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Microinsurance: Reducing the vulnerability of the poor Dr Dermot Grenham FIA 13 May 2010 What I will cover • • • • • • Context Definition Examples Parties Actuarial input Issues What problems is microinsurance trying to solve? Poverty 1.4bn live on less than $1.25 a day (World Bank) Vulnerability The aim is not just to get people out of poverty but to prevent them falling back into poverty as a result of shocks eg extreme weather events Social exclusion Traditional means of risk management and transfer may not provide a complete solution. The impact of One of the shocks that poor people may climate change be affected by is the impact of climate change which may increase the incidence of hurricanes and flooding Risks faced by the poor Lifecycle marriage and birth, education, healthcare, home-making, widowhood, old age, death and the need for an inheritance for one’s heirs. Structural These tend to be long-term or permanent changes in the national or international economy. Include seasonal factors that affect income and expenditure. Crisis Sudden, unexpected shocks to the household that disrupt its ability to generate income, and are particularly difficult to manage without access to insurance and/or savings. Risk mitigation strategies used by the poor Formal insurance CIC FINCA Uganda Informal insurance Harambee projects Risk pooling Mutuals Savings In-kind savings, saving at home, Rotating Savings and Credit Associations, Accumulating Savings and Credit Associations, saving with MFIs and even (in a few cases) with formal sector banks. Diversified sources of income If one source dries up then the poor have others they can rely on Who is insured by whom? What is microinsurance? IAIS definition Microinsurance is insurance that is accessed by low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices. Low income populations Not just low but possibly non-regular. Income mainly from the informal sector No bank accounts Entities Insurance companies Mutuals NGOs Insurance practices Product design and pricing Risk pooling Solvency requirements Types of microinsurance Crop Indemnity or index based Weather – rain, hurricane Production or price Livestock Disease Weather Production or price Property Fire Theft Life Microfinance related Credit Funeral plan Health Indemnity Cash plan Who is involved? Insurance companies Local and international Reinsurance companies International Governments Sponsoring Subsidising Overseas Development Agencies (DfID) Regulators Need to decide how to regulate NGOs Provide access to poor people Respected names Subsidise insurance IFIs World Bank/IFC UN/ILO Actuarial input Product design Simple or complex? Indemnity or index? Risks covered Level of payout Pricing Historical data analysis Allowance for trends Loadings for expenses, cost of capital and profit Level of underwriting Solvency Calculating technical provisions Calculating capital requirements Assessing reinsurance needs Issues Affordability Not just affordable but valuable Distribution How to access the poor in a cost effective manner Premium collection Regulation Sales practices Licensing Pricing and solvency Product design Understandable Claims process Cost effective Basis risk Financial education People are unlikely to buy unless they understand what it is they are buying and how it will help them. Profitability Long term sustainability without subsidies Scale