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CAT Micro Insurance – Has Its Time Arrived ?

CAT Micro Insurance – Has Its Time Arrived ?. Pane Stojanovski. Insurance in Developing Countries: Exploring Microinsurance and Other Commercial Opportunities Lloyd’s November 19, 2009. Perspectives on CAT Micro Insurance. View From the BOP (*). View From the Industry.

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CAT Micro Insurance – Has Its Time Arrived ?

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  1. CAT Micro Insurance – Has Its Time Arrived ? Pane Stojanovski Insurance in Developing Countries: Exploring Microinsurance and Other Commercial Opportunities Lloyd’s November 19, 2009

  2. Perspectives on CAT Micro Insurance View From the BOP(*) View From the Industry Demand side - data quality / availability issues, non-standard products across geographies, low CAT risk awareness by agencies serving the poor Supply side - models for peril / regions where cat micro insurance is a concern, ability to quantify micro insurance risk Consensus –viable and commercially sustainable MI solutions; How to get there? • Skeptical of insurance • Catastrophes not perceived as high risk compared to other risks • Little insurable property • Microfinance institutions start showing interest for credit default risk protection • Country specific situations (*) BOP – Bottom of the Pyramid

  3. Making CAT Micro Insurance Work Models and data are necessary, but they are not sufficient Need for a catalyst that can provide risk quantification, who is independent and objective, and capable of bringing all players together Cat micro insurance cannot be a charity, it has to be based on social entrepreneurship foundation to provide affordable, commercially viable and sustainable risk transfer solutions to the populations served

  4. Reinsurers A CAT Micro Insurance Model Governments Insurers • Drivers of the wheel: • Independence • Objectivity • Competence • Education of stake holders • Bring stake holders together Development banks / agencies Regulators Guy Carpenter Guy Carpenter Others World Bank MFI’s

  5. RMS as Catalyst for Micro Insurance Solutions • Founded and conducted 3 MiRT’s (Micro Insurance Round Table) forums with Nanyang Technological University (NTU) – since 2007 • Chartered Singapore – NTU Alliance for Micro Insurance - 2009 • Focused team (Dr. Stojanovski, Dr. Dong, Ms Wagh) working together with Prof. Shah on cat micro insurance activation • Pilot viability / sustainability studies – Rural China, Gujarat • Complete micro insurance risk quantification • Feasible programs • In the pipeline: Andhra Pradesh, Indonesia, Philippines • expand on perils and programs (drought, cyclone, flood ) • Workshop with a spectrum of stake holders across to move cat micro insurance to the next level - spring 2010

  6. Rural China • Policy coverage • Limit of 16,000 RMB – meaningful CAT coverage for farmers • Step policy – (to minimize operational costs) • Full limit (16,000 RMB) for a collapsed or red tagged (uninhabitable) house • No payment for other levels of damage • Individual annual premium = 10 RMB (affordability!) • Total countrywide premium: 10 RMB *(222 m./ 4) = 550 million RMB The premium covers the cost of risk, risk loading, fixed costs, and loss adjustment expenses across all layers of the program.

  7. Rural China

  8. Gujarat People – Livelihood Risk MFIs – Credit Default Risk What is at risk ?

  9. Gujarat - Parametric Multi Trigger Policy • Payout rules • MFIs: Portion of the outstanding loans in the district where earthquake epicenter is, defined with the ratio of area with ground shaking >= 0.1g (modeled) and the district area • People:Fixed amount to all loan holders in the district where the epicenter is as function of the magnitudeM > 7.25 1,000 INR; M > 6.75 750 INR; M > 6.25 500 INR • Premium of 5 to 6 INR covers the program costs across all layers

  10. Incentives and Challenges Incentives Challenges High programs participation Minimizing costs Affordability Recognized role of the catalyst Multi peril coverage! Regulatory Risk awareness and insurance solutions education for all stake holders • Insured: quick cash payout, simple policies (step, index, multi trigger, ...) • Governments / Regulators : reduction of sovereign risk • Development agencies, NGOs: commercially sustainable CAT protection and support for the BOP moving up • MFIs: managing credit default risk • Industry: product expansion (uncorrelated / lightly correlated with the existing business)

  11. CAT Micro Insurance – Has Its Time Arrived ? regular insurance wealth micro insurance Bottom of the Pyramid - BOP population Needs of the populations served Commercial viability and sustainability

  12. Cat Micro Insurance is Arriving

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