Tuesday Dec 16, 2025
Tuesday Dec 16, 2025
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Spirited tourists engaged in relief work voluntarily in some of the Ditwah cyclone impacted areas
Multifaceted and uneven climate vulnerabilities in Sri Lanka tourism
Protecting the tourism sector from climate disasters should be seen as a necessary investment, not an optional expense. It is a basic responsibility to investors and stakeholders. Waiting until after disasters for actions is both inefficient and too expensive to continue. Reacting only after disasters happen costs more and it doesn’t work long-term, but places immense burdens on public funds while making a crippling recovery. This is why pre-disaster investment strategies are powered by modern financial instruments
Estimated costs of 2025 flooding and landslides (Cyclone Ditwah)
Human toll (as of December 1, 2025):
Sectoral impacts:
Parametric insurance represents a groundbreaking solution that is particularly relevant for a nature-dependent tourism economy like Sri Lanka. This innovative instrument can provide rapid and targeted financing to protect the ecosystems of tourism industry.Parametric insurance revolutionises post-disaster liquidity by basing payouts on objective, pre-defined event triggers rather than slow, subjective on-the-ground damage assessmentsStructural and economic fragilityBeyond its physical location, the intrinsic structure of Sri Lanka tourism contains fragilities that amplify potential damage from disaster events.
- Dominance of SMEs: Small and Medium-sized Enterprises (SMEs) are the backbone of the tourism industry, generating most of its employment. These SMEs are disproportionately located within the vulnerable coastal and mountainous zones, yet they possess limited financial resources to invest in essential resilience measures. They often lack the capital for structural upgrades and struggle to implement formal business continuity planning (BCP) or access affordable post-disaster finance, leaving them exceptionally exposed to operational disruptions.
- Dependence on natural and cultural assets: the competitiveness of the tourism industry is inextricably linked to the health of its natural assets (e.g., coral reefs, beaches, wildlife) and the integrity of its cultural heritage (e.g., historical sites).
The degradation of these assets in coastal and mountainous regions directly threatens the viability of the SMEs that depend on them. Rising sea surface temperatures cause coral bleaching, destroying marine ecosystems vital for tourism, while coastal erosion threatens both beaches and seaside heritage sites.The devastating impact of the 2004 Indian Ocean Tsunami serves as a stark reminder of the sector’s vulnerability. An estimated 25 percent of registered hotels in Sri Lanka were affected, a figure that significantly overlooks the impact on the many informal and unregistered establishments that constitute a large part of the tourism ecosystem, highlighting the cascading economic consequences from such kinds of disasters in future.Most disaster losses are not covered by insurance. This “insurance gap” hits small and medium businesses hardest. These are the very businesses that make up most of the tourism sector. Standard insurance policies typically do not cover things like lost income during closures, which often forces businesses to shut down permanently.
Therefore, the real damage from disasters is not just broken buildings. It is lost business, tourists who have been frightened away and no financial help to recover. Small tourism businesses suffer most because insurance rarely covers these hidden costsProactive risk financing and discretionary costProtecting the tourism sector from climate disasters should be seen as a necessary investment, not an optional expense. It is a basic responsibility to investors and stakeholders. Waiting until after disasters for actions is both inefficient and too expensive to continue. In other words, reacting only after disasters happen costs more and it doesn’t work long-term, but places immense burdens on public funds while making a crippling recovery. This is why pre-disaster investment strategies are powered by modern financial instruments.The biggest problems often come after the initial disaster is over. When Sri Lanka experienced the 2004 Tsunami, the tourism industry lost approximately $ 250 million, mostly of which was not from damaged buildings, but from:
- Businesses unable to operate for extended periods
- Broken supply chains
- Damaged reputation that frightened tourists away
- Difficulty getting loans because businesses looked financially weak
The insurance problemMost disaster losses are not covered by insurance. This “insurance gap” hits small and medium businesses hardest. These are the very businesses that make up most of the tourism sector. Standard insurance policies typically do not cover things like lost income during closures, which often forces businesses to shut down permanently.Therefore, the real damage from disasters is not just broken buildings. It is lost business, tourists who have been frightened away and no financial help to recover. Small tourism businesses suffer most because insurance rarely covers these hidden costs.The need of the hour is to emphasise that specialised disaster risk financing tools such as climate insurance and an industry security scheme are urgently required to safeguard the economically vital tourism sector from intensifying climate threats like floods, coastal erosion, and extreme weather. This sector currently contributes 10% to GDP and employs more than 450,000 peopleInnovative instruments for tourism resilienceTraditional financial and insurance products have proven inadequate for addressing the unique, systemic risks confronting the tourism sector. Their limitations, particularly for SMEs and in covering nature-based assets have created a necessity for a shift towards modern financial instruments designed to overcome these barriers and build systemic resilience from the ground up.Tourism businesses, especially SMEs, face significant financial hurdles that prevent them from investing in resilience and securing adequate protection against disasters due to several reasons:Affordability to prepare: Small tourism businesses don’t have the money upfront to protect themselves from disasters. Things like strengthening buildings, creating backup plans, or buying emergency equipment are simply too expensive.Unwillingness of insurance organisations: Regular insurance does not work for most tourism businesses because:
- Premiums are too expensive, especially in coastal and hilly areas where disasters are more likely
- Policies only cover damaged property, but not lost income when businesses have to close and
- Many disaster types are not covered at all.
As a result, small businesses are left vulnerable with no way to prepare and no safety net when disasters strike. However, these small tourism businesses face a dialectic problem. One is that they cannot afford to prepare for disasters and insurance does not cover what they need when disasters happen.Potential of parametric insurance for tourismParametric insurance represents a groundbreaking solution that is particularly relevant for a nature-dependent tourism economy like Sri Lanka. This innovative instrument can provide rapid and targeted financing to protect the ecosystems of tourism industry.Parametric insurance revolutionises post-disaster liquidity by basing payouts on objective, pre-defined event triggers rather than slow, subjective on-the-ground damage assessments.This model provides a direct and powerful blueprint for protecting the vital natural assets of Sri Lanka. A similar parametric insurance facility could be developed to secure immediate post-disaster funding for the restoration of beaches, the rehabilitation of coral reefs or the repair of infrastructure in national parks, thereby underwriting the very natural capital upon which the tourism product of the country is built.A collaborative framework for actionRealising the full benefits of innovative disaster risk financing and insurance requires a coordinated and strategic policy environment. Success depends on a collaborative effort between Government bodies, which set the regulatory framework and the private financial sector must develop and deploy the necessary products for both to work in concert to build a resilient tourism industry in Sri Lanka.Realising the full benefits of innovative disaster risk financing and insurance requires a coordinated and strategic policy environment. Success depends on a collaborative effort between Government bodies, which set the regulatory framework and the private financial sector must develop and deploy the necessary products for both to work in concert to build a resilient tourism industry in Sri LankaRecommendations for Government bodies
- Integrate tourism into national strategy: Mandate the explicit inclusion of the tourism sector’s unique vulnerabilities and financial needs within the country’s overarching national disaster risk management and climate adaptation plans. This ensures that tourism resilience is treated as a national economic security priority.
- Incentivise private sector resilience: Develop and implement policy incentives to encourage risk reduction such as tax credits for structural retrofitting and preferential access to public financing for businesses with certified continuity plans or conditioning tourism operator licenses on holding adequate coverage, with a special focus on supporting SMEs.
- Foster public-private partnerships (PPPs): Actively facilitate and co-invest in partnerships between the tourism industry, insurers and financial institutions. The Government can play a crucial role as a convener and enabler to pilot, de-risk and scale up innovative risk-sharing and insurance products, including parametric solutions for critical natural assets.
Recommendations for financial institutions and insurers
- Develop tailored insurance products: Collaborate directly with tourism industry associations to design markets and distribute accessible and affordable insurance products. These must meet the specific needs of tourism SMEs, including comprehensive coverage for business interruption and developing bundled microinsurance products that are affordable for small-scale operators.
- Pioneer innovative risk transfer mechanisms: Invest in technical expertise, data analytics and risk modelling required to develop and underwrite innovative instruments like parametric insurance. This should cover not only physical infrastructure but also natural assets, beaches and protected areas that are critical to the value proposition of the tourism industry in Sri Lanka.
- Integrate climate risk into financial decisions: Systematically incorporate climate and disaster risk assessments into all lending, investment and underwriting criteria for the tourism industry. This will allow for more accurate pricing of risk and create market-based incentives for resilience-building investments by tourism businesses and reduce the financial sector’s own exposure to climate-related losses.
The continued growth and global competitiveness of Sri Lanka tourism must be contingent on its ability to proactively manage the escalating risks posed by natural disasters and climate change.Most importantly, a reactive stance is no longer viable. A proactive and collaborative approach along with leveraging innovative disaster risk financing and insurance is not merely a defensive measure but a strategic necessity to protect livelihoods, secure economic returns and build a truly sustainable future.Finally, this is not a choice between cost and resilience, but an investment for competitiveness, market stability and the sustainable growth of the tourism industry in Sri Lanka.(The author is Professor in Tourism Economics, University of Colombo, Sri Lanka. He can be reached via email at [email protected]; [email protected])
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