Bringing Science to the Art of Underwriting™

CAT Micro Insurance – Has Its Time Arrived ?

Pane Stojanovski

Insurance in Developing Countries:

Exploring Microinsurance and Other Commercial Opportunities

Lloyd’s November 19, 2009

© 2009 Risk Management Solutions, Inc.

Perspectives on CAT Micro Insurance

View From the BOP(*)

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

View From the Industry 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?

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(*) BOP – Bottom of the Pyramid

© 2009 Risk Management Solutions, Inc.

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

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© 2009 Risk Management Solutions, Inc.

Guy Carpenter

A CAT Micro Insurance Model

Drivers of the wheel:

• Independence• Objectivity• Competence• Education of

stake holders• Bring stake

holders together

Gov

ernm

ents

Regulators

World Bank

Rein

su

rers

Insurers

Development banks / agencies

Other

s

MFI’

sGuy Carpenter

© 2009 Risk Management Solutions, Inc.

RMS as Catalyst for Micro Insurance Solutions Founded and conducted 3 MiRT’s (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

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© 2009 Risk Management Solutions, Inc.

Rural China

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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.

© 2009 Risk Management Solutions, Inc.

Rural China

88%

0.95%

0.11%

0.01%

0

2

4

6

8

10

12

14

16

18

Loss

(R

MB

Billi

on)

Probability

R.P. ~ 900 yrs.

R.P. ~> 100 yrs.4 billion

2 billion

12 billion

PI : AAL = 163 m. = 321 m.

GovernmentAAL = 4.6 m. = 188 m.

Reinsurance or ARTAAL = 13 m. = 183 m.

© 2009 Risk Management Solutions, Inc.

Gujarat

What is at risk ?

MFIs – Credit Default Risk

People – Livelihood Risk

© 2009 Risk Management Solutions, Inc.

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 >= 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 > 7.25 1,000 INR; M > 6.75 750 INR; M > 6.25 500 INR

Premium of 5 to 6 INR covers the program costs across all layers

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© 2009 Risk Management Solutions, Inc.

Incentives and Challenges

Incentives

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)

Challenges

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

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© 2009 Risk Management Solutions, Inc.

CAT Micro Insurance – Has Its Time Arrived ?

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wealt

h

population

regular insurance

micro insurance

Bottom of the Pyramid - BOP Needs of the populations served Commercial viability and sustainability

© 2009 Risk Management Solutions, Inc.

Cat Micro Insurance is Arriving

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