Community-level insurance programs are clear examples of industry innovation that can serve as the switch to initiate broader market change. These utilize index insurance products and pay out benefits if a pre-determined event occurs (a quake with an intensity of a certain level, or a certain rainfall level) (1). Such products provide solutions for many different types of stakeholders:
1. Benefits come from low-income stakeholders who streamline distribution and reduce administrative processes without compromising product and service quality. Simply downscaling existing homeowners coverage for low-income consumers will likely not work since the expense of administering such a product, burdened by the need for individualized loss assessments and expensive overheads would exceed the available premium. However, the microinsurance model is one potential approach that addresses these expenses in various ways.
- Blue Marble Microinsurance, an insurance industry consortium and venture incubator, demonstrates industry initiative to bring insurance solutions to emerging countries. The consortium consists of American International Group, Inc., Aspen Insurance Holdings Limited, Guy Carpenter & Company, LLC (a wholly owned subsidiary of Marsh & McLennan Companies, Inc.), Hamilton Insurance Group, Ltd., Old Mutual plc, Transatlantic Reinsurance Company, XL Catlin and Zurich Insurance Group. Blue Marble is committed to launching 10 microinsurance ventures over the next 10 years to deliver solutions that address the risk management needs of the underserved. Through collaboration and innovative technology enabled platforms, Blue Marble seeks to improve sustainability by expanding the role of insurance in society. These ventures will consider unique distribution methods, local partnerships, product development and impact services. Blue Marble is evaluating solutions for Africa, Latin America and emerging Asia; risk awareness and technology is an essential pillar in its deployment.
2. The Caribbean Catastrophe Risk Insurance Facility was the first multi-country risk pool. Utilizing a combination of (re)insurance and capital market financing, it is designed to limit the financial impact of excess rainfall, tropical cyclone and earthquake.
3. African Risk Capacity is a regional insurance pooling mechanism whose mission is to help African Union Member States better anticipate extreme weather events and protect the food security of vulnerable populations. Nine countries are expected to be covered in 2015 and the aim is to increase this number to over 20 in the next four years.
Parametric derivatives, in the form of adequate and affordable products for risk-prone communities, may be a partial answer for private sector (re)insurers assisting countries affected by catastrophe to actually engage in “building back better.” Complex situations that entail multiple stakeholders, many of whom have competing interests, call for solutions that are flexible and varied so that they can be tailored over time around shifting dynamics.
Permanent solutions backed by sustainable catastrophe capacity are needed for governments and communities to remove untoward hazard risk from their balance sheets in a manner that enables the private sector to handle the risk in a sustainable way.
1. National Flood Insurance Program: Report to Congress on Reinsuring NFIP Insurance Risk and Options for Privatizing the NFIP, 2015.