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2015-10-16 | project

Understanding the determinants of adaptive behaviour and developing Disaster Risk Insurance for the Informal Sector

Many of Cape Town’s informal settlements are found in the low-lying flood-prone Cape Flats. These informal settlements are flooded annually during the wet, rainy season – resulting in damage to dwellings and property and causing a myriad of health problems as residents are forced to live in wet damp conditions, surrounded by pools of stagnant water. With the frequency of extreme weather events such as floods projected to increase with climate change coupled with little prospects for relocation out of the Cape Flats, this situation is likely to worsen.

There are a number of individual and community-wide adaptation strategies that residents and communities can adopt in a bid to reduce the risk of flooding. While these individual and community-wide adaptation strategies would go some way to reducing the risk of flooding, after a number of meetings with field officers from the City of Cape Town, it is evident that these strategies are not implemented exhaustively. (Note: this is despite educational campaigns by the City of Cape Town).

In this context, the first objective of this study is to determine why some people adapt while others do not. In other words, this study will explore the determinants of adaptive behaviour in this flood mitigation context. Risk preferences are likely to play an important role in individuals’ flood mitigation/adaptive strategies and in this context we will also measure individual risk preferences and relate these to individuals’ flood mitigation strategies.  

Developing an understanding of adaptation decisions is extremely important. From discussions with the City of Cape Town as well as a preliminary analysis of survey data, it is apparent that individuals are familiar with at least some (and in some cases all) of the adptation strategies advocated by the City. Despite this fact, very few of these strategies are implemented. Once again, from meetings with City of Cape Town officials, it is apparent that there is very little benefit from allowing your home to be flooded. Specifically, in the case of a flood event, the City of Cape Town only provides a plastic sheet and a packet of nails. In cases where officials feel that the resident’s roof has been poorely maintained, they provide nothing. Certain field officers are extremely strict on this issue in order to incentivise dwelling maintenance before the rainy season. 

As such, a big component of this study is determining why some people are adapting while others are not. This will be determined through focus groups, one-on-on interviews, site visits and surveys with representative samples. A proper understanding of adaptation strategies is necessary in order to identify ways to incentivise people to take action at the start of the rainy season.

Purchasing and insurance product would no doubt be an important component of any individual’s adaptive strategy. However, lack of access to micro insurance problems is a significant constraint for poor communities in South Africa. Despite the high frequency of flooding in informal settlements during winter, there are very few insurance products available with which informal households (living in informal dwellings) can insure themselves against the onset of disaster. Discussions with one of the leading insurance companies has indicated that insurers view the informal sector as a market with a lot of potential, however more research is needed in this area as very little is known about this potential market.

In this context, the second objective of this project is to work in conjunction with informal settlement communities, the Informal Settlement Network, the City of Cape Town and one of the leading insurance companies to design a disaster risk index insurance product (which would cover the advent of floods or other disasters such as fires).  

The flood risk index insurance product will allow poor households in the informal sector to overcome constraints to adaptation –by insuring against the risk of flooding. In addition, such a product will help insurance companies overcome issues of moral hazard and adverse selection by linking the payout with a verifiable event – such as water rising above a certain level.

While very few household insurance type products are available in the informal sector, of those that are available, from our current work in this area, it seems that uptake is extremely low. This is not a signal of lack of interest in insurance or evidence that insurance is not an appropriate tool for mitigating risk in informa sectors. From our current work it is evident that people in the informal sector do not buy household insurance because (a) there is widespread distrust of insurance institutions, (b) they assume the product will not cover people living in informal settlements and (c) their income is variable.

From the perspective of the insurance companies, providing household insurance in flood prone areas is difficult – given that around 90% of dwellings are affected in a single flood event. As such, the risk of payout is not spread unevenly across households. In this context insurance companies are concerned that premiums will not sufficiently cover payouts in the advent of a flood. Once again, in our opinion, this does not indicate that insurance is an inappropriate tool, but rather, that non-conventional insurance products are needed. In this context we will consider a group-savings scheme administered by community members but underwritten by a financial institution.

To sum up, a large part of this project will be devoted to understanding the needs of both informal communities and insurance companies and attempting to bridge the two..

The third objective of this study, in the context of the first objective of understanding the determinants of adaptive behaviour, is to understand the the determinants of insurance uptake. After ongoing dialogue with informal settlement communities, we would like to hold a pilot workshop where we offer the insurance product to a sample of informal sector residents. This will enable us to determine the characteristics (for example risk aversion) that make people more likely to adopt insurance.

The fourth objective of this study relates to collective of community-wide adaptive behaviour. Specifically, we will consider the extent to which social capital serves as a coping mechanism in times of disaster and the extent to which a community can act together to mitigate the risk of floods (for example by monitoring the throwing of refuse into stormwater drains).

The project will focus on informal settlements situated on the Cape Flats (for example Khayelitsha and Philippi). In order to achieve the project objectives we will: (i) conduct interviews with City of Cape Town officials (we have already conducted a number of interviews) and community leaders, (ii) run focus groups with residents of flood prone areas, (iii) conduct interviews with one of the leading insurance companies, and (iv), run an experimental workshop where we elicit risk preferences and collect a host of attitudional and demographic information.

Outcomes of the study include a number of academic articles and policy briefs (as detailed below). However, another outcome would be the design of an insurance product that could be used by the informal sector.