Real Risk

human and economic toll of disasters is still to be determined.

Reducing disaster-related poverty through microinsurance

presents formidable challenges to local, national and international

communities.

A major challenge is assuring the financial sustainability of

microinsurance providers and at the same time providing afford-

able premiums to poor and high-risk communities. Many people

support subsidies to meet this challenge and caution against shift-

ing responsibility from national or international solidarity to the

poor, while others warn against the negative incentives promoted

by subsidies. One of the most salient observations of this review

is the different roles played by national and international soli-

darity in supporting microinsurance schemes. India is playing a

leading role with its pro-poor insurance regulation, which

provides pre-disaster solidarity through a cross-subsidized insur-

ance system. At the international scale, the World Bank is

exercising global solidarity through its financial and technical

support, mainly for starting up risk-transfer systems for low-

income households, farms and governments. At the same time,

many microinsurance programmes are providing products to

clients, who can purchase protection in the absence of subsidies,

and private insurers are optimistic that they can market affordable

products.

If microinsurance is to become a welfare-enhancing instrument,

an equally challenging prerequisite is its propensity to reduce the

unacceptably high human and economic impacts of disasters on

the poor. While some schemes embed insurance within a disas-

ter risk management framework, this review has revealed a lack

of direct links and incentives on the part of present microinsur-

ance programmes to reduce the direct losses from disasters. This

finding is not unique to insurance in developing countries, but

it flags a more general concern about integrating risk financing

into risk management programmes that combine regulatory and

citizen oversight to assure incentives and effective regulations.

Sceptics rightly warn that insurance may conversely present disin-

centives to taking proactive risk reduction measures. Index-based

schemes offer a possible exception insofar as a physical trigger

minimizes such moral hazard.

Microinsurance is only viable to the extent that private insur-

ers remain solvent following large-scale or sequential disaster

events, or that they choose to enter these high-risk markets. If

insurers with limited capital reserves choose to indemnify large

covariant and recurring risks, they must guard against insolvency

by diversifying their portfolios geographically, limiting exposure

and/or transferring their risks to the global reinsurance and finan-

cial markets. This review shows little transparency or

commonalities in the financial backup arrangements of private

market providers. Since many programmes are in the start-up

phase or have not experienced major disasters, further research

is needed to track the performance of existing schemes.

A related challenge is creating partnerships and institutional

frameworks that contribute to credible and trusted microinsur-

ance systems. Safety nets for high-risk poor communities cannot

be put into place without public-private alliances since no one

partner can operate without the assistance of the others: highly

exposed and fiscally unstable developing country governments

cannot fully absorb the risks; informal community solidarity and

family systems are overtaxed by large covariant losses; and private

insurers cannot offer low-cost policies given the need for expen-

sive reinsurance and large uncertainties in the projected loss

estimates. One of the findings of this review is the creative

alliances among NGO/community groups, microfinance organi-

zations, government regulators, entrepreneurs and international

financial and donor institutions in pioneering microinsurance

programmes.

Of special interest is an emerging new role for donors in

supporting these schemes. The Global Index Insurance Facility

(GIIF), which is already eliciting contributions from donor insti-

tutions, may be a milestone in shifting donor focus from reaction

to risk pooling. Coupling the GIIF and other initiatives with disas-

ter loss prevention will require up-front capital, but the outlays

may be small compared to the international humanitarian assis-

tance and development finance currently channelled into

post-disaster relief, recovery and reconstruction.

For disaster microinsurance to serve as a wide-scale safety net

for the poor, the current pilot and fledgling programmes will need

to be scaled up to cover the large number of low-income house-

holds and farms facing risks from natural disasters. The potential

is large, and upscaling is occurring, but there is insufficient expe-

rience with current programmes to judge their future viability.

The research community can contribute by collecting evidence

and eliciting lessons from operating experience. The challenge of

disaster microinsurance as a pro-poor instrument, and the many

unanswered research issues, will be the focus of continued

ProVention–IIASA collaboration.

[

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Microinsurance can help low-income households and businesses

protect their assets and livelihoods against disasters

Photo: Yoshi Shimizu/International Federation of Red Cross and Red Crescent Societies