Micro- -Insurance for Natural Disasters Insurance for Natural - - PowerPoint PPT Presentation

Micro Micro-

• Insurance for Natural Disasters

Insurance for Natural Disasters

Concepts, Present and Future Outlook Concepts, Present and Future Outlook

Haresh C. Shah Haresh C. Shah Obayashi Professor of Engineering, Emeritus, Obayashi Professor of Engineering, Emeritus, Stanford University Stanford University Founder & Sr. Advisor, RMS Inc. Founder & Sr. Advisor, RMS Inc. Asian Science and Technology Forum Asian Science and Technology Forum Tokyo Conference Center Shinagawa Tokyo Conference Center Shinagawa October 5, 2007 October 5, 2007 Tokyo, Japan Tokyo, Japan

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Changing Demographic Profile

5 10 15 2 0 2 5 3 0 3 5 4 0

T

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y

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e

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l N e w Y

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k M u m b a i D e l h i M e x i c

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i t y S a

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a u l

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h a k a L

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A n g e l e s J a k a r t a L a g

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M a n i l a

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u e z

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C a l c u t t a K a r a c h i B u e n

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A i r e s

City

Population in Millions

High per capita income Low per capita income Source: Munich Re, Megacities- Megarisks

15 Most Populous Cities in the World in 2015

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Changing Demographic Profile (cont Changing Demographic Profile (cont’ ’d) d)

0.00 1.00 2.00 3.00 4.00 5.00 1950 1975 2000 2030 Population in billions Urban population in industial countries Rural population in developing Urban population in developing countries Rural population in industrialis

Source: Munich Re, Megacities - Megarisks

The Gap is Widening

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Natural Catastrophes: Number of Loss Events Natural Catastrophes: Number of Loss Events

Earthquake, Volcanic Eruption Windstorm Flood Others Africa America Asia Australia/Oceania Europe Worldwide 55 177 272 66 131 701

Source: Munich Re Topics 2001

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Natural Catastrophes: Number of Fatalities Natural Catastrophes: Number of Fatalities

Africa America Asia Australia/Oceania Europe Worldwide 1,525 1,758 21,500 13 267 25,063 Earthquake, Volcanic Eruption Windstorm Flood Others

Source: Munich Re Topics 2001

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Natural Catastrophes: Economic Losses (US$ m) Natural Catastrophes: Economic Losses (US$ m)

Africa America Asia Australia/Oceania Europe Worldwide 330 18,687 13,982 535 2,456 35,990 Earthquake, Volcanic Eruption Windstorm Flood Others

Source: Munich Re Topics 2001

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Natural Catastrophes: Insured Losses (US$ m) Natural Catastrophes: Insured Losses (US$ m)

Africa America Asia Australia/Oceania Europe Worldwide 9,091 1,788 122 508 11,509 Earthquake, Volcanic Eruption Windstorm Flood Others

Source: Munich Re Topics 2001

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Natural Catastrophes: 700 Loss Events Natural Catastrophes: 700 Loss Events

12% 20% 32% 36%

Earthquake, Volcanic Eruption Windstorm Flood Others

Source: Munich Re Topics 2001

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Natural Catastrophes: 25,000 Fatalities Natural Catastrophes: 25,000 Fatalities

9% 19% 8% 64%

Earthquake, Volcanic Eruption Windstorm Flood Others

Source: Munich Re Topics 2001

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Natural Catastrophes: Economic Losses: US$ 36 Natural Catastrophes: Economic Losses: US$ 36 bn bn

11% 10% 24% 55%

Earthquake, Volcanic Eruption Windstorm Flood Others

Source: Munich Re Topics 2001

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Natural Catastrophes: Insured Losses: US$ 11.5 Natural Catastrophes: Insured Losses: US$ 11.5 bn bn

Earthquake, Volcanic Eruption Windstorm Flood Others

4% 8% 88%

Source: Munich Re Topics 2001

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Insured vs. Total Economic Loss in Major Natural Catastrophes

100% 47% 40% 8% 0.3% 2% 4% 5% 5% 6% 6% 7%

0% 20% 40% 60% 80% 100% Bangladesh (Floods, 1998) India (Gujarat/Bhuj, 2001) El Salvador (San Salvador, 1986) Turkey (Izmit, 1999) Mexico (Mexio City, 1985) Honduras (Mitch,1998) Poland (Floods, 1997) Colombia Indonesia (Floods, 1996) Puerto Rico (Hugo, 1989) USA (Northridge, 1992) France (Storm Lothar, 1999)

Insured Uninsured

5,000 4,571 2,000 21,591 10,024 5,000 3,700 1,660

Source: Eugene Gurenko, 2004. Catastrophe Risk and Reinsurance: A Country Risk Management Perspective

136 2,000 36,406 4,535

Total Economic Loss (US$MM)

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Catastrophe Insurance Penetration in Developing Catastrophe Insurance Penetration in Developing Countries Countries

India – under 0.5% the Philippines – under 0.3% Iran – under 0.05% Romania – under 5% Bulgaria – under 3% China – under 0.5% Turkey – 17%

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Observations from Data Observations from Data

• 1. Economic losses are increasing with time
• 2. No progress in fatality reduction
• 3. Developed countries have made progress in

reducing fatalities but not in economic losses

• 4. Developing countries have not made any

progress in reducing fatalities or economic losses

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Discontinuity Between Knowledge and Performance Discontinuity Between Knowledge and Performance

Knowledge Generators are not talking to Knowledge Users & Knowledge Implementers. Experts talking to Experts can not close information transfer loop. Lack of understanding of who are the movers and shakers on the part of Knowledge Generators. Lack of articulation of where the ownership of the problem lies. Reaching out and connecting the Last Mile is missing.

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Source: Financial Times Source: Financial Times

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Some Suggestions for Creating Effective Partnerships Some Suggestions for Creating Effective Partnerships

Understand and communicate incentive for Risk Mitigation to General Public. Partner with Media to communicate incentives and costs. Partner with Financial Institutions to communicate incentives and costs. Partner with Insurance/Reinsurance Industry to mitigate risk through Risk Transfer. Develop products like micro-insurance and micro-credits to help low income and rural population to transfer risks and to improve the risk profile of their homes.

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Concluding Remarks Concluding Remarks

Dynamics of Demographic changes require us to develop true International Partnerships for Natural Disaster Mitigation. “Business as Usual” has not worked. Innovative methods are needed to get the job done. Unless society understands properly the cost/benefit equation of Risk Mitigation strategies and understands personal, corporate and societal incentives, it would be difficult to reduce Natural Disaster Risk.

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What is MICROINSURANCE? What is MICROINSURANCE?

“micro” or insurance cover with “low/small sum assured/benefit levels.” Target: low income households/ moderately poor i.e., households above the poverty line but vulnerable to slipping back into poverty. Also, SME’s are potential targets.

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Why Why Microinsurance Microinsurance? ?

Poverty Dynamics: 25 years Poverty Dynamics: 25 years ago to Present ago to Present

17.8% (A) Remained Poor 7.9% (C) Became Poor 11.1% (B) Escaped Poverty 63.2% (D) Remained Non-Poor 25 Years Ago 25 Years Ago Poor Poor Not Poor Not Poor Poor Poor Not Not Poor Poor At At Present Present

Trends in household poverty in 35 North Indian Villages (poor households, %) Source: Anirudh Krishna (2004); “Escaping Poverty and Becoming Poor: Who Gains, Who Loses, and Why?”; World Development Vol. 32, No. 1, pp. 121–136, 2004.

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Risk analysis, Product development, and Pricing

Aligning products with the NEEDS. Given the “low- value”and “cost of product development” limited investments made by insurance company to develop new products. NO products to cover major “livelihood risks” of the rural poor e.g., livestock.

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Remittance Financing Remittance Financing

Gordon Woo of RMS has suggested a scheme for financing the Risk Transfer for Micro Insurance. He calls his scheme “Remittance Financing of Micro-Insurance. Following Slides are taken from Gordon Woo’s Presentation.

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Trans Trans-

• national risk transfer to

national risk transfer to diaspora diaspora communities in the industrialized world communities in the industrialized world

Industrialized World Developing World

Migration Financial Risk

Insurance remains unaffordable Insurance remains unaffordable for most people in the developing world. for most people in the developing world.

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20 40 60 80 100 120 140 160 180 200 2000 2001 2002 2003 2004 2005 2006

The rising level of remittances The rising level of remittances

$ BILLION $ BILLION

Economic Economic Implications Implications

• f Remittances
• f Remittances

and Migration and Migration World Bank World Bank

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Remittances pay for natural disasters Remittances pay for natural disasters

Expatriate Gujaratis contributed hundreds of millions of dollars above their normal remittances, after the January 2001 Bhuj earthquake. Remittances from Bangladeshis rose by 18% in the aftermath

• f the 1998 Bangladesh floods.

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As many as 2 As many as 2 million million El Salvadorans live in USA El Salvadorans live in USA; ; (6 million live in El Salvador). (6 million live in El Salvador). After the 2001 earthquakes, After the 2001 earthquakes, T Temporary emporary P Protective rotective S Status tatus was granted to 150,000 was granted to 150,000 illegal immigrants, illegal immigrants, so they could continue so they could continue to send money home. to send money home. Annually, $3 billion are sent back by expatriates to El Salvado Annually, $3 billion are sent back by expatriates to El Salvador. r. This is about 15% of GDP, and larger than the annual Salvadoran This is about 15% of GDP, and larger than the annual Salvadoran government budget. government budget.

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‘Despite USAID’s 170 million dollar disaster reconstruction program, reconstruction projects remain incomplete, and the US embassy in El Salvador has estimated that the projects will not be complete before 2008. Only 46% of the total number of houses destroyed or damaged had been reconstructed or repaired within five years of the 2001 earthquakes.’

Department of Homeland Security US Citizenship and Immigration Services

Employment Authorization documents Employment Authorization documents automatically extended to September 9th 2007. automatically extended to September 9th 2007.

Ex Ex-

• post disaster financing slows recovery

post disaster financing slows recovery

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Breaking out of the disaster cycle Breaking out of the disaster cycle

In the absence of insurance, disasters can impose a severe long- term burden on senders of remittances. Through a global disaster insurance scheme, remitters can pool their risk to mutual benefit.

Just a couple dollars a month, (the cost of a beer), could buy catastrophe earthquake insurance cover for a migrant’s family back home in a seismic undeveloped country.

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Simplified loss adjusting Simplified loss adjusting

Kashmir: 8 October 2005

For simplicity and affordability, coverage could be limited to severe damage, rendering the property uninhabitable, and the occupants homeless.

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Benefits of Benefits of diaspora diaspora disaster insurance disaster insurance

This is a first-world solution to a third-world problem.

– Those who are better able to pay shoulder the risk.

Insurance payouts facilitate rapid post-disaster response.

– Lives and livelihoods can be saved.

Money goes directly to the affected local communities, avoiding government misallocation of relief funds.

– In the aftermath of the Kashmir earthquake of October 8th 2005, some of the disaster relief was channeled into terrorist funds.

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It is in the interest of governments to encourage GLOBAL risk sharing among private citizens, to mitigate risk and ameliorate future post- disaster hardship.

Governments should encourage risk sharing Governments should encourage risk sharing

Kashmir: 8 October 2005

Most of the million ethnic Pakistanis in UK have community links with Kashmir.

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TECHNOLOGI CAL I MPLEMENTATI ON

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Recent developments in m Recent developments in m-

• banking

banking

November 2006: Rabobank introduces Rabo Mobile: an integrated mobile banking and voice calling service. January 2007: The Gates Foundation provides a $24 million grant to support mobile banking and other programs that use technology to expand access to financial services. The Consultative Group to Assist the Poor (CGAP) is the recipient

• f the 4-year grant.

Remittances is where m-banking will really be world-changing. In Latin America, less than 10% of remittance recipients have bank accounts. Some of the commission on remittances could be re-allocated to pay for micro-insurance.

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'This agreement with Citigroup has the potential to create a step change in global remittance services and one in which the mobile service provider plays a central role.

Alan Harper, Vodafone director for group strategy and new business

VODAFONE AND CI TI GROUP ANNOUNCE WORLDWI DE MOBI LE FI NANCI AL REMI TTANCE VENTURE

12 February 2007

It builds upon Vodafone's recent successful pilot of the M- PESA mobile money transfer service by its affiliate in Kenya. It is anticipated that Vodafone customers in the UK will have the first opportunity to use the service to send money to Kenya on a trial basis and both parties plan to launch commercially, with a focus on Eastern European and Asian markets, such as Poland and India, in the near future.

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Global payment system for remittances Global payment system for remittances

Cell phone operators and banks are backing a scheme to allow those who work abroad to use their phones to send money home. The pilot program, announced on February 12, 2007, by mobile operator trade body, the GSM Association, could make sending cash easier and cheaper for migrant workers. The initiative is backed by 19 mobile firms representing over 600 million customers in over 100 countries.

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Public and private sector support

‘The program will resonate with governments because it makes the international payment market more transparent, encourages financial inclusion, reduces crime, and boosts the flow of hard currency into their countries.’

GSMA CEO, Rob Conway 3 GSM conference, February 13, 2007

‘We are happy to partner with the GSM Association in this landmark project. We piloted a project in a small Himalayan village of Pithoragarh in India with Airtel and have seen the tremendous results in this unbanked village. This project has the potential

• f transforming the lives and economies across the globe.“
• Mr. O P Bhat, chairman of the State Bank of I ndia

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Global expansion of the remittance sector Global expansion of the remittance sector

The initiative could double the number of recipients of international remittances to more than 1.5 billion and quadruple the size of the market from $230bn to more than $1 trillion by 2012, the GSMA says.

I ncreasing migratory pressures exacerbated by global warming Larger international remittances to more and more recipients

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Micro Micro-

• payments for micro

payments for micro-

• insurance

insurance

Mastercard is providing international authorization, clearing and settlement for the GSM pilot program. Micro-insurance premiums could be paid by remitters via cell phone text messages. Alternatively, as with credit card transactions, there might be a procedure for insurance cover to be associated with designated remittance transactions. Claims could be settled through money transfers to local Mastercard merchants close to the region affected.

Could global telecoms take the initiative in facilitating Could global telecoms take the initiative in facilitating m m-

• insurance as well as m

insurance as well as m-

• banking?

banking?

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‘By laying stress on the greatness of the calamity and its dreadful character, and by conducting themselves with the greatest seriousness and dignity, they had such an effect on cities, and especially on kings, that not only did they receive most lavish gifts, but the donors themselves felt that a favour was being conferred on them.’ Polybius: On the Rhodes earthquake

• f 227 B.C.

Shouldering risk as a charitable contribution

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Source: Financial Times Source: Financial Times