According to the International Labour Organisation micro-insurance alone may not be enough to protect the poor in developing nations from natural disasters and weather related catastrophe events. Where extreme weather events and disasters are concerned the ILO recommends the use of what they have termed meso-insurance or macro-insurance schemes as micro-insurance may be too localised to assist on a larger scale.
The ILO is a proponent of micro-insurance and particularly weather-index insurance schemes, having founded their own Micro-insurance Innovation Facility to look into the sector and work on pilot-projects. However insurance is not always an easy solution to fit into developing nations where impoverished people need low-cost protection against weather and climate risks. It does work though; “Despite the challenges, and with the help of subsidies, technology and innovative approaches, insurance schemes can play a key role in helping reduce the vulnerability of the poor to weather disasters and global warming,” said Craig Churchill, who heads the ILO Microinsurance Innovation Facility.
However the micro level is not always the most appropriate to target when you are looking to protect through insurance cover against larger weather disasters and climate events. In these cases meso or macro level cover may be more appropriate.
Micro-insurance typically targets individuals and families, or a group of up to several hundred people within a small community. Meso, the ILO says, refers to larger communities, associations or cooperatives ranging from thousands to millions of people. Macro is the term used to describe cover for entire countries or regions, with hundreds of thousands to many millions of people involved.
While microinsurance is proving popular and very successful in some regions of the world, such as India where more than nine million farmers benefit from weather-index insurance, a natural disaster can wipe out whole portfolios of microinsurance risk. It is also difficult to scale microinsurance according to the ILO and many pilot schemes fail due to having too big an ambition to grow.
Where larger interventions are required, the ILO suggests that meso and macro insurance programmes could fit into this gap in the insurance market. With many microinsurance schemes being parametrically structured using weather indices and parametric triggers, it makes sense that you can scale these ideas up to community, country and regional level with the support of the global reinsurance markets.
The ILO cites the Microinsurance Catastrophe Risk Organisation (MiCRO) which helps protect Haiti’s micro-entrepreneurs from the economic impact of natural catastrophes as a successful example of mesoinsurance. At the macro level they cite the Caribbean Catastrophe Risk Insurance Facility (CCRIF) as a successful example of a regional programme which protects in a similar way to micro-insurance but across many countries via a risk-pooling parametric facility.
The alternative reinsurance markets, especially catastrophe bonds, insurance-linked securities and parametric covers, have a role to play in providing the meso and macro level products which will enable communities, countries and regions to afford weather and catastrophe cover. The parametric nature of products, combined with the capital market risk transfer and funding, are a perfect combination to enable cover to be brought to populations who are currently exposed. Meso and macro level parametric products could also provide the reinsurance cover for microinsurance programmes as the triggers involved could be matched closely to actual claims experiences.
We’ve heard of interesting research ongoing into how cat bonds could be structured for use in the microinsurance markets, using automated parametric triggers to keep costs low. We know of global reinsurers assessing these areas as potential future markets they may become involved in and also other initiatives similar to the CCRIF which may launch in developing areas of the world. With a concerted focus on the meso and macro levels the risk transfer and reinsurance markets could bring new levels and availability of cover to areas of the world where to date cover has been lacking.