december 8, 2010icrm.ntu.edu.sg/.../documents/news2010/shahh-slides.pdfdecember 8, 2010 prof. haresh...

December 8, 2010

Prof. Haresh Shah Chairman, ICRM Advisory Board at NTU, Singapore

Emeritus Prof., Stanford UniversityEmeritus Prof., Stanford University

Founder and Senior Advisor, RMS, Inc

Cambridge Centre for Risk Studies2nd Annual Meeting8-9 December, 2010.

Risks faced by poorCatastrophe RiskBOP and Catastrophes in AsiaGrowth in AsiaMicro-insurance

– Market SizeCAT Micro-insurance

– Concept– Challengesg– Future– Micro-insurance Initiatives from Asia

L© 2010 Risk Management Solutions, Inc. 2

Micro insurance Initiatives from Asia

Poor are extremely vulnerable to their external surroundings. – Health risksHealth risks Disability Loss of life Pandemics Pandemics

– Livelihood risk Loss of employment Loss of income Loss of income-earning family member

– Financial risksFinancial risks Loans Loss of income Catastrophe risk– Catastrophe risk Natural Man-made


Catastrophes could be – Natural: earthquake, flood, drought, pandemics, etc.– Man-made: terrorism, etc.

Impact of catastrophesLoss of life– Loss of life

– Economic losses – Social disruptions

People affected the most– In Asia – Bottom of the Pyramid (BOP) population– BOP in other parts of the worldBOP in other parts of the world BOP population – why?̶ Poorer nations have limited resources, poor governance, competing demands on

limited resources̶ Challenge of handling various risks – food, day-to-day livelihood, shelter, education for

their children, etc.̶ Protecting themselves and their families from catastrophe risk is not high on their

agenda


agenda.

Asia is the home to the largest number of “poor” people of the world -(around 2 billion)

Climate change issues will potentially impact Asia more than any other continent.

Historically, Asia has suffered the most due to catastrophic events but y, phas the least number of safety net or risk transfer mechanisms.– The Asian Tsunami of 2004– The Kashmir earthquake of 2005The Kashmir earthquake of 2005– The Padang, Sumatra earthquake of 2009 – Food Security Crisis is slow and ongoing unlike natural disasters. The

rise in food prices render them unaffordablerise in food prices render them unaffordable. India has a higher rate of malnutrition among children under the age of three (46%

in year 2007) than any other country in the world.

High life, economic and social vulnerability of poor nations and societies of Asia who are at the bottom of the economic pyramid.


The “Report Card”The Report Card

Looking at Facts oo g at acts

Taking Actiong



ucsdnews.ucsd.edu


www.csiberkeley.com/article_indo.html


www.monstersandcritics.com/news/asiapacific/


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World (1960 – 2009)World (1960 2009)

Flood, 280,000

Storm, 920,000

Storm, 798,000,000

Number of killed Number of affected

Drought, 4,100,000 Earthquake,

1 108 000

Epidemic, 208,000

280,000

Drought, 2,180,000,000

Earthquake, 157,000,000

Flood, 3,045,000,000

1,108,000 , ,Epidemic,

22,000,000 Total = 6,600,000

Total = 6,200,000,000 Estimated Damage (USD Million)Drought, 87,000 ,

Earthquake, 448,000

Storm, 735,000

448,000

Epidemic, 0Flood,

427,000


Total = 1,700,000

Source: EM-DAT: The OFDA/CRED International Disaster Database –www.emdat.be – Université Catholique de Louvain – Brussels – Belgium

Storm, 718,000,000


Drought, 1,500,000

Flood, 201,000

Storm, 850,000 Drought,

1,580,000,000

Earthquake,

Flood, 2,900,000,000

Earthquake 918,000

Epidemic, 70,000

Earthquake, 126,000,000

Epidemic, 7,800,000 Estimated Damage (USD Million)Total = 3,550,000

Total = 5,330,000,000 Drought, 28 00028,000

Earthquake

Storm, 155,000

Earthquake, 315,000

Flood, 242,000


Total = 740,000 Epidemic, -

All perils (1960‐2009)All perils (1960 2009)Number of killed Number of affected

Rest of the World,

900,000,000

Asia, 3,600,000

Rest of the World,

3,000,000

AsiaAsia, 5,300,000,000

Estimated Damage (USD Million)Total = 6,600,000

Total = 6,200,000,000

Asia, 740,000

g ( )

740,000

Rest of the World,

960,000


Total = 1,700,000

Earthquake (1960‐2009)Earthquake (1960 2009)Rest of the

World, 190,000

Rest of the World,

32,000,000


Asia, 920 000

Asia, 126,000,000

920,000

Estimated Damage (USD Million)Total = 1,110,000

Total = 158,000,000

Rest of the World,

Asia, 315,000

,133,000


Total = 448,000

Asia is a growing economic and financial power for the 21st Century21st Century.

Largest rate of growth of real assets and urban centers on Earth High asset growth has exacerbated theon Earth. High asset growth has exacerbated the problems of Catastrophe Risks.


1. Tokyo Japan Asia 33,800,0002. Seoul South Korea Asia 23,900,0003. Mexico City Mexico North America 22,900,0004. Delhi India Asia 22,400,0005. Mumbai India Asia 22,300,0006. New York USA North America 21,900,0007. Sao Paulo Brazil South America 21,000,0008. Manila Philippines Asia 19,200,0009. Los Angeles USA North America 18,000,00010. Shanghai China Asia 17,900,00011. Osaka Japan Asia 16,700,00012. Kolkata India Asia 16,000,00013. Karachi Pakistan Asia 15,700,00014. Guangzhou China Asia 15,300,00015. Jakarta Indonesia Asia 15,100,000


All perils: earthquake, typhoon, flood, …

Daily survival risksDaily survival risksLeast safe buildings – highest casualtiesDestroyed livelihoodsDestroyed livelihoodsExposed to other perils

A natural catastrophe pushes many of them down the unrecoverable poverty spiral!


How much does a good design of new buildings help the poor?poor?

Is retrofitting a feasible option to poor?C fi (i di i l ) hCan governments finance (in traditional ways) the protection of all ?

Great advances we have made towards designing and t fitti f f t d f dretrofitting for safety and performance are necessary and

should continue!Can we retrofit everything? And what can we do whileCan we retrofit everything? … And what can we do while retrofitting efforts slowly make progress?


Micro-insurance – provision of protection to the low-income people against the consequences of specific risks inpeople against the consequences of specific risks, in exchange for regular premiums proportionate to their livelihood and cost of risk involved.livelihood and cost of risk involved.

Types– Health Micro-insurance– Health Micro-insurance– Life Micro-insurance– Agriculture Micro-insurance– Agriculture Micro-insurance– Livestock Micro-insurance

CAT Micro insurance– CAT Micro-insurance– Etc.


Global market – 3 billion peopleCurrently covered – 140 million mainly in Africa and Asia50% of micro-insurance products are focused on life and

h l hhealth Less than 10% of micro-insurance is currently aimed at

f d f b t h t ti lfarms and farmers, but has potential. India, Indonesia and the Philippines have the biggest

t ti l f th di t th i d t ffi i lpotential for growth according to the industry officials.


Catastrophe Micro-insurance – provision of protection to the low income people against the consequences oflow-income people against the consequences of catastrophes such as earthquake, flood, drought or weather risks, in exchange for regular premiums proportionate torisks, in exchange for regular premiums proportionate to their livelihood and cost of risk involved.

The idea is to create risk mitigation techniques for BOP g qinstead of focusing solely on disaster (risk) response strategies after the disaster has occurred.


Provide coverage to meet the catastrophic needs of the low-income populationincome population

Minimize operating costsMi i i h (i l di h i f hMinimize the cost (including the transaction costs for the clients) to enhance affordability and accessibilityP id h i h d f th l h ff t dProvide cash in hands of those people who are affected


BOP is poor– Insurance premiums unaffordable– Insurance premiums unaffordable– Lack of education– Low trust in insurance industryLow trust in insurance industry

Insurance companies– Find subsidizing premiums unaffordableg p– Cost of underwriting is high– Transaction costs are highg– Operating costs are high

Premium pool generation through– Governments?– Micro-insurance bonds?


Many Stakeholders– Customer – low-income people clients of micro-financeCustomer low-income people, clients of micro-finance

institutions– Insurance provider – commercial insurance providerp p– Facilitators – rural Banks, micro-finance institutions– Entrepreneurs – village-level entrepreneursp g p– Payment channels – rural banks, micro-finance institutions,

mobile payment companies– Government and Regulators– Funding partners – diaspora sending remittances, donors,

government.Need a Catalyst to bring them all together


Many pilots but no sustainable and scalable products yetWe have all the partsWe have all the parts

– Technical expertise– Insurance expertiseInsurance expertise– Financial understanding– Social understandingg

What we don’t have, – ability to put them all together and ab y o pu e a oge e a d– come up with a self-sustainable and scalable CAT micro-

insurance product!

We need a Driver to drive this micro-insurance eco-system!


system!

eins

urer

s

Drivers of the wheel:• Independence• Objectivity

Re • Objectivity

• Competence• Education of

stake holders• Bring stake• Bring stake

holders together

RegulatorsDevelopment banks / agencies

s


MFI

’s

India– National Agriculture Insurance Scheme (NAIS)– Weather Based Crop Insurance Scheme (WBCIS)– Rashtriya Swathya Bima Yojana (RSBY) (National Health Insurance

Scheme))– Several other health, life and weather related insurance schemes by

Bajaj Allianz, ICICI Lombard, ITGI and other insurance companies PhilippinesPhilippines

– Several health, life and agriculture insurance schemes Indonesia

H l h d Lif i h– Health and Life insurance schemes– Weather-related insurance schemes such as Flood Insurance

China– Subsidized weather insurance

Other developing countries are also developing micro-insurance!P t ti l t CAT Mi i !


Potential to grow CAT Micro-insurance!

regular insuranceregular insurance

wea

lth

micro insurance

B tt f th P id BOPBottom of the Pyramid - BOP Needs of the populations served Commercial viability and sustainability


population

Dominantly rural inventory (building stock)

Double Trigger Parametric Solution

55 million households covered

10 RMB premium (90% subsidized)

Cover all destroyed (un-inhabitableCover all destroyed (un-inhabitable

houses (16, 000 RMB per house)

Cash payouts to all policy holders in

the “epicentral” county of 500 to

1,000 RMB


Feasibility case study – earthquake micro insurance program

A l f l h 66 800 RMB (Y b k ‘08 d t i 4 Average value of a rural house ~ 66,800 RMB (Yearbook ‘08 data, assuming 4 people per household)

Policy coverage– Limit of 16,000 RMB – meaningful CAT coverage for farmers

Policy type – 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!) Individual annual premium = 10 RMB (affordability!)– Total countrywide premium: 10 RMB *(222 m./ 4) = 550 million RMB

Claims and client services - insurance agencies and village organizations g g g

Is the program feasible and sustainable? What are the benefits for the involved stakeholders?

L© 2010 Risk Management Solutions, Inc.

0.01%18 0.01%

16

18

12

14

Billion

)

12 billion GovernmentAAL = 4.6 m. = 188 m.

0 11%

8

10

s (R

MB B

R.P. ~ 900 yrs.

0.95%

0.11%

4

6

Loss

R.P. ~> 100 yrs.4 billion Reinsurance or ART

AAL = 13 m. = 183 m. 88%

0

2

Probability

y

2 billion PI : AAL = 163 m. = 321 m.


Layer Expense Amt (mil RMB)

Feasibility case study – earthquake micro insurance program

Layer Expense Amt. (mil. RMB)PI : Primary Ins.

AAL = 163 m

Risk loaded AAL 163 + 0.2*321 227.00Fixed costs: 2.5% of

ll t d i0.025*550 13.75

AAL = 163 m.

= 321 m.collected premiumLoss adjustment: 5% of layer AAL

0.05*163 8.15

RI : ReinsuranceAAL = 13 m.

= 183 m

Risk loaded AAL 13 + 0.2*183 49.60Brokerage: 25% of premium

0.25*49.6 12.40 183 m.

GOV : GovernmentAAL = 4.6 m.

Risk loaded AAL 4.6 + 0.2*188 42.20Brokerage: 11% of 0.11*42.2 4.68

= 188 m. premium

All Layers 357 78All Layers 357.78Countrywide Premium (100% participation) 550.00Premium Over Expenses 192.22


Earthquakes, cyclones , floods, drought– Often two catastrophe events in the same year

Year Peril1965 Drought1979 FloodOften two catastrophe events in the same year

– 2001 Bhuj earthquake : more than 20,000 dead 167,000 injured, one million destroyed homes. Economic loss ~ USD 2 billion

1982 Flood1982 Storm1986 Flood1993 Flood1993 StormEconomic loss ~ USD 2 billion

– 2005 Flood – Killed several hundred and affected millions. Economic loss ~ USD 2 billion.

1994 Flood1997 Flood1998 Flood1998 Storm2000 Drought2000 Drought2001 Earthquake2002 Drought2005 Flood2006 Flood2007 Flood2007 Flood


MFIs - Credit Default Risk– Loans based on trust rather than collateralLoans based on trust rather than collateral– Loan insurance if any, is only against death of the beneficiary rather

than their economic insolvency– Affected clients will likely default on payback of loans– No options to recover loans outstanding

Clients - Livelihood Risk– Survivors lose health, home and means of income. They lose

livelihoods!livelihoods!– They have no immediate monetary relief aid to put their lives back

togetherg– Poor are set back even farther than where they started out before

micro-loan


Total outstanding micro-loans 1.3 billion INRNumber of loans (households served) 325,000Average (per loan) outstanding amount 4 000 INRAverage (per loan) outstanding amount 4,000 INROperating area: whole of GujaratClients served – below the poverty line (BPL)

Data used in the study are not specific to any MFI or the MFI industry in Gujarat. It is based on our interpretation of some publicly available data. One of the goals of our discussions is to get such data for the completion of the study, leading to earthquake micro-insurance protection in Gujarat for the MFI’s and the poor who are their clients


insurance protection in Gujarat for the MFI s and the poor who are their clients.

Layer ExpensePI P i I Ri k l d d AAL 520 000 0 2*3 400 000 1 200 000

Amount (INR)PI ‐ Primary Insurance Risk loaded AAL 520,000 + 0.2*3,400,000 1,200,000

AAL = 520,000Fixed costs:2.5% of collected premium 0.025 * 1,625,000 40,625 L dj

3,400,000Loss adjustment: 5% of layer AAL 0.05 * 520,000 26,000

Expenses Total: 1,266,625 Gujarat wide premium (100% participation) 5 * 325,000 1,625,000 Premium over expenses 358,375

This program is adequate for traditional and well diversified insurance company, where the cat micro-insurance program is smaller part of their book of businessI di id l i f 5 INR ld i h


Individual premium of 5 INR could sustain the program42

Layer ExpensePI ‐ Primary Insurance Risk loaded AAL 380,000 + 0.2*1,900,000 760,000

Amount (INR)

AAL = 380,000Fixed costs:2.5% of collected premium 0.025 * 1,950,000 48,750 Loss adjustment:

1,900,000 5% of layer AAL 0.05 * 380,000 19,000 RI ‐ Reinsurance Risk loaded AAL 140,000 + 0.2*2,100,000 560,000

Brokerage:AAL = 140,000 25% of collected premium 0.25 * 1,950,000 487,500

= 2,100,000All Expenses 1,875,250

Thi ( l ) i f ll i l i

All Expenses 1,875,250 Gujarat wide premium (100% participation) 6 * 325,000 1,950,000 Premium over expenses 74,750

This (or more complex) program is necessary for a small regional insurance company without much diversification in its own book of business. It must seek diversification through reinsurance risk transfer in the global reinsurance market (for a price !)


(for a price !) Individual premium of 6 INR could sustain the program

43

State has extreme climate in terms of rainfall and temperature;

The floods are reported almost every third year in one or other part of the state;

State has witnessed many damaging floods during recent time (GSDMA, 2006).( , )


Identification and verification of a trigger qualifying event– Incomplete coverage of measuring stations (gauges) in developing p g g (g g ) p g

countries– Incomplete / insufficient flow data

T diti l h t d l i fl d i k d l (f i d it– Traditional approach to developing flood risk models (for indemnity based insurance) difficult, costly and time consuming.(high resolution exposure, DTM, river networks, ...)

– Limited reporting agency capability to identify trigger event Alternative approach (methodology)

Flood event identification through rainfall data (much denser and more– Flood event identification through rainfall data (much denser and more complete coverage)

– Flood severity estimation from rainfall data and regional flood proneness analysis

– Account for cross correlation amongst measuring stationsTrigger event identification based on reporting agency data


– Trigger event identification based on reporting agency data

45

Part related to micro-loans default risk: MFIPart related to loan holders livelihood riskPart related to loan holders livelihood risk

– Loan holders, orPart of the interest rate (MFI) and/or– Part of the interest rate (MFI), and/or

– Subsidies (“money pools”, governments, NGOs)

S l ti h d th h i t ti f thSolutions reached through interaction of the involved stake holders


Demonstrate that the multi peril micro-insurance program for the MFIs in Gujarat and their micro-loan is feasible (after pilot study completion)

For MFI’s: protection against loan default in case of earthquake For loan holders: immediate financial assistance in post For loan holders: immediate financial assistance in post

earthquake recovery Primary Insurance: commercially viable product expansion low Primary Insurance: commercially viable product expansion, low

operational costs, recognition of social responsibility Reinsurers: product expansion uncorrelated with existing p p g

business, low operational costs, recognition of social responsibility


Government: Reduced impact of catastrophes 47

Catastrophes devastate those who are already struggling with the normal everyday life sustenance.

Technological solutions (better construction and retro-fitting of existing dwellings) continues to be globally promoted by governments, NGOs and academic institutions. These are truly valuable in minimizing the catastrophic loss of life and economy.

Over the five decades during which time we have learned so much about the earthquakes and ways for designing and building dwellings and other structures, the devastations due to such events continue unabated.

h d h l f h h l l d The micro-insurance products may not save the lives of those who live in poorly constructed homes, but they will certainly help those who lived through the disaster towards putting their lives in order after the event.

A true holistic solution would be a global thrust for better housing construction and a better way to help those who survived a better way to help those who survived and who need to y py pdeal with the economic calamity that follows for the poor of the world disaster after disaster. Those are the kinds of bridges we need to build for the last mile.


Cambridge Centre for Risk Studies2nd Annual Meeting8 9 D b 20108-9 December, 2010.

THANK YOU

december 8, 2010icrm.ntu.edu.sg/.../documents/news2010/shahh-slides.pdfdecember 8, 2010 prof. haresh...

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