developing microinsurance for natural catastrophes in asia€¦ · microinsurance the solution?...

DEVELOPING MICROINSURANCE FOR NATURAL CATASTROPHES IN ASIA MANILA MICROINSURANCE CONFERENCE

4th February2015

James Nash

Regional CEO

Location: Manila

GUY CARPENTER C:\Users\scapay\Desktop\DEVELOPING MICROINSURANCE FOR NATURAL CATASTROPHES IN ASIA.pptx

The role of insurance and reinsurance

Insurance contributes to long-term economic growth by

protecting against personal and business risk, and augments

capital formation.

1

GUY CARPENTER C:\Users\scapay\Desktop\DEVELOPING MICROINSURANCE FOR NATURAL CATASTROPHES IN ASIA.pptx 2

How are we doing? Large natural catastrophe losses (2009 to 2013)

91bn

223bn

427bn

21%

43%

- 100 200 300 400 500

Europe

North America

APAC

Source: Swiss Re, Munich Re, Guy Carpenter Excludes WW Marine & Aviation, Africa, ME and rest of the world

USD Bn

Uninsured

Insured

Reinsured


How are we doing? Advanced vs. Emerging Economies; 2002 – 2011 (Economic & Insured)

While the portion of uninsured catastrophe losses is higher in emerging

markets, a lack of catastrophe insurance usage is a global issue.

3 March 6, 2015

Cat Losses in Advanced Markets - 2002 to 2011

Economic Losses Insured Losses

Cat Losses in Emerging Markets - 2002 to 2011

Economic Losses Insured Losses

Source: Guy Carpenter January 1, 2014 Renewal Report


75

100

125

150

175

200

225

250

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Limit Index GDP Index

What about reinsurance? Reinsurance vs GDP Growth

4

Growth in reinsurance catastrophe limit in APAC has not kept pace with economic growth since 2006

Source: Guy Carpenter, World Bank, IMF


Is Capital the Issue? Alternative or “convergence” capital

Global Pension Fund Assets Under Management: US$32 trillion

Portion potentially available for allocation to insurance-linked

investments: US$900 billion (estimated)

Global property cat limit: >US$300

billion Collateralized limit:

≈15% of global property cat limit

5

The solution to pricing

inefficiency and coverage shortfall?


Is Innovation the Issue? Changing Landscape

6

• For many year insurance and reinsurance products remained

the same

• New capital is changing the way in which we transact business

• Increased development of parametric trigger products

• New types of reinsurances developed with the use of actuarial

and modelling tools

• Enhanced Nat Cat risk assessment


Closing the Gap at All Levels Multiple Tiers of Intervention

Micro:

Individuals

Meso:

Institutions

Loss Event Affected Segments

Macro:

Government Entities

Ex Ante Risk Financing Methods

Microinsurance

Portfolio Risk Transfer

Public Policy Solutions / Risk Pool Development /

Macro(re)insurance

7

• In order to close the gap investment is needed in:

• Catastrophe/weather risk assessment capacity

• Innovative product/program design (e.g. alternative risk transfer; non-indemnity/parametric

solutions)

• Public-private partnerships

• New insurance paradigms


Microinsurance The Commercial Challenge – Indemnity vs. Index

• Indemnity products are too expensive & require loss

adjustment:

– Inadequate loss adjustment

– Agreed-value products are much easier to administer

- (e.g. TREIF) but technical loss adjustment of some form still required

– Loss adjustment is cost ineffective for micro premiums

• Bottom Line:

– Indemnity property microinsurance products are commercially untenable

8 March 6, 2015


Microinsurance The Commercial Challenge – Indemnity vs. Index

• Index products are more cost-effective but introduce basis

risk:

– Index insurance creates coverage gaps

– Bespoke, technically difficult product development work for each region

– Difficult to educate client base on how product works

– Due to coverage gaps the value proposition is less clear without some form

of compulsion/subsidy

• Bottom Line:

– Despite difficulties, index insurance is the best (perhaps only practical)

option for new commercial microinsurance product offerings

– Fraught with difficulties as evidenced by the array of pilots which have been

launched in Asia though have failed to scale and self-sustain:

9 March 6, 2015

1) Yield-based indexes in crop microinsurance effectively offer all-perils protection though are difficult to develop due to independent data requirement; no equivalent index for other forms of asset protection beyond crop


Microinsurance The Solution?

• Voluntary commercial index-based microinsurance may not be

possible

– To justify product development costs and establish commercially self-

sustaining program sufficient scale required (e.g. min 100k policyholders

in two-year’s time)

– Voluntary take up rates for microinsurance programs (index or

otherwise) generally very small without external intervention (e.g.

mandatory purchase; subsidy)

– Only one index program worldwide has reached 100k policy threshold so

far to our knowledge (Kilimo Salama in Kenya which benefits from

significant amounts of past and ongoing investments from donors)

• Bottom Line:

– Voluntary index insurance programs don’t work; compulsory purchase or

subsidy needed to scale and sustain commercial interest

10 March 6, 2015


Industry Owned Microinsurance Venture Incubator A Vision for the Future, A Different Approach

Shared Vision

The ability to manage and finance risk is important to the development of a society and, as an industry, we have a

responsibility to be socially relevant. We commit to a collaborative approach for innovating the ventures needed to

support a viable microinsurance market. Working together we will narrow the gap between economic and insured

losses by advance the relevance of insurance in society and addressing the risk needs of the underserved. American International Group, Inc., Aspen Insurance Holdings Limited, Catlin Group Limited LLC,

Guy Carpenter & Company, LLC together with Marsh & McLennan Companies, Inc., Hamilton Insurance Group, Ltd.,

Transatlantic Reinsurance Company, X .L. Group, plc, and Zurich Insurance Group

Mission The MVI is a Bermuda-based entity formed to create markets that deliver risk protection to the underserved in

developing countries by:

• Providing turn-key, cost-effective service ventures through collaborative innovation

• Creating active and profitable markets for multiple microinsurance products & services, in multiple

geographic locations

• Benefiting the global “emerging consumer” segment (first generation insurance customers)

• Contributing toward solving societal problems (e.g. economic continuity, health, longevity, food security)

Approach: Collaborative Innovation MVI will support the launch and operations of a portfolio of micro insurance ventures worldwide. These ventures

will provide the business services necessary to achieve scale and profitability in the market including: unique

distribution methods, local partnerships, product development and impact services such as measuring/monitoring

social impact.


Function

Consortium

Investors

• Fund the operating cost and intellectual capital needed

to launch the MVI

• Have equal share in the MI Incubator

• Upon launching the MVI, become founding

shareholders

• Govern MVI and approve Strategic Investors

MV

Incubator

• As a legal entity, support the launch and operations of

the portfolio of ventures

• Replication of innovation across the portfolio of

ventures

Ventures

• Local management operating commercially with the

goal of reducing vulnerability of first-generation

insurance customers

• Policy issuance, claims settlement, product design,

distribution

Risk

Bearing

Scheme

• Provides capital to support risk bearing schemes of the

ventures in the form of quota-share agreement

• Consortium investors have first right of refusal

• Any risk not underwritten by consortium investors is

placed in the market

Donors and

External

Partners

• May provide unique form of donor capital potentially

capping loss ratio of specific ventures in early years

Strategic

Investors

• Provide financial investment and potentially distribution

platform and product innovation in one or multiple

ventures

Venture N

Venture 2

Venture 1

Consortium Investors

MI Incubator

Portfolio of Ventures

Emerging Consumers

Strategic Investors

Risk Bearing Scheme

Donors &

External partners

A Microinsurance Venture Incubator Model Structure


Progress To Date

• During the period of June – November 2013, leading insurance companies joined

together in collaborative workstreams staffed by their associates to blueprint the

microinsurance venture incubator.

• Following the completion of the blueprint, five companies -- Guy Carpenter, Zurich,

XL Group, Catlin and AIG, expressed solid commitment to design and finance the

Microinsurance Venture Incubator (MVI)

• Launched at Davos 2015 with the first Venture in Q3 2015


Conclusion

Think Big:

- Ask the Right Questions

- Design the Model

- Data, Data, Data

- Act Small

- Learn

- Scale Up with More Information

THANK YOU

Summary

developing microinsurance for natural catastrophes in asia€¦ · microinsurance the solution?...

Documents