CAT Micro Insurance

1
CAT Micro Insurance Has Its Time Arrived ?

• Pane Stojanovski

Insurance in Developing Countries Exploring
Microinsurance and Other Commercial
Opportunities Lloyds November 19, 2009
2
Perspectives on CAT Micro Insurance

• View From the BOP()

• View From the Industry

• Skeptical of insurance
• Catastrophes not perceived as high risk compared
  to other risks
• Little insurable property
• Microfinance institutions start showing interest
  for credit default risk protection
• Country specific situations

• Demand side - data quality / availability issues,
  non-standard products across geographies, low
  CAT risk awareness by agencies serving the poor
• Supply side - models for peril / regions where
  cat micro insurance is a concern, ability to
  quantify micro insurance risk
• Consensus viable and commercially sustainable MI
  solutions How to get there?

() BOP Bottom of the Pyramid
3
Making CAT Micro Insurance Work

• Models and data are necessary, but they are not
  sufficient
• Need for a catalyst that can provide risk
  quantification, who is independent and objective,
  and capable of bringing all players together
• Cat micro insurance cannot be a charity, it has
  to be based on social entrepreneurship foundation
  to provide affordable, commercially viable and
  sustainable risk transfer solutions to the
  populations served

4
A CAT Micro Insurance Model

• Drivers of the wheel
• Independence
• Objectivity
• Competence
• Education of stake holders
• Bring stake holders together

Guy Carpenter
5
RMS as Catalyst for Micro Insurance Solutions

• Founded and conducted 3 MiRTs (Micro Insurance
  Round Table) forums with Nanyang Technological
  University (NTU) since 2007
• Chartered Singapore NTU Alliance for Micro
  Insurance - 2009
• Focused team (Dr. Stojanovski, Dr. Dong, Ms Wagh)
  working together with Prof. Shah on cat micro
  insurance activation
• Pilot viability / sustainability studies Rural
  China, Gujarat
• Complete micro insurance risk quantification
• Feasible programs
• In the pipeline Andhra Pradesh, Indonesia,
  Philippines
• expand on perils and programs (drought,
  cyclone, flood )
• Workshop with a spectrum of stake holders across
  to move cat micro insurance to the next level -
  spring 2010

6
Rural China

• Policy coverage
• Limit of 16,000 RMB meaningful CAT coverage
  for farmers
• Step policy (to minimize operational costs)
• Full limit (16,000 RMB) for a collapsed or red
  tagged (uninhabitable) house
• No payment for other levels of damage
• Individual annual premium 10 RMB
  (affordability!)
• Total countrywide premium 10 RMB (222 m./ 4)
  550 million RMB
• The premium covers the cost of risk, risk
  loading, fixed costs, and loss adjustment
  expenses across all layers of the program.

7
Rural China
8
Gujarat

• What is at risk ?

People Livelihood Risk
MFIs Credit Default Risk
9
Gujarat - Parametric Multi Trigger Policy

• Payout rules
• MFIs Portion of the outstanding loans in the
  district where earthquake epicenter is, defined
  with the ratio of area with ground shaking gt
  0.1g (modeled) and the district area
• People Fixed amount to all loan holders in the
  district where the epicenter is as function of
  the magnitudeM gt 7.25 1,000 INR M gt 6.75 750
  INR M gt 6.25 500 INR
• Premium of 5 to 6 INR covers the program costs
  across all layers

10
Incentives and Challenges

• Incentives

• Challenges

• Insured quick cash payout, simple policies
  (step, index, multi trigger, ...)
• Governments / Regulators reduction of
  sovereign risk
• Development agencies, NGOs commercially
  sustainable CAT protection and support for the
  BOP moving up
• MFIs managing credit default risk
• Industry product expansion (uncorrelated /
  lightly correlated with the existing business)

• High programs participation
• Minimizing costs
• Affordability
• Recognized role of the catalyst
• Multi peril coverage!
• Regulatory
• Risk awareness and insurance solutions education
  for all stake holders

11
CAT Micro Insurance Has Its Time Arrived ?

• Needs of the populations served
• Commercial viability and sustainability

12
Cat Micro Insurance is Arriving