Financing Microinsurance

How to Up-scale Investments Made Locally?

Mehul PandyaAll India Disaster Mitigation Institute

411, Sakar Five, Near Natraj CinemaAshram Road, Ahmedabad - 380 009, India

Tel: 0091-79-26583607/26586234, Fax: 0091-79-26582962E-mail: mihir@aidmi.org, Website: http://www.aidmi.org

3rd Micro-Insurance Round-Table (MiRT) Forum, April 2-4, 2009, Singapore

Overview

1. Risk Transfer for DRR2. AIDMI Experience3. Afat Vimo (Disaster Insurance)4. 2007 Afat Vimo Review5. Key Conclusions on Financing

Microinsurance6. Work in Progress: Micro-

insurance Client Impact Evaluation

Risk Transfer for DRR

• Insurance and other ex ante risk financing mechanisms form a critical part of a comprehensive disaster risk management strategy

• Financial products are not enough on their own, however, and must be tied to incentives for investment in risk reduction

• Often current mechanisms do not reach the poor

• Continued lack of insurance culture

AIDMI Experience• Communities are repeatedly exposed to disaster risks. They

are also perpetually restricted in their access to vital financial services such as micro-insurance.

• Risk reduction is not a new thing; communities reduce risk on day-to-day basis, if they do not, they cannot survive. However, disasters visit communities more frequently than their rate of building mitigation capacities.

• Loss assessments often ignores the loss of informal sector, compensation takes too long and is notoriously below market rates.

• Humanitarian actors initially provide relief and leave to provide relief to someone else. Therefore, after this relief, communities are still exposed to risk.

• Most relief measures leave out risk reduction.

Indian scenario• Each year, India suffers disaster losses of US$1 billion

according to World Bank studies. • And on average, direct natural disaster losses amount

to 2% of India’s GDP and up to 12% of central government revenues. (Lester and Gurenko 2003).

• The Calamity Relief Fund of the Government of India spends US$ 286 million towards providing relief to the victims of disasters.

• Assuming that the impact of natural disasters remains so high, and many estimates expect them to increase, how will India be able to cope?

Financial losses to disasters in Asia have significantly less coverage than losses experienced in America and Europe.

Are we Funding Losses?

What is AIDMI?• The AIDMI is a community based action research,

planning and advocacy organisation.• Action and learning both.• Established in 1989 after repeated droughts.• Four sector programmes: Food, Water, Livelihood and

Habitat.• Team of 24: multi-disciplinary and multi-level.• Implementing projects in Gujarat, Tamil Nadu, Jammu

and Kashmir, Rajasthan, and Bihar

Key Interest Areas

• Risk Transfer• Climate Change Adaptation• Small Business Recovery• Action Learning Activities• Learning Resources• Child’s Right to Safer Schools• Urban Risk Reduction• Distance Learning Training

What is LRF and CCISB?

Livelihood Relief Fund (LRF) (Since 1998)• One-to-one retail relief; and need-based, demand-based, and

tailor-made approach.• Covered around 13500 micro businesses and families to recover.• Shelter support: 8,124 for temporary, permanent and additional

participatory tailor made shelter support.

Chamber of Commerce and Industry of Small Businesses• DEC Evaluation findings observed

“…..neglect of slums in disaster relief.”• Established in 2003 after 2001 Gujarat Earthquake.• Focus is on Economic Recovery and Development. • Revolving Capital, Risk Transfer , Developing Market

Opportunities, Capacity Building for Continued Recovery

Afat Vimo: The Scheme• Afat Vimo (Disaster Insurance).• Covers life (Life Insurance Corporation of India) and

non-life losses (United India Insurance Company Ltd).• One-time upfront premium. The annual premium is

approximately three days’ wage for the client.• The scheme covers losses or damages to house, stock-

in-trade, loss of work due to accident and death of earning family member up to Rs. 75,000 ($1900).

• The scheme spreads risks across disaster events, communities, occupational groups and geographical areas.

• More than 3700 clients in Gujarat.

Client Profile

• All disaster affected.• All low-income families.• All in low-income areas.• Men and women both.• Mostly micro businesses.• Assets worth Rs.13000 on average.• Annual incomes Rs.16000 to Rs.24000.• Family involvement.

Relevance to Disaster Risk Management

• Client is a disaster victim.• Intermediary is disaster mitigation agency.• Coverage is for 19 types of disasters (includes fire,

riots, strike, storm, cyclone, flood, tornado, landslide, earthquake, aircraft damage, typhoon, lightening to name a few).

• Includes micro-mitigation measures such as revolving fund in Bhuj, fire safety in schools, and capacity building inputs to clients.

Process Cycle

Main Challenges

• Low levels of private sector player interest. Focus on high premium and low volume.

• Setting up operational systems for collection and settlement.

• Mitigation matters. Risks must be reduced, not merely covered.

• It is a great struggle to do such projects as pilot, even more difficult to upscale action and advocacy with government and international bi-lateral institutions.

• Caution about all marketing no service experience.

2007 Afat Vimo ReviewKey findings• The scheme is clearly welcomed by client and there is pressure to

extend it. The renewal rate is around 80%.• The insurance companies have proved to be quick in resolving

claims (average about 20days).• Clients have suggested number of additional elements for

insurance, notably health, but express doubts when the costs are set out).

• AIDMI should consider an option to insure entire family rather than just the policy-holder.

• The main value of micro-insurance lies in limiting the indebtedness that can quickly arise around an event such as death, accident or disaster. It does not so much take people forward as prevent them from slipping back.

• Risk comes at poor people from many angels and it is only by a combination of savings, credit, organization and so on that they can be overcome.

Afat Vimo: Next Steps

1. For the current product to be financially viable, more policyholders are needed.

2. Implement a financially efficient and scalable microinsurance model for replication,

3. Extend product access to 20,000 additional individual/ family policyholders,

4. demonstrate, communicate and train CSOs and local media on the value of commercial insurance; and

5. Integrate viable risk transfer options into regional policies and global disaster reduction models

Key Conclusions

• At scale, and with efficient delivery, microinsurance can be financially viable—even for the poor.

• Initial stages require provider, donor, insurance company, and participant investment.

• Compared with costs of relief and costs of investment in public preparedness infrastructure, financing for MI up-scaling is minimal and potentially revolving.

• A range of local initiatives exist that can benefit from targeted financial and technical support.

Expanding Investment in Risk Transfer Options

1. Local organisations have invested significant amount of time, money, and efforts. An equal investment effort from donors will help up-scale existing products.

2. Globally, governments are increasing grants for governmental perparedness and disaster reduction. Intergovernmental organisations increasing grants for these governments. More emphasis is needed on local and private sector measures that the poor are buying.

Micro-insurance Impact EvaluationThe Potential of Risk Transfer for Pro-poor Disaster Risk Management.

Purpose:

To build the evidence base for risk transfer as a tool for reducing disaster risks in poor countries

Investigate and strengthen the relationship between micro-insurance and disaster risk reduction.

Approach:

Multi-partner initiative on knowledge development

Led by AIDMI, International Institute for Applied Systems Analysis (IIASA) and ProVention Consortium

A range of other partners from South Asia such as Basix, Yasiru, Proshika, and Center for Self-help Development.

Thank you