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MicroMicro--Insurance for Natural DisastersInsurance for Natural DisastersConcepts, Present and Future OutlookConcepts, Present and Future Outlook
Haresh C. ShahHaresh C. ShahObayashi Professor of Engineering, Emeritus, Obayashi Professor of Engineering, Emeritus,
Stanford UniversityStanford UniversityFounder & Sr. Advisor, RMS Inc.Founder & Sr. Advisor, RMS Inc.
Asian Science and Technology ForumAsian Science and Technology Forum
Tokyo Conference Center ShinagawaTokyo Conference Center Shinagawa
October 5, 2007October 5, 2007
Tokyo, JapanTokyo, Japan
..
Changing Demographic Profile
0
5
10
15
2 0
2 5
3 0
3 5
4 0
Tokyo
Seoul
New York
MumbaiDelh
iMex
ico C
itySao
Paulo
Dhaka
Los Angele
sJa
karta
Lagos
Manila
-Quez
onCalc
uttaKara
chi
Buenos A
ires
City
Popu
latio
n in
Mill
ions
High per capita income
Low per capita income
Source: Munich Re, Megacities- Megarisks
15 Most Populous Cities in the World in 2015
..
Changing Demographic Profile (contChanging Demographic Profile (cont’’d)d)
0.00
1.00
2.00
3.00
4.00
5.00
1950 1975 2000 2030
Popu
latio
n in
billi
ons
Urban population in industial countries Rural population in developingUrban population in developing countries Rural population in industrialis
Source: Munich Re, Megacities - Megarisks
The Gap is Widening
..
Natural Catastrophes: Number of Loss EventsNatural 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
..
Natural Catastrophes: Number of FatalitiesNatural 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
..
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
..
Natural Catastrophes: Insured Losses (US$ m)Natural Catastrophes: Insured Losses (US$ m)
Africa
America
Asia
Australia/Oceania
Europe
Worldwide
0
9,091
1,788
122
508
11,509
Earthquake, Volcanic Eruption
Windstorm
Flood
Others
Source: Munich Re Topics 2001
..
Natural Catastrophes: 700 Loss EventsNatural Catastrophes: 700 Loss Events
12%
20%
32%
36%
Earthquake, Volcanic Eruption
Windstorm
Flood
Others
Source: Munich Re Topics 2001
..
Natural Catastrophes: 25,000 FatalitiesNatural Catastrophes: 25,000 Fatalities
9%
19%
8%64%
Earthquake, Volcanic Eruption
Windstorm
Flood
Others
Source: Munich Re Topics 2001
..
Natural Catastrophes: Economic Losses: US$ 36 Natural Catastrophes: Economic Losses: US$ 36 bnbn
11%
10%
24%
55% Earthquake, Volcanic Eruption
Windstorm
Flood
Others
Source: Munich Re Topics 2001
..
Natural Catastrophes: Insured Losses: US$ 11.5 Natural Catastrophes: Insured Losses: US$ 11.5 bnbn
Earthquake, Volcanic Eruption
Windstorm
Flood
Others
4% 8%
88%
Source: Munich Re Topics 2001
..
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, 1
998)
India (Gujarat/B
huj, 2001)
El Salvador (S
an Salvador, 1986)
Turkey (Izmit,
1999)
Mexico (Mexio City
, 1985)
Honduras (Mitc
h,1998)
Poland (Floods, 1997)
Colombia
Indonesia (Floods, 1
996)
Puerto Rico (H
ugo, 1989)
USA (North
ridge, 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 4,535Total Economic Loss (US$MM)
..
Catastrophe Insurance Penetration in Developing Catastrophe Insurance Penetration in Developing CountriesCountries
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%
..
Observations from DataObservations 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
..
Discontinuity Between Knowledge and PerformanceDiscontinuity 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.
..Source: Financial TimesSource: Financial Times
..
Some Suggestions for Creating Effective PartnershipsSome 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.
..
Concluding RemarksConcluding 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.
..
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.
..
Why Why MicroinsuranceMicroinsurance? ?
Poverty Dynamics: 25 yearsPoverty Dynamics: 25 yearsago to Presentago 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 Ago25 Years Ago
PoorPoor Not PoorNot Poor
PoorPoor
Not Not
PoorPoor
AtAt
PresentPresent
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.
..
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.
..
Remittance FinancingRemittance 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.
..
TransTrans--national risk transfer to national risk transfer to diasporadiasporacommunities in the industrialized worldcommunities in the industrialized world
IndustrializedWorld
DevelopingWorld
Migration
Financial Risk
Insurance remains unaffordable Insurance remains unaffordable for most people in the developing world.for most people in the developing world.
..
020406080
100120140160180200
2000 2001 2002 2003 2004 2005 2006
The rising level of remittances The rising level of remittances
$ BILLION$ BILLION
Economic Economic ImplicationsImplicationsof Remittances of Remittances and Migrationand Migration
World Bank World Bank
..
Remittances pay for natural disastersRemittances pay for natural disasters
Expatriate Gujaratis contributed hundreds of millions of dollars above their normal remittances, after the January 2001 Bhujearthquake.
Remittances from Bangladeshis rose by 18% in the aftermath of the 1998 Bangladesh floods.
..
As many as 2As many as 2 million million El Salvadorans live in USAEl Salvadorans live in USA;;(6 million live in El Salvador).(6 million live in El Salvador).
After the 2001 earthquakes, After the 2001 earthquakes, TTemporaryemporary PProtectiverotective SStatustatuswas granted to 150,000 was granted to 150,000 illegal immigrants, illegal immigrants, so they could continueso they could continueto send money home.to send money home.
Annually, $3 billion are sent back by expatriates to El SalvadoAnnually, $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.
..
‘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 SecurityUS Citizenship and Immigration Services
Employment Authorization documentsEmployment Authorization documentsautomatically extended to September 9th 2007.automatically extended to September 9th 2007.
ExEx--post disaster financing slows recoverypost disaster financing slows recovery
..
Breaking out of the disaster cycleBreaking 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.
..
Simplified loss adjustingSimplified 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.
..
Benefits of Benefits of diasporadiaspora disaster insurancedisaster 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 channeledinto terrorist funds.
..
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 sharingGovernments should encourage risk sharing
Kashmir: 8 October 2005
Most of the million ethnic Pakistanis in UK have community links with Kashmir.
..
TECHNOLOGICALIMPLEMENTATION
..
Recent developments in mRecent developments in m--bankingbanking
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 of the 4-year grant.
Remittances is where m-banking will really be world-changing.In Latin America, less than 10% of remittance recipients havebank accounts. Some of the commission on remittances could be re-allocated to pay for micro-insurance.
..
'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 CITIGROUP ANNOUNCE WORLDWIDE MOBILE FINANCIAL REMITTANCE 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.
..
Global payment system for remittancesGlobal 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.
..
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 Associationin 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 of transforming the lives and economies across the globe.“
Mr. O P Bhat, chairman of the State Bank of India
..
Global expansion of the remittance sectorGlobal 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.
Increasing migratory pressuresexacerbated by global warming
Larger international remittancesto more and more recipients
..
MicroMicro--payments for micropayments for micro--insuranceinsurance
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 facilitatingCould global telecoms take the initiative in facilitatingmm--insurance as well as minsurance as well as m--banking?banking?
..
‘By laying stress on the greatness of the calamityand its dreadful character, and by conducting themselveswith 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 of 227 B.C.
Shouldering risk as a charitable contribution
..Source: Financial TimesSource: Financial Times
