December 8, 2010 Prof. Haresh Shah Chairman, ICRM Advisory Board at NTU, Singapore Emeritus Prof., Stanford University Emeritus Prof., Stanford University Founder and Senior Advisor, RMS, Inc Cambridge Centre for Risk Studies 2 nd Annual Meeting 8-9 December, 2010.
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December 8, 2010icrm.ntu.edu.sg/.../Documents/News2010/shahh-slides.pdfDecember 8, 2010 Prof. Haresh Shah Chairman, ICRM Advisory Board at NTU, Singapore Emeritus Prof., Stanford UniversityEmeritus
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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
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
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.
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
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
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?
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
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
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
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
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 !)
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
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
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.