Insurance protection for climate-resilient progress

Patrick Lenain

Vietnam is highly exposed to climate change. Typhoons, heavy rain precipitation, coastal flooding, saltwater intrusion, heatwaves and droughts are increasingly frequent and intense.

Communities and businesses are facing mounting economic losses when these extreme weather events occur. Farmers are particularly exposed because much of agriculture is concentrated in low-lying deltas, where changing weather threatens rice yields, aquaculture and export crops.

In 2024, Typhoon Yagi alone resulted in $3.4 billion in economic losses, while the succession of 21 storms in 2025 caused damage approaching $4 billion.

Similar trends are underway around the world: more frequent and intense typhoons in Southeast Asia, devastating wildfires in the United States and Australia, and sudden floods in Europe. Climate scientists and weather modellers predict that the occurrence of these disasters will increase further.

Ambitious policies to reduce global carbon emissions are essential to limit the effects of climate change, but their impact unfolds over decades. Adaptation measures, such as seawall construction, mangrove restoration and urban greening, also require time, planning and capital.

In the meantime, insurance can provide immediate financial buffers to mitigate the impacts of extreme weather. By pooling premiums and spreading risk across policyholders, insurers can compensate those who suffer losses and face reconstruction costs after a disaster.

Yet the rapid increase in climate-related payouts is straining the industry. According to Aon, insured losses from global natural disasters in 2025 were 27 per cent above the long-term average since 2000.

In addition, climate-related catastrophes generate highly correlated losses, for example when a single typhoon triggers widespread flooding, making risk diversification difficult.

Insurers respond by raising premiums, narrowing coverage or withdrawing from high-risk areas. Each firm must protect its solvency, but these adjustments make coverage increasingly expensive, or unavailable. As insurance supply contracts, households and businesses are left directly exposed to potentially devastating financial losses.

In Vietnam, limited insurer appetite for highly exposed risks is compounded by weak demand from property owners, many of whom view coverage as costly or unnecessary. The result is a large protection gap, with a significant share of residential and small commercial properties left uninsured against natural disasters.

Possible remedies

There is also scant insurance protection in agriculture: only a few per cent of rice cultivation areas are covered. For example, after Typhoon Yagi, only about 10 per cent of affected borrowers at major agricultural banks had any form of cover. Despite government subsidies covering up to 90 per cent of premiums for poor households, only a few thousand individual farmers nationwide participate in insurance programmes. When a disaster strikes, the damage ends up being covered by the farmers themselves and government aid.

Such large protection gaps in property and agriculture are detrimental. For low-income citizens, insurance can help families not fall into protracted poverty after a natural disaster. For the growing Vietnamese middle class, holding an insurance policy would protect their income, wellbeing, and financial future in the event of a disaster.

The first potential remedy is parametric insurance. Households and firms often hesitate to obtain insurance because they fear lengthy delays and uncertain payouts after an event. This is a critical bottleneck in Vietnam’s disaster-prone agricultural regions.

Parametric insurance addresses this concern by triggering automatic payouts based on objective data, such as rainfall levels or wind speeds reaching a specific threshold. This provides immediate liquidity, allowing businesses and farmers to recover before a temporary loss becomes permanent bankruptcy.

India has been successful with a restructured weather-based crop insurance scheme, which utilises a network of weather stations to trigger payouts. In Vietnam, a pilot program for coffee farmers in the Central Highlands recently delivered its first payouts using similar satellite-based triggers.

Secondly is the mandatory public insurance. When voluntary uptake is low due to a lack of awareness, governments can intervene by requiring mandatory participation in high-risk sectors. By pooling sizeable parts of the population or industry, the law of large numbers drives down premiums and ensures that the state is not the sole bearer of reconstruction costs. Turkey established the Catastrophe Insurance Pool following the 1999 Marmara earthquake. It made earthquake insurance mandatory for all residential dwellings.

In Europe, government-sponsored schemes provide a permanent floor of protection against intensifying climate risks. France’s CatNat system, established in 1982, is built on national solidarity; it mandates a “natural disaster surcharge” on every property policy which covers large-scale risks like floods and droughts.

Thirdly is the micro insurance. The lack of insurance protection can happen because people cannot afford to pay the premium. Micro-insurance offers policies with low premiums and simplified terms, specifically designed for low-income households and small businesses.

These products are often combined with other services, such as mobile phone plans or micro-loans, making them accessible to the unbanked or those in remote areas.

The Philippines is widely considered a global leader in micro-insurance, with 50 million people covered through non-traditional entities (like pawnshops and cooperatives) and a strong regulatory framework.

This has provided a vital lifeline, demonstrating how low-cost, high-volume policies can provide an immediate buffer against catastrophic loss. The success of the Filipino model lies in its speed; organisations like the micro-parametric CARD Mutual Benefit Association have settled 97 per cent of claims within 10 days of a disaster.

After the 2025 typhoon season, payouts for small business owners were delivered in as little as three days, providing the critical seed capital needed to repair market stalls or restock inventory before families were forced into predatory debt or permanent displacement.

Layered approaches

These schemes do not have to work alone: they can be combined in layered systems. In the Philippines, state-owned Philippine Crop Insurance Corporation is a subsidised agricultural insurance supported by the government. It gets its attractiveness by partnering with private micro-insurers.

By using a co-insurance model, the state benefits from the micro insurance widespread distribution networks and digital payout systems. This hybrid approach has pioneered parametric micro-insurance for small-scale fishers and farmers, delivering fixed cash payouts of up to $100 within days of a storm trigger.

When people fear that their local insurer might go bankrupt in case of a large disaster, they will not subscribe a policy. Reinsurance addresses these concerns. It allows local insurers to transfer their most volatile risks, such as a nationwide crop failure, to global markets with deep capital reserves.

By exporting this risk to international giants, local firms protect their own balance sheets. In Vietnam, the amendments to the Law on Insurance Business approved by the National Assembly introduces a risk-based capital regime in 2026. This will make reinsurance a vital tool for local companies to optimise their capital efficiency and maintain solvency without tying up massive amounts of idle cash.

In Thailand, the 2011 floods caused over $45 billion in economic damage, with insured losses reaching $15 billion. The Thai industrial sector was extensively insured by local insurers that were, in turn, 90 per cent reinsured internationally. The global market bore therefore nearly the entire insured cost.

This payout was vital for the recovery of global electronics and automotive supply chains, though it subsequently led to a tightening of the reinsurance market in Southeast Asia and surges in reinsurance premiums.

In Vietnam, the insured losses from Typhoon Yagi heavily impacted local reinsurers like Hanoi. However, because these local firms use risk transfer arrangements with global partners, a significant portion of the ultimate payout was funded by international capital, preventing a liquidity crisis within the local market.

Closing Vietnam’s insurance protection gap is not just a technical or financial fix. Wider coverage matters because insurance is a foundation for economic resilience and inclusive growth, not merely a payout mechanism. The experience of other countries also facing natural disasters shows that deeper insurance penetration can support financial security, labour force participation and long-term investment.

Wider protection reduces households’ vulnerability to shocks, strengthens business confidence, and frees up public resources for development priorities. In Vietnam, expanding insurance is therefore a key milestone on its path to shared prosperity and sustainable middle-income status, not an optional add-on.