Innovation out of chaos
Swiss Re and partners form insurer to respond to catastrophes in poor nations
By Michael J. Moody, MBA, ARM
The world watched in horror as the details of a massive earthquake, which had its epicenter just 16 miles away from Haiti's capital of Port-au-Prince, became all too real via the nightly news. While the actual event, which occurred on January 12, 2010, registered a 7.0 on the Richter scale, the resulting damage was substantial due in large part to the poor construction used throughout the country. This resulted in significant property damage and loss of life that runs in the range of 50,000 to 200,000 people. Beyond that, an additional 3-plus million (one-third of the nation's entire population) people were left homeless by the earthquake.
Much of the world did their best to try to provide support and assistance to the remaining inhabitants of this poor Caribbean island. However, for a small group of dedicated business professionals, this event was a wake-up call. They noted that for too long, catastrophic loss events have been occurring in many emerging markets, particularly Latin America and the surrounding areas. Unfortunately, these are the very areas that can least afford this kind of destruction.
A time for action
If the losses that resulted from these types of catastrophic natural events were not bad enough in and of themselves, the fact that most of them are not covered by insurance makes matters even worse. According to Nikhil da Victoria Lobo, senior vice president, Swiss Re, "Our research shows that only about 7% of these types of losses are insured." Of course, he points out, "That means that 93% of the loss is being paid by others." This typically includes other interested parties like the local government or, more likely, falling "on the backs of the poor." It is clear, he notes, that in most of these situations, there is usually a significant gap in insurance protection.
It was the recognition of this situation that caused Swiss Re to evaluate their response to it and ultimately led the company to develop a program that is referred to as "closing the gap strategy." They saw this problem from two different perspectives. According to da Victoria Lobo, it was the two perspectives that became the "bedrock for finding a solution and closing the gap."
The first aspect that needed to be addressed was on a macro basis and dealt with the local government's role. Since it frequently fell to the government to assist in returning its people to a pre-loss position, it was extremely important that the government immediately have access to funds for post disaster emergency expenses. An example of this approach was Mexico's Multi-CAT bond, notes da Victoria Lobo.
Just as important as this top down or macro portion of the program is the micro aspect of the program. The micro portion includes the local micro business owners who are working to improve their lives. These would typically be the poorest of the nation who have secured micro financing for their businesses and are working toward a more rewarding future. Any solution that was developed, notes da Victoria Lobo, would have to consider both of these important pillars, the micro, bottom up aspects as well as the top down macro that is represented by the local governments.
Time for a new approach
The program that was developed and unveiled earlier this year is known as Microinsurance Catastrophe Risk Organization (MiCRO). The primary purpose of MiCRO, according to Swiss Re, is to "empower Haiti's micro-entrepreneurs to protect themselves against the economic aftermath of severe natural catastrophes." The first risks to be addressed by MiCRO are earthquake, hurricane, and excess rainfall. MiCRO is providing an insurance product for individuals who want "to work their way out of poverty," points out da Victoria Lobo. "Our focus is clearly on the people who normally do not have access to such coverage."
Certainly providing insurance to small business owners who normally do not have access to insurance is a noble goal; however, it would have been very difficult had it not been for the use of an innovative claims settlement feature known as a "parametric trigger." Da Victoria Lobo points out that this is an approach that is based on the actual reported physical event (i.e., magnitude of an earthquake or wind speed of a hurricane) as measured by an independent third-party reporting organization. This then allows the coverage to be written subject to a minimum event intensity.
As a result, this approach makes the entire claims settlement aspect of the coverage much easier to handle, da Victoria Lobo says. "We could deploy the coverage much faster, overcoming the lack of specific loss information and eliminating or greatly reducing the moral hazard and the subsequent adverse selection issues." So, in the event of a loss, he says, MiCRO can provide rapid claims payment (in a matter of days, rather than weeks or months) and requires no loss adjustment expenses. Bottom line, da Victoria Lobo says, the use of the parametric trigger greatly increased the viability of the MiCRO concept.
Organizationally, MiCRO has a number of important partners that were needed to fully implement its strategy. It was established as an insurance/reinsurance facility with capital being supplied from four primary sources. These include:
• Mercy Corps, a global relief and development agency
• Fonkoze, Haiti's leading microfinance institution
• The UK Government via the Department for International Development
• The Swiss Government via the Swiss Agency for Development and Cooperation.
In addition, other key stakeholders included Swiss Re, risk management consultant CaribRM and reinsurance specialists Guy Carpenter & Company.
An ongoing aspect of the program is to attract more "not-for-profits" as participants, and private companies as sustainable investors, da Victoria Lobo indicates. He says that at some point, MiCRO should represent a good investment for larger, institutional investors looking to diversify their portfolios.
Put to the test early
MiCRO was pressed into service early when Haiti was hit with a devastating rainfall that resulted in widespread flooding. Initially, the program was established to provide Fonkoze's 50,000 loan clients with catastrophic insurance protection. The coverage was made available in January 2011, and the clients paid for the insurance at the onset of each new loan. The insurance was provided so that once damage to the business assets had been established, the value of the loan from Fonkoze was eliminated and a fixed sum was made available for rebuilding. In addition, a new loan was also available from Fonkoze as soon as each client was ready for it.
On June 20, 2011, MiCRO announced the release of a large amount of insurance proceeds that were made possible due to the use of the parametric triggers that are part of the claims settlement process. The proceeds were given to Fonkoze and will be used to eliminate the client's debt and provide cash support to the business owners that were impacted by the event. Members of the syndication of strategic stakeholders note that this payment demonstrates that MiCRO's innovative structure "will, in the short term, help micro-entrepreneurs in the affected areas to rebuild quickly."
Subsequent to this most recent catastrophic event, interest has been high from other disadvantaged areas looking for ways to help develop a more sustainable economy. Since the payout, da Victoria Lobo notes, "the demand has been overwhelming from all four corners of the world." In order to move forward, he says, "We need to bring on more key strategic partners and institutions to work with local aid groups." And he points out, "Now it is important to get the product to the people as quickly as possible."
Despite the newness of the concept, MiCRO is already making its mark on the insurance world. And da Victoria Lobo adds, "More importantly, we are making a tangible difference in people's lives." MiCRO has been designed, he says, "so we can do so in a good sustainable and commercial fashion." While the general concept of MiCRO is easily understood, some people still miss the linkage with the government. And, da Victoria Lobo states, it's this linkage (including both the macro and micro perspectives) that makes the story so compelling. Long term, MiCRO "will be able to reduce the contingent liability for the local government."
"Insurance cannot solve all the problems," da Victoria Lobo says, "but what it can do is provide funding so the insureds can wake up the morning after a loss event and know they can take action." He believes "this will make our societies much more resilient."