Risk Management 25 years after the 1985 Earthquake epi-centered in Michoacán

Presentation of the Book
“Microinsurance – An
Innovative Tool for Risk and
Disaster Management”
Giorgio Amsicora Onnis, Global Risk Forum GRF
Davos, Switzerland

www.grforum.org
EPFL Lausanne, 30 November 2009 Walter J. Ammann www.grforum.org

• Through its various activities Global Risk Forum Davos aims at
serving as a centre of knowledge and know-how exchange for the
application of contemporary risk management strategies, tools
and practical solutions. GRF Davos aims at:

• Reducing vulnerability for all types of risks and disasters to protect
life, property, environment, critical infrastructure and all means of
business for the worldwide community on a sustainable basis.
• Bridging the gap between science and practice
• Promoting worldwide exchange of know-how and experience
• Targeting solutions and promoting good practices in Integral Risk
Management
• Providing and managing a network for decision makers,
practitioners and experts from Politics, Government, IGOs,
business, science, NGOs, media and Society as a whole
• Organizing once a year the International Disaster and Risk
Conference IDRC Davos, one year in Davos, Switzerland
(Headquarters) and one year in different countries abroad.
• NEXT IDRC 26-30 August 2012. www.idrc.info
Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn.
Manejo Efectivo del Riesgo”
Giorgio Amsicora Onnis 30 November 2009
EPFL Lausanne, Walter J. Ammann México, 6 de Octubre 2010
Morelia, www.grforum.org

Microfinance
• Refers to the extension of financial services to low-
income people who are not considered qualified
enough to have access to traditional bank and
insurance services. Includes:
MicroCredit, MicroSavings and MicroInsurance
• First MC in Bolivia and Bangladesh (late 80s)
• Now serving 150m people in developing countries with
a variety of specialised credit products
• Quoting: „The most encouraging trends in MF is that the
world‘s largest banks are becoming interested“ – The
Economist, MF survey, 2005

Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del
Universidad Michoacana San Nicholàs de Hidalgo Giorgio Amsicora Onnis
Riesgo”
Giorgio
- EPFL Amsicora Onnis 30 November 2009 del sismo de 1985 Morelia, México, 6Octubre 2010 2010
La gestiòn del riesgo en México a 25 anos
Lausanne,
Giorgio Amsicora Onnis 6 de de Octubre
Walter J. Ammann México, 6 deOctubre 2010

Acquiring wealth and protecting it…

• Financial shocks: falling back into poverty
– Poorest segments of world‘s population are most
exposed to financial shocks
– The poors rely on informal risk coping strategies
– Informal risk sharing (solidarity)
– Avoid risky situations
– Self-Insurance (savings, cut expenditures)
– Emergency credit (relatives, money-lenders)
– Asset liquidation
– Selling children to labour
– Downsides: mainly ex-post strategies, no risk
pooling and transfer, hampered development

Seminario “La Gestion Riesgo” a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del
Manejo Efectivo del del Riesgo
Universidad Michoacana San Nicholàs de Hidalgo
Riesgo”
Giorgio Amsicora Onnis
Giorgio Amsicora Onnis 30 November anos
- EPFL Amsicora Onnis en México a 25 2009 del sismo de 1985 Morelia, México, 6 deOctubre2010 2010
La gestiòn del riesgo
Giorgio Lausanne, Walter J. Ammann México, 6Octubre 2010
Morelia, 6 de de Octubre www.grforum.org

Risks
• Poverty
• 2.6bn people (2/3 women) living in poverty (less than
2USD/day)
• 1bn people in extreme poverty ( less than 1USD/day)
• living in geographical and climatic regions that are
naturally most vulnerable to climate change
• Least able to cope when a crisis does occur
• Natural Catastrophes (typhoons, earthquakes,
floods, droughts, landslides)
• Climate Change
• Impacting 325m people today
• Over 4bn people (60% world‘s population) vulnerable
• Accelerating in the next 20 yrs
Source: W. Fust (2009), What will it take? Mitigation of Climate Change, talk at Global Humanitarian Forum, October 2009, Geneva
Riesgo” Giorgio Amsicora Onnis
- EPFL Amsicora Onnis en México a 25 2009
La gestiòn del riesgo 30 November anos
Giorgio Lausanne, del sismo de 1985 Morelia, México, 6 deOctubre2010
Walter J. Ammann 6 de Octubre 2010 www.grforum.org

Climate Justice – Facts & Explanations

Source: W. Fust (2009), What will it take? Mitigation of Climate Change, talk at Global Humanitarian Forum, October 2009, Geneva

Great natural catastrophes
Number of events:
„The trend
t o w a r d s
increasing
numbers of
catastrophes
continued in
2007“

Source: Figure and text: Munich Re Topics Geo 2007

Number of events last 10 years:

Source: Figure: Munich Re Topics Geo 2007

Overall losses and insured losses:
In 2007: „16.000
people died
throughout the
world as a result
of natural
catastrophes.“

Source: Figure and text: Munich Re Topics Geo 2007

Most expensive natural catastrophes:

Source: Figure: Munich Re Topics Geo 2007


• „The overall analysis since 1950
shows that throughout the period as a
whole, the heaviest losses were
caused by windstorms – particularly
hurricanes and typhoons – and that
North America recorded the largest
number of events and the largest
losses.“
• Weather-related disasters are most
frequent catastrophes.

Source: Munich Re Topics Geo 2007

Microinsurance
• Definition: „The protection of low-income people
against specific perils in exchange for regular
payments proportionate to the likelihood and the
cost of the risk involved“ (International Association of
Insurance Supervisors)
• Micro- refers to
• The new clientele it is intended to serve
• Low premium and limited coverage AFFORDABILITY
• Microinsurance is NOT charity, is instead a market-
based approach to Risk Management and poverty
reduction
• Micro- does NOT refer to the size of the risk insured

Universidad Michoacana San Nicholàs de Hidalgo Giorgio Amsicora Onnis
Giorgio
- EPFL Amsicora Onnis 30 November 2009 del sismo de 1985 Morelia, México, 6 de Octubre 2010
La gestiòn del riesgo en México a 25 anos
Lausanne, Walter J. Ammann 6 de Octubre 2010 www.grforum.org

Microinsurance: Facts & Features
• Like traditional insurance, MI involves a risk pooling element and
is funded by premiums, but with specific tools and mechanisms
to address the low-income market and its needs
• Only 35m low-income people (smaller than 5%) served by MI
worldwide, rarely with products they need
• Potential market: 1.5 to 3bn clients (2009 estimate Micro-
insurance Centre LLC)
 Market exploration already started:
• Commercial Insurers: potential to reach large underserved
markets
• Government and development agencies (UN, World Bank):
potential to secure poverty reduction, social protection and
sustainable economic growth
 Cooperation in Public-Private Partnerships to allow
customers (business and individuals) to transfer risk and
purchase security

MI products and business models
• Products
– Life: most common, easy to handle, effective to
familiarisation with insurance. Yet, little value to customers
– Health: most needed but least available. Complicated design
– Agriculture & Natural Catastrophes (flood, drought,
earthquake, typhoon): newest and most innovative. Payment
depending on an „Objective Index“ (trigger). High „Basis
Risk“
• Business Models
– Community Based: group putting money in a risk pool. No
access to reinsurance. Questionable
– Mutual: professional managing of a group‘s risk pool
– Partner-agent: link a delivery channel with a commercial
insurer. Market penetration. Access to reinsurance. Most
promising

Examples from the field
• Agriculture Microinsurance in Kenya
• 200 farmers insured maize inputs (8Kg) against
drought
• Index-Insurance: data from a net of weather
stations
• Input retailer as distribution channel
• Mobile phones for registration, claim processing
and payout information
• Linked to adoption of innovative agricultural
techniques
• Scale-up to more crops and areas in current year
(Syngenta Foundation 2010, GRF Book)

Examples from the field - II
• Earthquake Microinsurance in China
• Product design, program risk quantification for insured,
primary insurer, reinsurance and government
• 800 counties (222m people) assuming 100% take-up.
Premium: 10 RMB ( ca. 1.5 USD)
• Double-trigger program (6.5 and 8 Degree Richter)
• Premium can cover the underwriting costs and risk-
transfer expenses for primary insurer, reinsurer and
government AND be profitable in the long term (10yrs)
• Modeling by RMS Earthquake Model. Data from Harbin
Institute of Engineering Mechanics (Risk Management
Solutions Inc., Newark, CA, U.S.A., 2007)
Source: P. Stojanovski et al. “Double Trigger Earthquake Microinsurance Program for Rural China Viability and Sustainability”,
Proceedings from 14° European Conference on Earthquake Engineering 2010, Ohrid, Makedonia

GRF Book on Microinsurance
• Collection of 15 papers on the role
of Microinsurance as a poverty
reduction and risk mitigation tool
• Great variety of authors: academics,
development and insurance
professionals, practitioners in the
field from four continents
• Contents: Integrated Risk
Management in MI, Linkage to
Climate Change, Strategic role of
Regulatory and Policy framework
+12 case studies in Africa, Asia and
Latin America, grouped by risk
sectors (life, health, natural
disasters)

GRF Book on Microinsurance
• Demonstrates that
• the poor can afford and are willing to pay to purchase
good insurance products
• MI can play a decisive role in coping with various risk
associated with natural and economic adversities AND
in increasing resilience after a disastrous event

• Offers insight on a range of topics relevant to all the
stakeholders and key players in the MI supply-chain
to make MI programs
• Affordable to low-income households
• Economically viable and sustainable in the long term
for the insurance industry
... and revealing gaps for future improvement

Traditional vs Micro- Insurance
TRADITIONAL MICRO

CLIENTS LOW RISK HIGHER RISK/VULNERABILITY
ESTABLISHED INS. CULTURE WEAK INSURANCE CULTURE
(Business/Individuals/ WEALTHY POOR
Households)

DISTRIBUTION LICENSED INTERMEDIARIES NON-TRADITIONAL
INSURANCE COMPANIES INTERMEDIARIES
CHANNELS

POLICIES COMPLEX SIMPLE
MANY EXCLUSIONS FEW OR NO EXCLUSIONS
GROUP POLICIES

PRODUCT DESIGN and GOOD STATISTICAL DATA LITTLE HISTORICAL DATA
BASED ON INDIVIDUAL RISK GROUP PRICING
PRICING PRICE-SENSITIVE MARKET


Traditional vs Micro- Insurance - II
TRADITIONAL MICRO

PREMIUM MONTHLY TO YEARLY FREQUENT AND IRREGULAR
MAIL- OR DEBIT-ORDER- (adapted to volatile cash flow)
COLLECTION BASED OFTEN LINKED TO OTHER
TRANSACTIONS (e.g. loans)

RISK CONTROL LIMITED ELIGIBILITY BROAD ELIGIBILITY
SIGNIFICANT DOCUMENTATION LIMITED BUT EFFECTIVE CONTROLS
(adverse selection, SCREENING REQUIRED RISK INCLUDED IN PREMIUM
moral hazard, fraud) LINK TO OTHER POLICIES (e.g. credit)

CLAIM HANDLING COMPLICATED SIMPLE AND FAST PROCEDURES
EXTENSIVE VERIFICATION FOR SMALL SUMS
DOCUMENTATION EFFICIENT FRAUD CONTROL

Source: Lloyds 360 Risk Insights – Insurance in Developing Countries: http://www.lloyds.com/News-and-Insight/360-Risk-Insight/

Challenges
• Market education & understanding the cultural context
• Innovative delivery channels including:
• MFIs & Banks • Retailers
• CBOs & NGOs • Governments
• Speciality agents • Churches
• Brokers • Utility providers
• Employers • Mobile phones providers
• Staff training and capacity building
• Product design and pricing
• Efficient and fast premium collection
• Innovative risk control strategies, as inclusive as possible
• Technological solutions to deal efficiently with a large number
of small policies: cut costs, improve data collection and bridge
customers‘ physical distance


Challenges - II
• Bring all stakeholders & key players together
• Policy holders • Government
• Delivery channels • IGOs & Donors
• Regulated & Informal insurers • Science & Technology
• Reinsurers • Business
• Regulators & Supervisors

• In particular:
• Reinsurers played little role until now, providing
• Risk management expertise (expansion of risk
coverage and product diversity and complexity)
• Coverage for large risks
• Understanding of changing risk landscape
(urbanisation, economic growth and climate
change)

Challenges - III
• and..
• Regulators & Supervisors, enabling supportive conditions
to improve access to insurance while protecting MI policy-
holders, by
• Motivating providers to adapt and innovate systems,
products and sales strategies
• Motivating informal insurers to formalise and grow
• Motivating new microinsurers to enter the market
• Easing incentives to the demand-side to increase take-
up rates
• Supporting integration of Microinsurance policies into
the financial market
• Examples from GRF Book: India (2002) and The
Philippines (2004)


Outlook & Perspectives for MI
• Microfinance took 30 yrs to create interaction between
different actors and become established
• Microinsurance can grow even faster and produce a
larger impact on low-income customers. Still in its
nascent phase. No best practices found yet. Rather
experts refer to „good and bad practices“. A lot of work,
study and practice stands ahead of us.
• Social goals: Development & Protection
• Poverty reduction (poors better-off),
• Driving local learning and ultimately economic
growth
• More stable and secure society, with less social
inequalities

Outlook & Perspectives - II
• Business (supply-side) goals: Profitability

• Brand promotion Reputational
• Reputational benefits (short-term)
• Laboratory for innovation Knowledge
• Market intelligence (medium-term)
• First-mover advantage
Profitability and growth
• Portfolio diversification
(long-term)
• Hit a market of 3bn people


Conclusions

Rapidly growing economies in developing countries,
urbanisation and climate change urgently call for the
protection of the most vulnerable communities

There is a large potential demand for Microinsurance
products, but this should not be taken for granted. It
must be uncovered and driven by innovative market
education tools and approaches to win clients’ trust

Huge potential growth, especially in Agriculture
(Weather-Index) and Natural Catastrophes
Microinsurance


Useful links
• Global Risk Forum Davos: www.grforum.org
• The Microinsurance Network: www.microinsurancenetwork.org
• The Microinsurance Innovation Facility @ International Labour
Organisation – UN: www.ilo.org/public/english/employment/mifacility
• The Microinsurance Center (USA): www.microinsurancecenter.org
• The Microinsurance Academy (INDIA) www.microinsuranceacademy.org
• German Technical Cooperation GTZ (Germany): www.gtz.de/en
• Planet Guarantee @ Planet Finance Group:
www.planetfinancegroup.org/EN/pop_planet_guarantee.ph
• International Association of Insurance Supervisors : www.iaisweb.org
• Leapfrog Investment – Specialised MI Fund (USA):
www.leapfroginvest.com
• Microensure – MI intermediation (UK): www.microensure.com
• Avana Microinsurance – MI intermediation (USA):
www.avanamicroinsurance.org

Aug 26 – 30, 2012

International Disaster & Risk
Conference - IDRC Davos 2012

...Coming up in 2012, Davos,
Switzerland
www.grforum.org


www.grforum.org

Risk Management 25 years after the 1985 Earthquake epi-centered in Michoacán

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