Can micro-insurance cover natural risks?

Gehrke, Esther


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Dokumentart: Bericht / Forschungsbericht / Abhandlung
Institut: DIE - Deutsches Institut für Entwicklungspolitik
Schriftenreihe: Discussion paper // Deutsches Institut für Entwicklungspolitik
Bandnummer: 2011, 9
ISBN: 978-3-88985-539-8
Sprache: Englisch
Erstellungsjahr: 2011
Publikationsdatum: 05.09.2011
Originalveröffentlichung:$FILE/DP%209.2011.pdf (2011)
SWD-Schlagwörter: Elementarschadenversicherung , Entwicklungsländer
Freie Schlagwörter (Deutsch): Mikroversicherung
DDC-Sachgruppe: Politik
BK - Basisklassifikation: 89.93 (Nord-Süd-Verhältnis)
Sondersammelgebiete: 3.6 Politik und Friedensforschung

Kurzfassung auf Englisch:

Natural hazards affect human well-being in several ways. They destroy livelihoods, cause huge losses in production, reduce income and damage property. Many poor people in developing countries are especially vulnerable to natural risks, not only because they depend on agricultural production as their major source of income, but also because they are often obliged to settle in risk-prone areas such as hillsides, river basins, etc. It has become even more important to find adequate means to manage natural risks because climate change is causing many of them to increase in frequency and degree. Micro-insurance for natural risks has been proposed as a helpful tool to improve poor peoples’ risk management, and several development-cooperation projects have been initiated in order to promote micro-insurance for natural risks. However, it is not yet clear which risks are insurable in micro-insurance and which are not. This paper therefore analyses which natural risks could be covered by micro-insurance and shows how this can be done. In order to determine the natural risks that could be covered by micro-insurance, a conceptual framework has been developed that adapts current work on the insurability of risks to the case of micro-insurance. This framework is then applied to four different natural risks that can serve as examples for most other natural risks. For example, drought risk can be insured similarly to extreme fluctuations in temperature. The insurability of hail risk, in turn, is representative for storm and typhoon risks, while flood risk poses the same difficulties to micro-insurance as the risk of tsunamis, landslides and volcanic eruptions. Finally, the results from analysing the insurability of livestock diseases are equally applicable to other pests and diseases. Six criteria determine if a risk is insurable in micro-insurance or not. Different microinsurance schemes are best suited to cover the risk – depending on the degree to which the following criteria are fulfilled: First, the loss must be accidental and unintentional. If it cannot be clearly observed, whether or not the loss was unintentional, only community-based schemes can cover the risk because these schemes are better suited to prevent moral hazard. Second, the chance of loss must be calculable – by using a wide range of information about the probability of occurrence and the expected loss. Third, in order to prevent adverse selection, the insurer needs to be able to classify policyholders according to their individual risk profiles. Because community-based schemes have better access to information about the insured, they might have comparative advantages in assessing the risk profile of the insured. Fourth, the losses should be determinable and measurable at relatively low cost. If this is not possible, an index must be used to approximate losses. In most cases, only full-service insurers have the technical capacity to offer index insurance. Fifth, in order to adequately diversify the risk a sufficiently large risk pool must be formed. For highly covariant risks, for example, only large insurance companies with access to international reinsurance are able to guarantee sufficient risk pooling. And sixth, micro-insurance should be the most adequate risk-management strategy, which means that no other risk-management strategy (such as risk prevention, mitigation or coping) should be superior to it in terms of costefficiency and effectiveness. Applying this framework to natural risks shows that only losses in agricultural production can be covered by micro-insurance, while property damages cannot be covered. Differentiating by the cause of risk, the following results are derived: – Drought risk can be insured in micro-insurance by a full-service insurer. The production losses need to be approximated by an index because on-the-ground loss assessment would be too expensive and allows for moral hazard. Due to the high covariance of this risk, only large insurance companies with access to international reinsurance can cover it. – Hail risk is also insurable in micro-insurance but can only be covered by an innovative micro-insurance scheme. Since the loss assessment requires on-the-ground visits, group insurance must be introduced in order to hold down transaction costs. This risk is not currently covered by micro-insurance because large insurance companies prefer providing index-based micro-insurance, as these are easier to manage and because community-based schemes cannot cover this risk. – The risk of river flood is theoretically insurable, but requires very precise topographic data in order to prevent adverse selection: Advanced technologies have to be used in order to assess the losses in agricultural production through remote sensing. Because the precise data and technology required are not yet available in many developing countries, it is still difficult to insure river flood risk in micro-insurance. – Livestock diseases, finally, are not easily insurable, since most of them can be prevented by sound management practices. Only a very few diseases are insurable, and these risks have to be covered by community-based schemes in order to guarantee immediate loss assessment. Despite the fact that different natural risks can be covered by micro-insurance, there is room to improve the outreach and efficiency of micro-insurance for natural risks by creating an innovative micro-insurance scheme. A promising way to organise a more comprehensive scheme is a national micro-insurance scheme that incorporates community-based insurance schemes in a national umbrella organisation. In such a national micro-insurance scheme, idiosyncratic risks could be covered by the community-based schemes, while the national umbrella would be responsible for covering covariant risks. Such a comprehensive micro-insurance scheme would be able to cover a wider range of natural risks by combining the advantages of existing schemes. Idiosyncratic risks such as certain pests and diseases could be covered, as well as covariant risks such as hail, storms, river floods, tsunamis and landslides. Droughts and fluctuations in temperature could still be covered by index-based micro-insurance. That way, the scheme would not only be able to cover in one contract those risks that have already been insured in micro-insurance, but could also extend the range of insurable risks to cover such risks as hail and storms that are theoretically insurable in micro-insurance, but for which no coverage yet exists.

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