Micro-insurance aids climate-hit poor

By Green Futures

The rain fell as a solid sheet for nine hours. When it eased, Corumi Street in Quezon City, where Maria Baltao had lived for 30 years, was a frothing torrent of brown water. Her house, a small concrete block with one bedroom into which she squeezed her three sons, was waist deep in water, and the roof had disappeared.

Until then, Maria had managed to keep her children in school by making and selling pulutan, a typical Filipino snack food, from her house. When, in a few hours last October, Typhoon Ketsana ripped through the Philippines, it seemed that everything was lost. Not only had she and her children lost their home, they had also lost their only means of income.

So far, it sounds like another story about a hapless victim of a climate disaster. But although Maria’s life was disrupted, it was far from ruined. Within three days, she’d had an insurance pay-out which gave her the money for a new roof, and the means to restart her business.

Conventional wisdom says that the poor are uninsurable. That no insurance company would take the risk of covering people on the margins, prone to disasters such as these. Thirty years ago, the same was said about banking — who would lend to people without assets or collateral? Then came Grameen Bank, and the rise of microcredit — which showed that poor people could prove more credit-worthy than many a large business. Today, there are signs that “micro-insurance” could be every bit as successful — and help boost the resilience of people most vulnerable to climate change.

The year before Ketsana ripped the roof off her home, Maria had purchased PAID (“packaged assistance in case of disaster”), a micro-insurance plan launched in 2007, specifically designed to help the poor in the Philippines recover from natural calamities. It was the brainchild of a local NGO, the Filipino Centre for Agriculture and Rural Development (CARD), which works with rural communities. It already had a track record in life insurance and microbanking. But it was not until 2006, when it was distributing emergency aid in the wake of two typhoons and a volcanic eruption, that it hit on the idea of insuring them against climate disasters. CARD’s members had told the organisation that they had enough immediate assistance; what they needed was financial help to rebuild their homes.

So CARD went into partnership with insurers Pioneer Intercontinental to develop a product that could be both affordable and commercially sustainable. The trick, explains CARD’s Alex Dimaculangan, was to package the natural disaster insurance with personal accident and funeral cover. This not only addressed members’ needs, it also overcame a key hurdle for any insurance scheme: managing “covariant risk.” With climate disasters the risk can be very high, in that many people are affected at once. This could leave them uninsurable — or send premiums skyrocketing far beyond affordability. But by packaging the climate element together with more banal products, the risk was reduced to manageable levels for a commercial scheme.

As a result, the premium is just US $4.50 a year, which, Dimaculangan says, is sufficient to finance the payouts, typically around US $180 in the event of a house being destroyed. “It is only a small amount but it helps a lot,” says Maria Baltao. “Without PAID, I would be like other people, living in their houses even though they are all in pieces.”

The scheme’s proved popular with CARD members, with 133,000 plans sold to date. And it’s washing its own face, too. So far fewer than 3,000 claims have been made, and income from premiums is more than double the amount paid out.

While typhoons can cause spectacular damage, a more insidious threat of climate change is persistent crop failure due to either drought or excessive rains. These can prove devastating to rural communities in Africa who already find themselves on the edge of viability. Which makes them prime candidates for micro-insurance.

In Kenya, farmers can get cover against crop losses through Kilimo Salama (Swahili for “safe harvesting”). It’s an insurance scheme with a difference, introduced last year by UAP Insurance in partnership with the Syngenta Foundation for Sustainable Agriculture and mobile phone service provider Safaricom.

Farmers who enroll pay an extra 5% on inputs such as seeds sold by companies registered with the scheme. The premium effectively insures the resulting produce. The bar code of every purchase is scanned with a mobile phone camera and immediately registers with the insurance provider, UAP. Farmers then receive confirmation of the insurance policy through a text message.

To make a claim, farmers must be registered with one of 30 automated solar-powered weather stations. When a station broadcasts data indicating that drought or excessive rainfall has destroyed crops, farmers automatically receive an insurance payout via Safaricom’s money transfer service, MPESA.

It’s technology such as this which makes the scheme commercially viable, says UAP’s Head of Marketing, Joseph Kamiri. Previously, the costs of collecting and assessing many small premiums and claims were prohibitive. But the new mobile phone technology enables the collection of very small premiums at low cost, and the “index” insurance means that, if rainfall is outside an agreed range, payment is made automatically, without the need for costly on-the-ground assessment.

Rose Goslinger, who developed Kilimo Salama at the Syngenta Foundation, says that not only is the minimum premium of 20 Kenyan shillings (about $0.25) perfectly affordable for farmers, but trust in the product has also grown. “In the first year farmers were insuring one bag of seed, but we are seeing them come back this year and insuring them all,” she says. To date, over 11,000 farmers have registered with the scheme.

In Ethiopia, meanwhile, Oxfam America is testing another model of agricultural micro-insurance, this time to protect teff, a hardy cereal crop, against drought. As with Kenya, payouts are triggered when rainfall levels in a particular area fall short of a specified minimum. Here, though, satellite data rather than weather stations are used for monitoring, which further cuts costs, explains Oxfam’s micro-insurance specialist David Satterthwaite. The scheme is linked to a government security initiative, the Productive Safety Net Program, which allows farmers to work on community projects such as irrigation trenches and tree planting in return for having their crops insured.

Rather than promoting the insurance directly, Oxfam uses educational tools, such as games that simulate weather cycles, to build understanding and acceptance of the idea within the community. The insurance company partner, Nyala, can then introduce the product knowing that potential clients have the financial skills and knowledge to assess its worth. Although the insurance is still at piloting stage, Satterthwaite aims to have tens of thousands of clients in 2011. Such schemes, he says, make farms more credit-worthy since, if a harvest is lost, farmers know they have the ability to recover from it. This in turn encourages prudent borrowing, allowing farmers to invest in increasing productivity and so generate more income. “Insurance allows you to transfer risk into the future. It takes the surplus of the good years and uses it for the bad,” says Satterthwaite. “Its value cannot be overstated.”

So can these models be replicated and expanded elsewhere? Satterthwaite is optimistic, but cautions: “Reaching the last mile in providing services for the rural poor is very challenging.” Insurance is governed by the law of the large: it needs big numbers to make it work financially, and that takes time to achieve. But over the next decade, he adds, “we will see how advances in mobile technologies, satellite weather monitoring and regulatory environments (could) allow these small-scale initiatives to scale up.”

Alice Chapple, Director of Sustainable Financial Markets at Forum for the Future, is excited about the potential. “Micro-insurance has come a long way in recent years, and in some cases at least, full commercial viability is a definite prospect. And that could really change the landscape, in more ways than one.”

Editor’s note: This was a guest article by environmental economist and writer Deborah Kirby that originally appeared in Green Futures. Green Futures is published by Forum for the Future and is the leading magazine on environmental solutions and sustainable futures. Its aim is to demonstrate that a sustainable future is both practical and desirable — and can be profitable, too.