MiCRO: Bringing insurance solutions to Central America’s vulnerable populations

Read­ing time: 4 mins

Senior Microin­sur­ance Spe­cial­ist for the Inter­na­tion­al NGO, Mer­cy Corps, Josh Ling gives us an overview of microin­sur­ance in Cen­tral Amer­i­ca. 

The Microin­sur­ance Cat­a­stro­phe Risk Organ­i­sa­tion (MiCRO) is a rein­sur­ance com­pa­ny spe­cial­is­ing in the design and imple­men­ta­tion of nat­ur­al haz­ard risk trans­fer solu­tions for low-income mar­kets.  MiCRO was found­ed in the wake of the 2010 Haiti earth­quake by the inter­na­tion­al NGO, Mer­cy Corps, and the largest micro­fi­nance insti­tu­tion (MFI) in Haiti, Fonkoze.  After first launch­ing in Haiti, MiCRO went on to pro­vide microin­sur­ance cov­er­age to over 60,000 Haitians.  In Novem­ber 2016, the organ­i­sa­tion launched its first prod­uct in Cen­tral Amer­i­ca, “Esfuer­zo Seguro”, an index-based bun­dled earth­quake, drought and excess rain­fall insur­ance for low-income Guatemalans, that will also launch in the El Sal­vador mar­ket in 2017.

Microin­sur­ance is a type of insur­ance that serves pop­u­la­tions that do not have access to more tra­di­tion­al insur­ance prod­ucts.  Insur­ance pen­e­tra­tion across Guatemala, Hon­duras, Nicaragua and El Sal­vador, the ini­tial four Cen­tral Amer­i­can coun­tries select­ed by MiCRO, is 1.7%. 

But more than a risk trans­fer solu­tion that mere­ly increas­es the pen­e­tra­tion of insur­ance, MiCRO sees its insur­ance prod­uct design process as a plat­form that cre­ates a broad­er dia­logue on risk man­age­ment for vul­ner­a­ble pop­u­la­tions. 

MiCRO part­ners with local insti­tu­tions to pro­vide link­ages to dis­as­ter risk reduc­tion pro­grams for its tar­get clients, as well as bundling its insur­ance offer­ing with sav­ings and loans prod­ucts offered by local finan­cial part­ners.  This approach not only pro­vides a more holis­tic risk man­age­ment solu­tion, but makes the insur­ance risk trans­fer solu­tion more effec­tive in trans­fer­ring the resid­ual risk after oth­er risk mit­i­ga­tion activ­i­ties are account­ed for.

Cen­tral Amer­i­ca is a region that is high­ly exposed to nat­ur­al haz­ards with the effects of cli­mate change mak­ing nat­ur­al dis­as­ters an ever more com­mon occur­rence.  Earth­quakes, hur­ri­canes, trop­i­cal storms, and droughts con­tin­u­al­ly cause dam­age that is par­tic­u­lar­ly acute for vul­ner­a­ble low-income pop­u­la­tions who lack an ade­quate safe­ty net.  Although risk expo­sure may dif­fer slight­ly across dif­fer­ent parts of the region, Esfuer­zo Seguro bun­dles cov­er­age for earth­quake, excess rain­fall and drought at a lev­el nation­wide pre­mi­um to pro­vide acces­si­bil­i­ty and an easy to under­stand prod­uct to all poten­tial clients.

© Jorge Bar­ri­en­tos

© Jorge Bar­ri­en­tos

 

A chal­lenge not uncom­mon to microin­sur­ance is a lack of data upon which to price the prod­uct.  As an index insur­ance, pay­outs under MiCRO’s prod­uct depend on the observed lev­els of a pre-defined index that utilise satel­lite data to mea­sure rain­fall and droughts, and ground vibra­tion mea­sure­ments to deter­mine earth­quake mag­ni­tude.  Index insur­ance pro­vides trans­paren­cy and allows the prod­uct to min­imise the admin­is­tra­tive costs asso­ci­at­ed with loss adjust­ment.  How­ev­er, the cre­ation of a reli­able (and viable) index insur­ance requires a strong cor­re­la­tion between observed index lev­els and loss­es expe­ri­enced on the ground.

Esfuer­zo Seguro was designed using around 15 years of his­tor­i­cal data.  Com­pound­ing the chal­lenge of scant cli­mate data with which to design and price the prod­uct, cli­mate change sug­gests that future weath­er pat­terns are like­ly to be sig­nif­i­cant­ly dif­fer­ent from those observed over the last 15 years.  For an actu­ary, a pric­ing exer­cise such as this one presents a far more daunt­ing chal­lenge than mor­tal­i­ty improve­ments observed on a life table over a 50-year peri­od.  In fact, the com­plex mod­el­ling of Esfuer­zo Seguro was per­formed by a hydro­cli­ma­tol­o­gist, who devel­oped indices based on observed month­ly lev­els of veg­e­ta­tion, and three-day accu­mu­lat­ed rain­fall, both of which cor­re­lat­ed with his­tor­i­cal loss­es and are used to cov­er the risks of drought and excess rain­fall respec­tive­ly.  MiCRO ver­i­fied the cor­re­la­tion to actu­al loss­es by inter­view­ing numer­ous poten­tial clients liv­ing on small two hectare farms in var­i­ous areas of rur­al Guatemala.  A price was then cal­cu­lat­ed based on a pay­out struc­ture that max­imised the insur­ance cov­er­age for the most cat­a­stroph­ic events, whilst still falling into the price range accept­able to vul­ner­a­ble pop­u­la­tions with a low dis­pos­able income.

© Jorge Bar­ri­en­tos

© Jorge Bar­ri­en­tos

As any good actu­ary knows, any sin­gle pre­dic­tion of the future has a very small prob­a­bil­i­ty of occur­rence.  In the con­text of cli­mate haz­ards that are dif­fi­cult to mod­el, one of the most sig­nif­i­cant jobs is the cre­ation of a mon­i­tor­ing sys­tem that can assess the qual­i­ty of the index design.  If the index insur­ance is con­sis­tent­ly over- or under-pay­ing in a par­tic­u­lar region, for a par­tic­u­lar haz­ard, when com­pared to orig­i­nal assump­tions, pric­ing and prod­uct design must be adjust­ed to ensure the product’s long term via­bil­i­ty.  Although microin­sur­ance has clear social objec­tives, the price charged is suf­fi­cient to cov­er all claims and admin­is­tra­tive expens­es incurred by the prod­uct.  This enables the prod­uct to con­tin­ue to be offered into the mar­ket, and to be rein­sured to min­imise the cap­i­tal strain on local insur­ers as the port­fo­lio expands its scale.

One final chal­lenge encoun­tered by microin­sur­ance ini­tia­tives is that tar­get mar­ket clients typ­i­cal­ly do not have an under­stand­ing of how insur­ance and oth­er finan­cial prod­ucts work.  Giv­en that most low-income indi­vid­u­als have their first expe­ri­ence of finan­cial prod­ucts through loans and sav­ings, MiCRO has part­nered with local MFIs to offer insur­ance linked to loans and sav­ings.  By pro­tect­ing the ini­tial bal­ance of an agri­cul­tur­al loan against the risk of nat­ur­al haz­ards, for exam­ple, an indi­vid­ual may be inclined to more effi­cient­ly invest the pro­ceeds into their pro­duc­tive activ­i­ties.  Microin­sur­ance can make cred­it more effec­tive, and can be offered togeth­er with or through the same trust­ed brand the clients know from their cred­it and sav­ings.

More than any­thing, how­ev­er, clients learn about the ben­e­fits of insur­ance by expe­ri­ence.  When a drought destroys part of a har­vest, MiCRO’s pol­i­cy­hold­ers will expe­ri­ence finan­cial relief from an event that oth­er­wise could have forced the sale of assets or the need for a sec­ond job just to repay the loan.  The unin­sured indi­vid­u­als with­in a com­mu­ni­ty will also see the ben­e­fits that oth­ers gain from being insured, hope­ful­ly per­sua­sive­ly enough to con­vince them of the val­ue of hav­ing insur­ance.  This is how MiCRO’s sto­ry has start­ed in Guatemala and will soon start in El Sal­vador.  Each new pol­i­cy sold means that more of the loss­es from nat­ur­al haz­ards are now cov­ered by the cap­i­tal mar­kets, allow­ing low-income pop­u­la­tions to con­tin­ue to build their liveli­hoods with­out tak­ing a step back­wards.  As a social busi­ness, each new pol­i­cy takes MiCRO on a path towards finan­cial sus­tain­abil­i­ty, where Cen­tral Amer­i­ca is just the start­ing point for its con­tri­bu­tion towards cov­er­ing the esti­mat­ed 4 bil­lion indi­vid­u­als that could ben­e­fit from microin­sur­ance world­wide.

© Jorge Bar­ri­en­tos

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About the author

Josh Ling

Josh Ling is a Senior Microinsurance Specialist for the International NGO, Mercy Corps. Based in Mexico City, Josh advises on insurance and financial inclusion projects across Latin America, Africa and Asia, and sits on the Board of Directors of two microfinance banks in Kosovo and Bosnia and Herzegovina. As a core part of his role, Josh is the Actuary for MiCRO, an organisation co-founded by Mercy Corps in 2011 as a microinsurance reinsurance company. MiCRO’s current focus is to expand natural catastrophe insurance solutions in Central America. Josh started his career as an insurance actuary with Deloitte Consulting in Australia, before joining the International Labor Organization’s Microinsurance Innovation Facility in Geneva, Switzerland. As a part of his work at the ILO, Josh undertook a 12-month placement in Mexico City, working with an association of rural Mexican microfinance banks to develop insurance products for rural, low-income populations in Mexico. Prior to joining Mercy Corps, Josh worked as a consultant for the World Bank’s Disaster Risk Financing and Insurance team, advising governments on the financial management of the risks of natural disasters. Josh is a Fellow of the Institute of Actuaries of Australia (FIAA). He has a Master of Commerce and a Bachelor of Actuarial Studies, both from Macquarie University in Sydney.

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