When a drought hits in Guatemala, low-income farmers and their families can suffer devastating setbacks. A new type of microinsurance aims to protect these populations against natural disasters, and for the first time, protect low-income customers in areas that have otherwise been considered not insurable.
The Microinsurance Catastrophe Risk Organization (MiCRO), a reinsurance company incorporated in Barbados, has already delivered its product in Haiti to nearly 65,000 microfinance clients, who received a total of $8.8 million following events like Hurricane Sandy and Tropical Storm Isaac.
Central America is the next target, said Carlos Boelsterli, MiCRO’s CEO, because insurance coverage in the impoverished region is very low, while exposure to natural catastrophes – such as excessive rainfall, earthquakes and droughts – is extremely high. Historically, low-income families without coverage in the region have lost everything after these types of disasters, and have had nothing to fall back on.
“This impacts the region especially hard, given the high levels of poverty and thus vulnerability of large segments of the population,” said Boelsterli in an email to Humanosphere. “This is nevertheless only a first step that will be soon followed by a regional expansion, since the problems addressed by MiCRO are (unfortunately) not limited to Central America.”
Unlike traditional insurance, where losses are verified by an insurance adjuster on a case by case basis, MiCRO’s index-based insurance uses predetermined indices, such as rainfall levels, that trigger an automatic payment to all insured clients within a geographic region. The stronger the event, the greater the payout to the beneficiaries will be.
This relatively new approach has helped make it commercially feasible to reach low-income areas in countries like Guatemala, which has a rural poverty rate of 80 percent. A similar insurance product has already helped some 16,000 families in Kenya and Ethiopia, where climate change has made once-occasional droughts more frequent and severe.
“It is becoming more common in the developing world, but is still relatively new,” said Boelsterli. “You need sufficient and reliable historical data to develop accurate climate models. … Fortunately, the improvements in satellite technology and data analysis make this increasingly possible.”
Index-based insurance is only now possible thanks to advances in data analysis and technology over the last decade. Satellites, for example, can identify the amount of rainfall within a one kilometer square area of land over a specific period of time. This data is then compared against historical averages to determine the severity of the event and the compensation for policyholders.
Index-based insurance is not perfect; if a policy is set to pay out for an earthquake of magnitude 7 or above, for example, but an earthquake only registers 6.9 magnitude, a client may experience damage that is not covered by the policy. On the other hand, individuals could also receive payments that surpass the value of their losses.
Another challenge is simply convincing rural, often illiterate farming communities to purchase an invisible product every year with no financial benefit. In Kenya, researchers developed picture books, comic books, videos and radio shows to explain how the insurance worked, and awarded some payments in ceremonies to garner maximum publicity.
“Trust plays a very big part in selling this type of product,” said Boelsterli of his product in Guatemala. “The intended customer typically has never used insurance before, so we work closely with our local partners to provide information about how it works, and how their policy covers them during specific catastrophic events.”
His company also works through government organizations, he said, to make sure customers receive disaster risk reduction and preparedness training.
MiCRO hopes to enroll up to 5,000 people in Guatemala over the next 12 months, and would like to expand to reach 250,000 people across Central America by the end of 2019. The company has already submitted a related product for approval in El Salvador and plans to expand to Honduras in 2017.