Risk transfer: agenda for micro insurance
Key global players in micro-insurance gathered in Mumbai under the auspices of Munich Re past week to discuss ways of taking micro insurance from knowledge to action, it is timely to discuss promotion of risk transfer for low income communities vulnerable to disasters. The rare gathering needed to investigate the strengthening of the relationship between risk transfer and risk reduction. The role of risk transfer as a key component of disaster risk reduction must be on follow up agenda.
All India Disaster Mitigation Institute’s (AIDMI) own work since 1989 in 5 states of India and 3 countries in the region has found that the poor among disaster victims are repeatedly exposed to and affected by disaster. They are perpetually restricted in their access to vital financial services including micro-insurance. The humanitarian acts are packed into a ‘project’ with a clear-cut beginning and a perfect end while risks can not be. Humanitarian actors provide relief and leave to provide relief to someone else some place else. After this short-term relief, communities and their small but important assets remain exposed to a range of risk. This is odd. Can micro-insurance help accelerate victim’s own recovery efforts? Can it help secure recovery?
Leading NGOs such as DHAN Foundation in South India and Opportunity International in Malawi found that there is a substantial lack of viable options for transferring risk available to the poor at micro level. For example, the proportion of disaster losses in 2005 covered by insurance was 51 per cent and 30 per cent for the USA and Europe, respectively. Over the same period, only 5 per cent losses faced in Asian countries were covered by insurance though Asia faces more disasters across large areas.
Global NGOs such as Christian Aid and local CBOs such as SNEHA, South India, acknowledge that development of risk transfer schemes at micro level faces a number of challenges including a lack of reliable information base, social exclusion, affordability, accessibility, low levels of awareness, expansion and up scaling of pilot projects, and sustainability including addressing lower renewal rates. There is no pressing demand for enabling policy environment from the victims. Integration of risk reduction and cost-cutting measures are considered important in order to ensure viability of micro-insurance from commercial point of view to penetrate rural and isolated communities vulnerable to or affected by disasters and make insurance affordable for the poor among the victims.
Recent work of ProVention Consortium, Geneva, revealed that micro-insurance cannot be used as stand-alone measure for risk reduction. Bundling of insurance products with other micro-finance products—savings or credit—and non financial services—mitigation measures and preparedness—are a crucial factor in sustaining risk transfer models at the micro-level. To succeed, both, poverty and risk must be reduced. One alone will not do. India’s National Disaster Management Authority (NDMA), Earthquake Reconstruction and Rehabilitation Authority (ERRA) of Pakistan and Disaster Management Centre of Government of Sri Lanka must take note of this need for bifocal approach while following from international financial institutions.
The role of above mentioned authorities, in order to overcome these challenges, is central in creating enabling regulatory environment offering incentives to insurers, making investment to enhance application of index-based weather insurance, as well as subsidizing cost of micro-insurance products and services reaching the poor. The authorities must invest in creating the market for such micro insurance services.
High danger of achieving very low levels of penetration is often mentioned by insurers as a caution as most of the poor in Asia and Africa cannot afford costly schemes to meet technical standards set up by insurer: almost half of the communities live outside the official statistics or entitlements. Data on risk does not cover the poor and vulnerable.
Low levels of market penetrations may not achieve financial viability of any risk transfer scheme. Sound premium and sound intermediary agencies are considered important for sustainability. Insurers must join authorities to ensure this.
Micro insurance sector should not catch up with the macro insurance sector but in fact set the agenda for all in the business of risk reduction.