Closing Brazil's Climate Insurance Gap: Professor Salanié's Plan for Municipal-Level Protection

Professor Bernard Salanié, the Sami Mnaymneh Professor of Economics at Columbia University, brings nearly two decades of experience as a government economist to his current research, which blends theoretical insights with applied microeconomics. Since joining Columbia in 2005, Professor Salanié has focused on using data-driven approaches to inform policy solutions. His latest project, funded by the second-round award from Climate Hub Rio, aims to develop a municipal-level flood insurance system in Brazil. This initiative seeks to protect vulnerable communities from climate-related disasters while encouraging preventative measures at the local level.

Read the full interview below to gain deeper insights into Professor Salanié's innovative approach and potential impact.

Question: Can you provide an overview of your research project on municipal-level flood insurance and its main objectives?

Answer: Our initial objective was to propose an insurance system that would both cover households against floods and mudslides and incentivize measures to reduce these risks. Over the past few months, we have realized that similar issues arise for all weather and climate risks; we also received much encouragement from contacts in the local government and the insurance sector. This led us to broaden our focus. We now aim to help construct a viable proposal that would encompass all of these risks.

Q: How do you think municipal-level flood insurance differs from other levels, such as state or national insurance programs?

A: If Brazil is to cope with climate risks, it is very important that it learn how to reduce their magnitude---otherwise the costs of disasters will be ruinous. Since mitigating measures are also costly, decision-makers must be given the appropriate incentives to undertake them; that is where insurance pricing comes into play. This cannot be done at the household level in Brazil, as the more exposed households are too poor to afford the expense; on the other hand, states and the federal government may not have enough information to act appropriately. We think that municipalities are at about the right level. When a municipality takes measures to mitigate climate risks, its residents would be given more favorable insurance terms.

Q: What motivated you to focus on municipal-level flood insurance in Brazil initially?

A: On my second visit to Rio in 2015 I met the woman who became my wife. Since then I have become a frequent visitor (and a clumsy lusophone). I was shocked by the impact of weather- and climate-related disasters on the lives of especially poorer Brazilians. The tragic 2022 Petropolis event in particular was a call to action for me.

Q: How would you describe the current insurance landscape in Brazil regarding climate change issues, and what gaps or challenges does your project aim to address?

A: The most striking fact about insurance against climate risk in Brazil is that there is so little of it… to take an example, we estimate that fewer than 1 percent of residential units have any kind of flood insurance coverage. That leaves the other 99 percent dependent on local or federal government help. It is a gap with the dimensions of a chasm.

Q: How do you see the impacts of recent extreme events, such as the one in Rio Grande do Sul in May, on the insurance market, and how do you foresee the future of flood insurance evolving in Brazil in light of increasing climate change impacts?

A: Clearly, the floods have focused minds on this issue. Since private insurance coverage was so low, the main impact on the insurance market will be an increase in insurance premia, and a reduced access to reinsurance. It should make it even clearer that private insurance can only be a partial contributor to a solution. A more positive effect is that decision-makers will be acting more urgently on mitigating the risks.

Q: Are there any lessons or insights from your project in Brazil that could apply to other regions facing similar climate challenges? 

A: Definitely. Many middle- or low-income countries are exposed to climate change and are not well-prepared to cope with it. I expect them to face similar difficulties that can be approached within the same framework.

Q: How do international examples of flood insurance systems compare to the Brazilian context, and what lessons can Brazil learn from these examples?

A: There are very different models around the world. Some rely heavily on government regulation intervention (as in France, and also in the US), some more on the private sector (as in Germany or the UK). Closer to Brazil, many Caribbean and Central American countries participate in a mutual insurance system that benefits from the financial support of multilateral institutions and rich countries.

Q: Although this is a topic that directly affects the highest levels of the financial market, do you believe that civil society can influence this issue? If so, how?

A: On July 31 we held a roundtable discussion of these issues, co-organized by the Global Center and the Fundação Getúlio Vargas. I concluded my intervention with the phrase: “It takes a village”. To attack a problem of this magnitude requires a many-pronged approach, and civil society must pressure governments to act. We aim to use newspapers and other media to spread the message broadly.

Q: What partnerships or collaborations have been crucial to the success of your project?

A: It is too early to speak of success; I have been very pleased with, and grateful for, the warm reception of our project. Among many, I would single out our friends at the Climate Policy Initiative in Rio, and of course at the Fundação Getulio Vargas, which hosted me.

Q: In what ways did the Rio Global Center and Climate Hub Rio contribute to the success of your project and the positive outcomes of your visit to Brazil?

A: We benefited from a Climate Hub Rio grant; even more importantly, the staff of the Global Center convened a meeting at Columbia during which I established my first contacts with climate scientists and planning officials in Rio. This was extremely useful as the basis for durable partnerships. I have found the Global Center staff very supportive at every step.

Q: Can you share some highlights of your overall experience in Brazil? Any particularly memorable moments?

A: I guess I don’t have to tell anyone what a wonderful city Rio is… I try to find time to discover other parts of Brazil on every trip. Foz de Iguaçu was stupendous, I loved Paraíba; most of all I was amazed by the beautiful historical towns of Minas Gerais, with the contrast between their gold-filled churches and the mines where slaves toiled to generate that wealth.

Q: Were there any unexpected findings or surprises that emerged during your research in Brazil? 

A: Given the size of the informal economy in Brazil, I expected to find that the great majority of households had little insurance coverage against climate risks. Still, after looking at the available data and speaking to Brazilian insurers, I was shocked by how few households were covered, and very surprised to learn that firms were also massively underinsured.

Q: What advice would you give to other researchers interested in studying flood insurance or conducting fieldwork abroad?

A: Start by making contacts and speaking to varied interlocutors: social scientists, climate scientists, local government, the private sector… I learned much more in a short time than I would have by sitting in my chair.

Q: Do you have any book, podcast, newsletter, or documentary recommendations to share? It could be related to your research topic or something entirely different!

A: Liran Einav and Any Finkelstein have written a short book on insurance economics for the general public: “Risky Business”. It is both entertaining and didactic and I warmly recommend it. For my part, I learned a lot about climate change in Brazil from “Nem Negacionismo ném Apocalypse” by Gesner Oliveira and Artur Villela Ferreira. On climate science, I heartily recommend Andrew Dessler’s website and books.