Microinsurance took a step forward with Swiss Re's recent release of approximately $1 million in parametric insurance proceeds in response to a June 2011 rainstorm in Haiti. Parametric payments differ from traditional claims payments in that they are issued based upon triggers, such as storms of a given intensity within a geographic location, rather than on the basis of individual claims submitted. Swiss Re acted in its capacity as reinsurer for policies issued by the Microinsurance Catastrophe Risk Organization (MiCRO) a donor capitalized insurance facility, of which Swiss Re is also a founding partner.
The funds released by Swiss Re will go to micro-entrepreneur clients who have microinsurance policies associated with loans issued by Fonkoze, Haiti's largest microfinance institution. Fonkoze has approximately 50,000 clients in Haiti. Clients affected by the weather event received two concrete benefits as a result of the disbursement, one being a deduction in the outstanding balance of their small microfinance loans, and the other being an emergency cash grant to help them get back on their feet, according to Nikhil da Victoria Lobo, senior VP, public sector business, Swiss Re (Zurich, Switzerland). The parametric approach to microinsurance overcomes several obstacles faced in emerging markets, he asserts.
"A traditional insurance system requires a certain amount of infrastructure -- good data, claims adjusters, fixed or define assets -- which tend to be substantially restricted in emerging markets," da Victoria Lobo explains. "Speed of payment is another issue, as clients in these markets do not have the resources to absorb the typical delay associated with claim payments."
Parametric insurance schemes also utilize various strategies to align moral hazards between the risk taker and the insurer, da Victoria Lobo notes.
"In emerging markets we need to step outside traditional mechanism for handling moral hazards, such as deductibles and co-insurance," da Victoria Lobo says. "These are complex concepts and they also require capital that people don't have."
Parametric-based insurance triggers payments on the basis of publicly available data, in this case a judgment to pay being based on a given quantity of rainfall occurring over given time.
"You don't need data because the data is already in existence from sources such as NOAA or USGS," da Victoria Lobo says. "And with regard to speed of payment, the events in Haiti occurred over a four-day event between June 2 and June 5, and the payment was made two weeks later."
Da Victoria Lobo emphasizes that the coverage was actuarially sound and that the insurance and payment cycle represent a valid risk management transaction. The weather event that occurred was not unexpected in terms of the underwriting conditions of the policies, he says, adding that greater frequency of events will result in higher premiums.
"We were very clear when designing this that people will have to pay the risk cost of their insurance," da Victoria Lobo says. "It's easy for insurers to sell you umbrellas in Southern California; we wanted to develop something whose value people could see up front, even though it meant paying a little more than they might otherwise be willing to pay."