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

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

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

• 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 Morelia, México, 6 de Octubre 2010


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

Universidad Michoacana San Nicholàs de Hidalgo Giorgio Amsicora Onnis

- La gestiòn del riesgo en México a 25 anos del sismo de 1985 6 de Octubre 2010

Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del Riesgo”





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






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 Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del Riesgo”



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:

Source: Figure and text: Munich Re Topics Geo 2007

„ T h e t r e n d t o w a r d s i n c r e a s i n g n u m b e r s o f catastrophes continued in 2007“






Great natural catastrophes Number of events last 10 years:

Source: Figure: Munich Re Topics Geo 2007






Great natural catastrophes Overall losses and insured losses:

In 2007: „16.000 p e o p l e d i e d throughout the world as a result o f n a t u r a l catastrophes.“

Source: Figure and text: Munich Re Topics Geo 2007






Great natural catastrophes Most expensive natural catastrophes:

Source: Figure: Munich Re Topics Geo 2007






Great natural catastrophes

• „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




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 Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del Riesgo”



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 (Business/Individuals/Households)

LOW RISK ESTABLISHED INS. CULTURE WEALTHY

HIGHER RISK/VULNERABILITY WEAK INSURANCE CULTURE POOR

DISTRIBUTION CHANNELS

LICENSED INTERMEDIARIES INSURANCE COMPANIES

NON-TRADITIONAL INTERMEDIARIES

POLICIES COMPLEX MANY EXCLUSIONS

SIMPLE FEW OR NO EXCLUSIONS GROUP POLICIES

PRODUCT DESIGN and PRICING

GOOD STATISTICAL DATA BASED ON INDIVIDUAL RISK

LITTLE HISTORICAL DATA GROUP PRICING PRICE-SENSITIVE MARKET




Traditional vs Micro- Insurance - II



TRADITIONAL MICRO

PREMIUM COLLECTION

MONTHLY TO YEARLY MAIL- OR DEBIT-ORDER- BASED

FREQUENT AND IRREGULAR (adapted to volatile cash flow) OFTEN LINKED TO OTHER TRANSACTIONS (e.g. loans)

RISK CONTROL (adverse selection, moral hazard, fraud)

LIMITED ELIGIBILITY SIGNIFICANT DOCUMENTATION SCREENING REQUIRED

BROAD ELIGIBILITY LIMITED BUT EFFECTIVE CONTROLS RISK INCLUDED IN PREMIUM LINK TO OTHER POLICIES (e.g. credit)

CLAIM HANDLING COMPLICATED EXTENSIVE VERIFICATION DOCUMENTATION

SIMPLE AND FAST PROCEDURES FOR SMALL SUMS 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 • CBOs & NGOs • Speciality agents • Brokers • Employers

• 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

• Retailers • Governments • Churches • Utility providers • Mobile phones providers




Challenges - II • Bring all stakeholders & key players together

• Policy holders • Delivery channels • Regulated & Informal insurers • Reinsurers • 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)

• Government • IGOs & Donors • Science & Technology • Business




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 Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del Riesgo”



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

• Brand promotion • Reputational benefits • Laboratory for innovation • Market intelligence • First-mover advantage • Portfolio diversification • Hit a market of 3bn people

Reputational (short-term) Knowledge (medium-term)

Profitability and growth (long-term)




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 Seminario “La Gestion del Riesgo a 25 anos del Sismo de 1985 con Epicentro en Michoacàn. Manejo Efectivo del Riesgo”



International Disaster & Risk Conference - IDRC Davos 2012

...Coming up in 2012, Davos, Switzerland

www.grforum.org

Aug 26 – 30, 2012

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

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

Economy & Finance

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