Insurance for rural water supplies – a good idea?

Email requests sometimes trigger the most interesting thoughts and ideas, particularly when there is no straightforward answer. Today, I received a question on whether at IRC we know of any experience with insurances for rural water supply. This question has reached us several times in the past year. Whereas my first answer to the question was “No”, now a clearer “no, but… maybe” answer starts to emerge. Encouraged by my colleague Catarina Fonseca, I decided to post this emerging answer in a blog.  

The background to the question is clear. Water tariffs, where used, are usually set at a level that should cover operational and minor maintenance costs. However, they rarely are sufficient to cover the depreciation or full replacement costs of assets. And even where communities do save for (part of) the replacement costs, these saving are often used as other urgent needs come up. As a result, communities may be able to keep their systems running for a couple of years, but may eventually bump into problems when for example the pump fails or the intake is washed away. They may then not have the funds to replace these. (Local) government may step in to cover some of these costs on an ad hoc basis. In that case, the community is lucky. Otherwise they may need to wait for the next project to come by and build a new system. At IRC, we believe that supporting asset renewal and rehabilitation by financing capital maintenance is an important part of the puzzle of ensuring sustainable water supplies – but a piece of the puzzle for for which there is still big need to come with innovative approaches.

The possibility of setting up insurances for capital maintenance is coming up more and more in discussions on this puzzle. Still, to date, to our knowledge insurance schemes have not been used in rural water supply, with exception of isolated initiatives in the north of Ghana with pooled funding for capital maintenance were initiated by an Association of Water and Sanitation Development Boards (AWSDB). This is not surprising, all theoretical considerations point against the sense in insurance for capital maintenance.

First of all, there is a moral hazard. If a community would insure, let’s say, its pump, it will have little incentive to maintain it, as the insurance would pay if it fails. And even if community A would do due maintenance, community B with a similar insurance might not do so. An insurer would need to raise the premiums to cover eventual costs. And community A would pay more for the negligence of community B. Secondly, an insurance is meant to cover for events that have a low likelihood of happening, but that would have a potentially big impact and would be beyond one’s means to pay. The costs of insuring something against an event that is likely to happen – even if you don’t know when – is higher than just saving for it. Compare it with a car or a house insurance. You can insure you car against damage in an accident, an event that is not likely or unsure that it will happen, but that would represent a big financial loss. You cannot insure your car against break-downs due to wear and tear of parts as those are bound to happen sooner or later, such as the replacement of a pair of breaks. It is not cheap to replace the breaks on your car, but neither unaffordable. Likewise, you can insure your house against the unlikely event of a fire, or the collapsing of your roof during a storm, but not against the need to replace the roof because the supporting beams are too old and have started to rot away.

These same principles apply to a water supply system. In theory it would make most (financial) sense to save for replacement of parts that will anyway break down sooner or later. You would only take an insurance for unforeseen events that are not likely to happen. So you would save for the replacement of a broken down pump, but take an insurance for, let’s say, the replacement of an intake structure, in case it gets washed away by a flash flood. If you would insure a pump, probably the premium you pay is relatively high, as the insurer knows this will happen sooner or later.

In spite of these theoretical considerations, it might still make sense to experiment with insurances, exactly because of the reasons mentioned in the introduction: saving simply doesn’t happen. By paying a premium, basically one is saving in an obligatory manner,  via the insurance company, but probably at a relatively high cost of capital. In addition, there may be hybrids of saving and insuring. For example, by only insuring against untimely break-down of critical parts like a pump. So you wouldn’t insure a pump per sé, but you would insure against a break-down before the theoretical expected life-time of that part. So, if a pump has an expected life-time of 10 years, you could insure it for breaking down before it has 8 years of functioning. At the same time, the community would still need to save for the eventual replacement after ten years. Such a hybrid, however, doesn’t the issue of moral hazard and it would need proper regulation and monitoring – issues typically lacking in many rural settings.

But, in the absence of many other alternative approaches to funding capital maintenance – as also described in this WASHCost Working Paper, it is at least a mechanism to further explore, as it may also trigger thinking on other financial services and products to cover this weakest link in the service delivery life-cycle. And as one request, trigger another: may we request our readers to share any experiences or ideas on insurances for capital maintenance, or any other financial products and services to that effect.

Thank you very much,

Stef Smits



3 comments on “Insurance for rural water supplies – a good idea?

  1. Very helpful — thank you! I wonder how the distinction between an inevitable event (against which, you save) and the disaster (against which, you might insure) would apply to the tropical storm in Central America? A hybrid of natural disaster that is fairly common… Savings couldn’t accumulate fast enough and premiums couldn’t possibly be affordable. Is the only solution an NGO solution?

  2. Dear Nina,
    That is an interesting question. I think an insurer would differentiate between damage to a piece of infrastructure caused by 1) poor maintenance, 2) natural causes and 3) premature defect before the expected life-time. It is clear that they would not insure against the first type of damages. The third type of damage could be insured, but may be tricky to assess. the second is actually what i think could be insured. I don’t think an insurer would see damage by a storm an an inevitable event. They happen a lot but you never know when and where. So, it should be insurable. However, they would probably put much stricter criteria on the infrastructure to be developed. So, they may want to insure only piped that are further than X meters away from the riverbed; or only intake structures that comply certain robustness and quality criteria. I see in Honduras so many water systems, where the pipes just follow the river course – of course because that is the cheapest and easiest solution. But an insurer would see a risk and vulnerability there, so they may demand the pipes to be put a bit further away from the river bed (terrain allowing) becore they can insure it. So, i dont expect that there is a hybrid there between saving and insuring, but rather an implication that the costs of the initial ifnrastructure development go up to make more robust systems.


  3. Insurance for rural water supply has been piloted through the World Bank Nepal Rural Water Supply and Sanitation Project (Phase 2) in the last couple of years. The Fund Development Board, which is the implementing agency for the project, arranged for 30 CBOs managing rural water supply schemes to take out insurance (with a local insurance company) against natural disasters. The insurance premiums were less than USD 5 per family per year, so the CBOs and water users felt they were affordable, and efforts are now being made to scale up this approach. However, despite natural disasters (floods and landslides in particular) being common problems for rural water supply systems in Nepal, no claims have yet been made … so we are still not sure how effective this approach will be in financing unexpected repair costs for resource-poor communities. The theory is good (spreading the risk and costs across a larger population) but it remains uncertain how reliable the insurance sector will be in paying the claims!

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