Recent natural disasters have highlighted one of the biggest challenges for the insurance world – the lack of policies in poorer regions. Helen Yates uncovers how microinsurance and public-private initiatives are slowly making changes.

The human cost of natural disasters is huge, but the insurance cost when the developing world is hit is likely to be low.

Indonesia has estimated that the final number of lives lost from the Sumatran earthquake in September this year could reach 3,000. Many of the deaths were in the capital Padang, where more than 500 buildings collapsed. But, as with the Sichuan earthquake in China last year, many of the losses are uninsured.

At a micro level

A number of approaches are now aiming to tackle the lack of policies. At the individual level, microinsurance is slowly providing cover across a number of classes, including agriculture, life and health. At a national or regional level, public-private initiatives are emerging as protection against natural disasters.

The fifth International Microinsurance Conference on 3-5 November in Dakar, Senegal, will discuss different schemes and ways of expanding cover around the world. Microinsurance works like any other kind of insurance, but in a more

difficult environment, says Munich Re Foundation vice-chairman Dirk Reinhard.

“It is insurance for people with low incomes, mainly in developing countries. In that sense it means people living near the poverty line.”

Without insurance, a single event such as a crop failure, natural disaster, loss of livestock, illness or death can have a huge impact on a family’s financial well-being. Insurance is preferable even where aid is available, Reinhard says.

“It has to do with self esteem. If you lose your house and then have to depend on people giving you money you feel like a beggar, but with insurance it’s something you’ve paid for and you have a right to it.”

The small premiums may not appear to bring much business value and could explain the limited number of providers. Penetration is increasing,

but there is still a long way to go, says Reinhard. “About 100 million people in 100 of the poorest countries, including China and India, have access

to some sort of microinsurance – nothing compared with the number of people living there. The regulator in India once told us that he believes about 200 million people need microinsurance, just in his country.”

There is a business opportunity here. As Reinhard points out, growing wealth in developing countries means that, in time, many microinsurance clients could become mainstream customers. And while transaction costs per contract are relatively high, many schemes have proved profitable, particularly where there is low competition.

“It’s a huge task: providing insurance for billions of people takes some time,” he adds. “And yes, the priority in providing insurance is not necessarily

providing microinsurance but providing insurance for the upscale market.”

Key attributes

Microinsurance is a group insurance that can cover thousands of customers under one contract. Insurers also typically reach customers by partnering with non-governmental organisations or microfinance institutions that take care of distribution and administration. This helps to make the product viable.

Products are tailored to a particular client base, with a number of risks commonly bundled together. “Off-the-shelf products won’t necessarily work with a population that has to deal with different types of risk,” says Allianz Group microinsurance expert Michael Anthony. “You need to tailor the products to client needs.”

Allianz backs two microinsurance initiatives in India. It distributes savings-linked life insurance to two million clients through microfinance institution SKS, while a bundled project, based in the south of the country, includes property and accident

insurance. This is distributed in partnership with aid agency CARE India to more than 100,000 clients through a network of non-governmental and community-based organisations.

The insurer’s Indian subsidiary Bajaj Allianz is also experimenting with a mutual health insurance scheme.

Anthony says distribution is the key challenge and India’s well-organised social infrastructure makes it a fertile ground for microinsurance. “To make the whole thing financially viable, we need to find structures that keep our involvement as limited as possible. The answer is to build on or piggyback an existing channel that is reaching out to the very bottom of the pyramid,” he says.

In other parts of the world, finding the right distribution requires more innovative thinking. While about 750 million households around the world do not have a bank account, an increasing number do own a mobile phone. In Nigeria, for instance, New Heights Microfinance Bank communicates its products, including loans, credit, savings, money transfer services and microinsurance, via text messages.

In South America, where most people have electricity and running water, utility bills are used to reach a target audience.

But education remains a huge hurdle. Allianz is addressing this in south India through a series of mass awareness campaigns, hosted by CARE. The agency uses Bollywood sketches and puppet theatres to teach rural communities about insurance and how it works.

“Many people are illiterate and are unfamiliar with the concept,” Anthony says. “That requires a lot of training and education on the principles and value of insurance.”

At a macro level

Because they are underwritten in bulk, microinsurance products tend to cover straightforward risks. They can provide relief for poorer populations blighted by natural catastrophes, however. Anthony uses Cyclone Nisha, which affected Southern India in November last year, as an example. The storm destroyed 16,000 microinsurance clients’ homes and the insurance payouts helped them rebuild their lives.

But there are limits. “Generally, natural catastrophe insurance or climate change-linked catastrophe insurance is difficult to price,” Anthony says. This

is where public-private initiatives can provide all-important protection for hazard-prone regions and, he thinks, will make microinsurance providers more confident about writing cover.

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is one such example. Set up in 2007, the joint initiative between the World Bank, a number of international reinsurers and brokers, and several donor governments, it provides cover for 16 Caribbean countries. It pools the risk, passing it on to the reinsurance and capital markets, and makes use of straightforward parametric catastrophe triggers to keep premiums as low as possible.

Dr Simon Young, chief executive of Caribbean Risk Managers, the CCRIF supervisor, thinks other regions could benefit from such an approach. “CCRIF is actually being presented as a model for replication in other parts of the world, both by the development banks and, more recently, as part of the climate change adaptation framework being negotiated in the build-up to COP15 [climate summit] in Copenhagen in December.”

In China, the low insurance cost of the Sichuan earthquake has prompted a major review into the feasibility of setting up a catastrophe pool. A recent

initiative by Swiss Re and the Beijing municipal government to provide reinsurance cover for catastrophe risks under the government-funded agriculture insurance scheme is seen as a step in the right direction.

More innovative solutions will mean less aid and government relief to help rebuild after disasters such as the Indonesian earthquake. While this does not minimise the human cost of natural catastrophes, it can provide reassurance. Giving individuals greater control over their own financial wellbeing is a crucial step forward for evolving insurance markets.

Helen Yates is a freelance journalist