Munich Re brings index-based flood micro-insurance to Indonesia

by Artemis on May 7, 2009

Munich Re have teamed up with Indonesian insurer Asuransi Wahana Tata to bring an innovative micro-insurance product to Indonesia. The product ‘Alert 1 Manggarai Protection Card‘ offers index-based flood insurance cheaply and easily to low income families in the Indonesian capital Jakarta.

The new product started life as a feasibility study between Munich Re (as partner and sole reinsurer), Asuransi and Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH on behalf of the Federal Ministry for Economic Cooperation and Development (BMZ). It’s now going to be piloted in 23 sub-districts of Jakarta.

The idea behind this new product is to offer cheap and easily understandable risk protection which has been specially designed for the population segment it is aimed at. There is no lengthy policy document (off putting for those in developing countries), rather the insured receives a protection card. One card costs 50,000 Indonesian rupiahs and guarantees a one off payment of 250,000 should the waters rise above 950cm (Alert 1) at the Manggarai Water Gate in Jakarta.

This trigger based flood micro-insurance product is the first micro-finance initiative to attempt to deal with flooding risks in the world. Given the risks faced by residents of Jakarta, where flooding is a recurring threat we expect this to prove popular. Should it prove a hit there it is easy to see how this could be applied in other countries which suffer severe flooding such as India and Bangladesh.

As micro-finance initiatives mature and come out of these pilot phases we hope to see them rolled out to larger areas of the developing world, they are essential to ensuring these countries and their population can progress with as little impact from severe weather as possible. In future could we see catastrophe bonds (or mini-cat bonds) issued as the financial backstop for large micro-insurance schemes? Currently some of these schemes are utilising weather derivatives as their financial backing, but for a product such as an index-triggered flood product perhaps a flood cat bond (with a similarly set trigger) would be possible in future. That would enable reinsurers such as Munich Re to roll out initiatives like this to wider areas safe in the knowledge that they would be able to pay the claims should a large event occur.

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