MICROINSURANCE- WHAT’S IT ALL ABOUT? By Agrotosh Mookerjee 1 ST June

OBJECTIVES GLOBAL CONTEXT RISKS FACED FEATURES OF MICRO-INSURANCE PARTIES INVOLVED FINANCING, PRICING & PRODUCT DESIGN HOW CAN ACTUARIES HELP? 2

GLOBAL CONTEXT 80% of world population- less than $10 a day 50% of world population- less than $2 a day “The two defining challenges of our century are managing climate change and overcoming poverty” - Lord Nicholas Stern “Of the 4 billion people on earth today who live on less than $2 a day, fewer than 10 million have access to insurance” - Munich Re Foundation Lloyds report billion policies. Range of strategies required-reduce poverty Access to savings and protection is one such strategy. 3

RISKS FACED “We cannot stop natural calamities, but we can and must better equip individuals and communities to withstand them.” - Former UN Secretary General Kofi Annan Risks- Weather, Health, Accident etc Malawi- HIV/AIDS, Bangladesh- Flood, Mexico- Earthquake Informal Risk Management strategies: -Buffer stocks, community support, diversifying -Migrating, selling assets, forgoing education -POVERTY TRAP. 4

MICROINSURANCE FEATURES 1 “Micro-insurance” term- coined in the 90s Often linked to microfinance loans, access Health, Agriculture, Life, Personal Accident... Low net worth- specific perils- developmental Low premium- Low cover Affordability, willingness to buy. 5

MICROINSURANCE FEATURES 2 Raise awareness of insurance Keep it simple! Few if any exclusions e.g. Zambia Often Group based e.g. women’s associations, trade unions, self-help groups Often community based- advantages Adequate cover vs Affordable premium. 6

PARTIES INVOLVED PolicyholderGroupMFIInsurerReinsurerCAT Bonds 7

RISK FINANCING Mutual e.g. BASIX, indexed crop, India Government e.g. Mongolian Livestock Cell Captive e.g. Hollard, South Africa Reinsurance e.g. Paris Re, Swiss Re CAT Bonds e.g. FONDEN, Mexico Pooling e.g. CCRIF- 16 member countries. 8

PRICING & PRODUCT DESIGN Has to be “good value”- very price sensitive Data- varies, lack of, poor quality Pricing when data does not exist! Burning cost approach Reinsurance pricing- simple & prudent Empirical Bayesian Credibility approaches Basis risk- not compensating loss Indexed vs Indemnity e.g. Crop insurance. 9

EXAMPLE OF RISKS FOR CROP 10

EXAMPLE OF PRODUCT DESIGN 11

OTHER CHALLENGES Marketing, collecting premium Inaccessible regions- market barriers Anti-selection, Moral Hazard Verifying valid claims Legal & regulatory environment Poor infrastructure- healthcare facilities. 12

...LEARNING FROM HISTORY! QUIZ Door premium collection- life insurance? Fire insurance- cooperative flats and shops? “Loan protection insurance”- credit union? “We are currently at the crossroads for microfinance to become a fully fledged and recognised global industry service. Microinsurance will follow microfinance.” -Peter Hoppler, Swiss Re. 13

HOW CAN ACTUARIES HELP? PROCEED WITH CAUTION!......Actuaries do “Caution”! Knowledge asymmetry- insurance know-how Pricing, Product Design, Reserving, Monitoring Collaborate with academics, professionals ‘Actuarial toolkit & Guidance Notes for Micro- insurance. 14

SUMMARY Micro-insurance- insurance for vast population Many risks faced- need risk management strategies Low premium/cover, simple, group, link to loans Various parties involved- risks often reinsured Financing- different structures Pricing & Product Design- scope for improvement Challenges exist... Can we learn from the past? Actuaries can help... Since this is “insurance”! QUESTIONS & COMMENTS? 15