Assessments of Brazilian water utilities' perception and potential uptake of index-based insurance schemes to cope with hydroclimatic extremes

Abstract

Risk management is of paramount importance in the water supply sector, as the occurrence of drought and flood events can directly affect water availability and damage water utility infrastructure, leading to water supply interruptions and increased infrastructure maintenance costs. Index-based insurance schemes may reduce the vulnerability of water utilities in the face of such extreme hydrological events. However, there is scarce knowledge and practical adoption of index-based insurance schemes for water utilities in Brazil, despite the new regulatory framework for water security under climate change. To gain a clearer picture of the potential uptake of index-based insurance in the water utility sector in Brazil and foster the development of new schemes, we interviewed experts from 10 selected Brazilian water utilities, responsible for the supply of 30 municipalities in the southeast region of the country. Respondents are involved in strategic decision-making in the respective water utilities. For the interviews, we developed a structured questionnaire containing information on how index-based insurance works, followed by questions regarding how often the utility was hit historically by droughts and floods, their willingness to pay for index-based insurance schemes covering damage from drought and flood, and their perceived importance and likelihood of acquisition. When asked about the importance and likelihood of adopting at least one of the proposed index-based insurance on a scale from 0 (no importance/not likely at all) to 5 (significant/high likelihood of acquiring insurance), interviewees gave an average score of 2.7 (importance) and 2.2 (probability of uptaking). The detailed results from our survey presented here show that the majority of the water utilities are willing to pay for at least one of the presented index-based insurance schemes, as they attribute a relevant degree of importance to them. The majority of them would uptake flood insurance schemes. However, half of the respondents declared they would not be willing to pay anything for drought index-based insurance. The reasons given for no uptake were: (i) utilities were not affected by drought or flood events during the last 10 years, (ii) there is disagreement with the proposed trigger and the type of financial losses covered, and (iii) the availability of other surface and groundwater resources can mitigate supply interruptions from the main source. Overall, our results demonstrate that there is quite some uncertainty regarding the perception and design of new index-based insurance products in the water utilities sector, which emphasizes the need for further research and co-design with utility stakeholders.