Microinsurance: Reducing the vulnerability of the poor Dr Dermot Grenham FIA 13 May 2010

What I will cover Context Definition Examples Parties Actuarial input Issues

What problems is microinsurance trying to solve? Poverty1.4bn live on less than $1.25 a day (World Bank) VulnerabilityThe aim is not just to get people out of poverty but to prevent them falling back into poverty as a result of shocks eg extreme weather events Social exclusion Traditional means of risk management and transfer may not provide a complete solution. The impact of climate change One of the shocks that poor people may be affected by is the impact of climate change which may increase the incidence of hurricanes and flooding

Risks faced by the poor Lifecyclemarriage and birth, education, healthcare, home-making, widowhood, old age, death and the need for an inheritance for one’s heirs. StructuralThese tend to be long-term or permanent changes in the national or international economy. Include seasonal factors that affect income and expenditure. CrisisSudden, unexpected shocks to the household that disrupt its ability to generate income, and are particularly difficult to manage without access to insurance and/or savings.

Risk mitigation strategies used by the poor Formal insurance CIC FINCA Uganda Informal insurance Harambee projects Risk pooling Mutuals SavingsIn-kind savings, saving at home, Rotating Savings and Credit Associations, Accumulating Savings and Credit Associations, saving with MFIs and even (in a few cases) with formal sector banks. Diversified sources of income If one source dries up then the poor have others they can rely on

Who is insured by whom?

What is microinsurance? IAIS definitionMicroinsurance is insurance that is accessed by low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices. Low income populations Not just low but possibly non-regular. Income mainly from the informal sector No bank accounts EntitiesInsurance companies Mutuals NGOs Insurance practices Product design and pricing Risk pooling Solvency requirements

Types of microinsurance CropIndemnity or index based Weather – rain, hurricane Production or price LivestockDisease Weather Production or price PropertyFire Theft LifeMicrofinance related Credit Funeral plan HealthIndemnity Cash plan

Who is involved? Insurance companies Local and international Reinsurance companies International GovernmentsSponsoring Subsidising Overseas Development Agencies (DfID) RegulatorsNeed to decide how to regulate NGOsProvide access to poor people Respected names Subsidise insurance IFIsWorld Bank/IFC UN/ILO

Actuarial input Product designSimple or complex? Indemnity or index? Risks covered Level of payout PricingHistorical data analysis Allowance for trends Loadings for expenses, cost of capital and profit Level of underwriting SolvencyCalculating technical provisions Calculating capital requirements Assessing reinsurance needs

Issues AffordabilityNot just affordable but valuable DistributionHow to access the poor in a cost effective manner Premium collection RegulationSales practices Licensing Pricing and solvency Product designUnderstandable Claims process Cost effective Basis risk Financial education People are unlikely to buy unless they understand what it is they are buying and how it will help them. ProfitabilityLong term sustainability without subsidies Scale