DEVELOPING MICROINSURANCE FOR NATURAL CATASTROPHES IN ASIA MANILA MICROINSURANCE CONFERENCE 4 th February2015 James Nash Regional CEO Location: Manila
DEVELOPING MICROINSURANCE FOR NATURAL CATASTROPHES IN ASIA MANILA MICROINSURANCE CONFERENCE
4th February2015
James Nash
Regional CEO
Location: Manila
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The role of insurance and reinsurance
Insurance contributes to long-term economic growth by
protecting against personal and business risk, and augments
capital formation.
1
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How are we doing? Large natural catastrophe losses (2009 to 2013)
91bn
223bn
427bn
21%
43%
- 100 200 300 400 500
Europe
North America
APAC
Source: Swiss Re, Munich Re, Guy Carpenter Excludes WW Marine & Aviation, Africa, ME and rest of the world
USD Bn
Uninsured
Insured
Reinsured
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How are we doing? Advanced vs. Emerging Economies; 2002 – 2011 (Economic & Insured)
While the portion of uninsured catastrophe losses is higher in emerging
markets, a lack of catastrophe insurance usage is a global issue.
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Cat Losses in Advanced Markets - 2002 to 2011
Economic Losses Insured Losses
Cat Losses in Emerging Markets - 2002 to 2011
Economic Losses Insured Losses
Source: Guy Carpenter January 1, 2014 Renewal Report
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75
100
125
150
175
200
225
250
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Limit Index GDP Index
What about reinsurance? Reinsurance vs GDP Growth
4
Growth in reinsurance catastrophe limit in APAC has not kept pace with economic growth since 2006
Source: Guy Carpenter, World Bank, IMF
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Is Capital the Issue? Alternative or “convergence” capital
Global Pension Fund Assets Under Management: US$32 trillion
Portion potentially available for allocation to insurance-linked
investments: US$900 billion (estimated)
Global property cat limit: >US$300
billion Collateralized limit:
≈15% of global property cat limit
5
The solution to pricing
inefficiency and coverage shortfall?
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Is Innovation the Issue? Changing Landscape
6
• For many year insurance and reinsurance products remained
the same
• New capital is changing the way in which we transact business
• Increased development of parametric trigger products
• New types of reinsurances developed with the use of actuarial
and modelling tools
• Enhanced Nat Cat risk assessment
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Closing the Gap at All Levels Multiple Tiers of Intervention
Micro:
Individuals
Meso:
Institutions
Loss Event Affected Segments
Macro:
Government Entities
Ex Ante Risk Financing Methods
Microinsurance
Portfolio Risk Transfer
Public Policy Solutions / Risk Pool Development /
Macro(re)insurance
7
• In order to close the gap investment is needed in:
• Catastrophe/weather risk assessment capacity
• Innovative product/program design (e.g. alternative risk transfer; non-indemnity/parametric
solutions)
• Public-private partnerships
• New insurance paradigms
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Microinsurance The Commercial Challenge – Indemnity vs. Index
• Indemnity products are too expensive & require loss
adjustment:
– Inadequate loss adjustment
– Agreed-value products are much easier to administer
- (e.g. TREIF) but technical loss adjustment of some form still required
– Loss adjustment is cost ineffective for micro premiums
• Bottom Line:
– Indemnity property microinsurance products are commercially untenable
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Microinsurance The Commercial Challenge – Indemnity vs. Index
• Index products are more cost-effective but introduce basis
risk:
– Index insurance creates coverage gaps
– Bespoke, technically difficult product development work for each region
– Difficult to educate client base on how product works
– Due to coverage gaps the value proposition is less clear without some form
of compulsion/subsidy
• Bottom Line:
– Despite difficulties, index insurance is the best (perhaps only practical)
option for new commercial microinsurance product offerings
– Fraught with difficulties as evidenced by the array of pilots which have been
launched in Asia though have failed to scale and self-sustain:
9 March 6, 2015
1) Yield-based indexes in crop microinsurance effectively offer all-perils protection though are difficult to develop due to independent data requirement; no equivalent index for other forms of asset protection beyond crop
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Microinsurance The Solution?
• Voluntary commercial index-based microinsurance may not be
possible
– To justify product development costs and establish commercially self-
sustaining program sufficient scale required (e.g. min 100k policyholders
in two-year’s time)
– Voluntary take up rates for microinsurance programs (index or
otherwise) generally very small without external intervention (e.g.
mandatory purchase; subsidy)
– Only one index program worldwide has reached 100k policy threshold so
far to our knowledge (Kilimo Salama in Kenya which benefits from
significant amounts of past and ongoing investments from donors)
• Bottom Line:
– Voluntary index insurance programs don’t work; compulsory purchase or
subsidy needed to scale and sustain commercial interest
10 March 6, 2015
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Industry Owned Microinsurance Venture Incubator A Vision for the Future, A Different Approach
Shared Vision
The ability to manage and finance risk is important to the development of a society and, as an industry, we have a
responsibility to be socially relevant. We commit to a collaborative approach for innovating the ventures needed to
support a viable microinsurance market. Working together we will narrow the gap between economic and insured
losses by advance the relevance of insurance in society and addressing the risk needs of the underserved. American International Group, Inc., Aspen Insurance Holdings Limited, Catlin Group Limited LLC,
Guy Carpenter & Company, LLC together with Marsh & McLennan Companies, Inc., Hamilton Insurance Group, Ltd.,
Transatlantic Reinsurance Company, X .L. Group, plc, and Zurich Insurance Group
Mission The MVI is a Bermuda-based entity formed to create markets that deliver risk protection to the underserved in
developing countries by:
• Providing turn-key, cost-effective service ventures through collaborative innovation
• Creating active and profitable markets for multiple microinsurance products & services, in multiple
geographic locations
• Benefiting the global “emerging consumer” segment (first generation insurance customers)
• Contributing toward solving societal problems (e.g. economic continuity, health, longevity, food security)
Approach: Collaborative Innovation MVI will support the launch and operations of a portfolio of micro insurance ventures worldwide. These ventures
will provide the business services necessary to achieve scale and profitability in the market including: unique
distribution methods, local partnerships, product development and impact services such as measuring/monitoring
social impact.
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Function
Consortium
Investors
• Fund the operating cost and intellectual capital needed
to launch the MVI
• Have equal share in the MI Incubator
• Upon launching the MVI, become founding
shareholders
• Govern MVI and approve Strategic Investors
MV
Incubator
• As a legal entity, support the launch and operations of
the portfolio of ventures
• Replication of innovation across the portfolio of
ventures
Ventures
• Local management operating commercially with the
goal of reducing vulnerability of first-generation
insurance customers
• Policy issuance, claims settlement, product design,
distribution
Risk
Bearing
Scheme
• Provides capital to support risk bearing schemes of the
ventures in the form of quota-share agreement
• Consortium investors have first right of refusal
• Any risk not underwritten by consortium investors is
placed in the market
Donors and
External
Partners
• May provide unique form of donor capital potentially
capping loss ratio of specific ventures in early years
Strategic
Investors
• Provide financial investment and potentially distribution
platform and product innovation in one or multiple
ventures
Venture N
Venture 2
Venture 1
Consortium Investors
MI Incubator
Portfolio of Ventures
Emerging Consumers
Strategic Investors
Risk Bearing Scheme
Donors &
External partners
A Microinsurance Venture Incubator Model Structure
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Progress To Date
• During the period of June – November 2013, leading insurance companies joined
together in collaborative workstreams staffed by their associates to blueprint the
microinsurance venture incubator.
• Following the completion of the blueprint, five companies -- Guy Carpenter, Zurich,
XL Group, Catlin and AIG, expressed solid commitment to design and finance the
Microinsurance Venture Incubator (MVI)
• Launched at Davos 2015 with the first Venture in Q3 2015
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Conclusion
Think Big:
- Ask the Right Questions
- Design the Model
- Data, Data, Data
- Act Small
- Learn
- Scale Up with More Information
THANK YOU
Summary