flood damage as well as the financial burden for both
government and households in the context of rapid urbanisation and climate change.