Microinsurance – Safeguarding livelihoods in emerging countries

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Solutions for developing countries and emerging markets

Munich Re contributes to solutions to address global challenges and to push the frontiers of insurance to new geographies, risks and types of clients. Particularly natural disasters often lead to severe socio-economic consequences for vulnerable developing countries. In form of partnerships with supranational organizations, development banks and –agencies at the national and regional level we contribute to financial resilience of these countries

Developing countries are particularly vulnerable to natural and man-made catastrophes. Low-income sections of the population in these countries have difficulty protecting themselves against such catastrophe risks. In tandem with investment in risk reduction and avoidance measures, risk transfer solutions can help mitigate the financial impact of catastrophes in the countries affected. Munich Re is therefore involved in collaborations with development banks and organisations in many regions around the world, with the goal of developing and putting into practice risk transfer solutions. For example, these provide the countries affected with prompt funding for emergency aid for their citizens and to pay for clearing-up operations.

But the positive effects of risk transfer solutions extend far beyond the provision of insurance cover. By harnessing our expertise on risk protection methods with local knowledge and infrastructure, we not only contribute to managing global challenges, but also assist governments and economies to identify and assess risks at an early stage, and to design measures based on their assessment to reduce socio-economic losses after natural catastrophes.

Through public-sector partnerships, we play a role in developing international policy and strengthen our voice at international level. Improvements in catastrophe management in vulnerable countries promote fair competition and a more stable business environment. Our clients in traditional reinsurance also benefit from this. We establish better general conditions for secure and responsible investment, and can shape new markets in the medium to long term.

Realisation of innovative risk transfer solutions: Our management approach
Experts in our specialist department Public Sector Business Development (PSBD), working in close collaboration with the business units, provide support to supranational organisations and development banks. These organisations are either our direct clients, or partner us in developing and implementing innovative risk transfer solutions for third parties. PSBD also supports our staff in the various business units, and in direct contacts with our insurance clients on innovative risk transfer solutions for the public sector, or with risks where providing safeguards is in the public interest. We measure our success by the number of transactions and the positive economic and social effects that are achieved. The satisfaction of our clients and business partners is important to us, so we place an emphasis on tailored consultation and support.

Below we present some examples of risk transfer solutions in the area of Public Sector Business Development:

Caribbean Catastrophe Risk Insurance Facility (CCRIF)

Munich Re supports the World Bank and the Caribbean Catastrophe Risk Insurance Facility (CCRIF) to set up the first Caribbean cat bond. The limited economic resources among Caribbean countries subject to natural disasters, as well as the dependence on financing from international donors for post-disaster needs, gave rise to the establishment of the CCRIF. The CCRIF is a risk-pooling facility that aims to provide immediate liquidity to Caribbean countries after major natural catastrophes. Munich Re strongly supported the World Bank in the development of the CCRIF by providing technical know-how to the design of the trigger and acting as a key reinsurance partner to the CCRIF.

On June 30, 2014, the CCRIF purchased $30m of combined tropical cyclone and earthquake capacity with a 3-year term from the capital markets via a cat bond issuance. The transaction is the first Insurance Linked Security (ILS) issuance out of the World Bank’s International Bank for Reconstruction and Development (IBRD) and the first cat bond placed for the benefit of a Caribbean sponsor. Munich Re contributed as co-lead structure to World Bank’s first cat bond emission using its new Global Debt Issuance Facility.

African Risk Capacity (ARC)

Motivated by recurrent catastrophic drought events in the Sahel, the ARC Agency was established as a specialized agency of the African Union (AU). In 2014 the ARC Ltd was established as a mutual insurance company in the Bermudas. The objective of ARC is to assist AU Member States to reduce the risk of loss and damage caused by extreme weather events and natural disasters. By now, eight participating countries bought a parametric insurance policy from the ARC. ARC Ltd is capitalized by KFW Bankengruppe (Germany) and the Department for International Development DFID (UK) and transfers risk to the market in order to build up a sustainable and independent system. The trigger is based on a Water Requirement Satisfaction Index and the Africa RiskView (ARV) model - a model developed by the UN World Food Program to calculate the estimated crop losses and drought response costs. As the Africa Risk View also serves as an early warning mechanism, it becomes clear before the end of the season whether a payout will occur.

If the early warning mechanism kicks in, a “Final Implementation Plan” detailing the use of the payout has to be submitted. The ARC pays out on an nationwide level and the payout is only provided if the government ensures allocation of indemnity to the affected people through a dedicated plan. The recipe for success of Africa Risk Capacity is the combination of risk assessment, contingency planning, implementation planning, risk transfer and rapid availability of funds. These elements as a whole make for a new innovative approach to drought risk mitigation and food security.

Munich Re supports ARC by participating in the reinsurance which globally is providing a capacity of $55m. Due to drought events in Senegal, Mauretania and Niger in the 2014/2015 season of ARC $26m have been transferred to the above mentioned affected countries. The use of these funds is informed by the Final Implementation Plans of each country. To provide an example of the measures taken: In Senegal pupils in public schools were provided with food packages.

More information on this project on artemis.bm.

Pacific Island Catastrophe Insurance Pilot

The Pacific Catastrophe Risk Assessment and Finance Initiative (PCRAFI) is a programme financed by various donors and administered by the World Bank. It was established as part of the World Bank's worldwide Disaster Risk Financing and Insurance Program (DRFIP). The aim is to promote insurance solutions as a contribution to financing catastrophe losses in emerging and developing countries. The focus areas here are advising political policymakers, analysing risks and developing outline solutions to finance and insure catastrophe risks. Munich Re, via NewRe in Zurich, is one of five companies involved in reinsuring the project.

The participating Pacific Island Countries (PICs) do not generally have access to the capital markets and therefore cannot raise capital there quickly in order to finance losses following natural disasters. The use of parametric triggers, where payouts are linked to the severity of a natural disaster rather than the actual loss amounts, allows payouts under such insurance programmes to be made in a very short time. The funds that are quickly made available can then be used for emergency aid and for clearing-up operations following a natural catastrophe.
The PCRAFI displayed already its value for the participating countries. After cyclone PAM made landfall in a number of islands belonging to Vanuatu in April 2015 and causing devastating damages, Vanuatu received $1.9m to support relief and recovery. In 2014 Tonga received $1.3m in the aftermath of Tropical Cyclone Ian.

"Integrated Financial Management of Climate Risks in Peru's Agricultural Sector"

Germany's Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and Munich Re are supporting the establishment of a risk transfer system for agriculture in Peru. The project, Integrated Financial Management of Climate Risks in Peru's Agricultural Sector, was launched to achieve this goal. The aim is to develop, in cooperation with the Peruvian authorities, a legal, institutional and structural framework for a system to protect agricultural production against weather-related risks. The project will last for five years and is being sponsored by the International Climate Initiative (ICI) of the German Federal Ministry for the Environment, Nature Conservation, Construction and Nuclear Safety.

Microinsurance – Developing and implementing tailored solutions

In partnership with primary insurers, other institutions and international NGOs, Munich Re offers microinsurances for people in exposed regions. Our microinsurance covers are adjusted to the needs of low-income sections of the population, and protect them against losing their livelihoods, while also safeguarding against other risks. In this context, we meet the needs of families and small businesses for risk protection following catastrophe events and, at the same time, make a key contribution to preventing impoverishment. The aim is to develop a viable reinsurance concept that reaches a large section of the affected population.

Through our commitment to developing and emerging countries, we are promoting economic stability and social development on the ground, and also investing in a growth market, and thus in the future of Munich Re. For these reasons, the Group offers microinsurance products not only in the form of reinsurance, but also in its primary insurance (ERGO) and Munich Health segments.

Munich Climate Insurance Initiative (MCII): Climate Risk Adaptation and Insurance in the Caribbean

Under the umbrella of the Munich Climate Insurance Initiative (MCII) and in collaboration with Munich Re, the Caribbean Catastrophe Risk Insurance Facility (CCRIF), and other partners, a weather-index-based insurance for individuals with low incomes was developed for the Caribbean islands of Jamaica, St. Lucia and Grenada. If pre-defined wind speeds or amounts of rainfall are exceeded, the Livelihood Protection Policy pays out to policyholders within a few days. Policyholders also receive a text message warning of the approach of a severe weather event, enabling them to protect their property and ensure their personal safety. A further coverage concept, Loan Portfolio Cover, is currently in the planning stages. This product is intended to protect credit institutes after an extreme weather event, to compensate for potential defaults in payments on small loans to farmers, small businesses and families.

The creation of an insurance solution for weather risks in developing and emerging markets, in conjunction with a loss prevention component, represents an initial operational step by MCII on the road towards establishing a comprehensive natural catastrophe risk management system for low-income regions. The German Ministry for the Environment has made a significant contribution to the financing and structural content of this pilot programme.

GRI: G4-DMA-Indirect Economic Impacts; G4-EC7; G4-EC8; G4-DMA-Society; G4-FS13-14; G4-DMA-Product Portfolio

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