A. Sovereign insurance provided at national level
Developed countries such as Japan, France, the United States, Canada, Sweden Norway and New Zealand
have established public-private national insurance systems against natural disasters.
Examples of such initiatives include the Turkish Catastrophe Insurance Pool (TCIP), which is
described as a case study below. The TCIP is modeled after the United States California
Earthquake Authority, the French and the New Zealand earthquake commission programs, which were set
up to provide earthquake coverage for homeowners and relied mainly on international reinsurance and
capital markets for their risk capital capacity.
Turkey: Turkish Catastrophe Insurance Pool (TCIP)
Organizations involved: World Bank, Government of
Turkey, private sector insurers
Background: Two years after the devastating Marmara
earthquake claimed over 18,000 lives and resulted in multi-billion economic damages, the World
Bank provided financial and technical assistance to the government of Turkey to establish the
TCIP, in order to provide reconstruction assistance for damages to houses, disaster mitigation
and risk management. The TCIP is the first national insurance pool of its kind, and
involves the public and private sector in different layers of risk coverage to help make
insurance affordable in an emerging economy.
Success so far: Almost 1.8 million earthquake
insurance policies have been underwritten since 2000, making the TCIP the second largest
catastrophe pool in the world, the first being the regional Caribbean Catastrophe Reinsurance
Facility (CCRIF) which is elaborated further in the chapter.
Lessons learnt: In a Risk Management Workshop held
in Washington, 2005, the World Bank has highlighted some issues regarding its role in being the
sole emergency lender for the TCIP. These concerns include:
- The World Bank would not be able to provide all liquidity needed to cover the
affected population in the case of a very large event;
- The World Bank suggested that in the case of the 2000 Marmara earthquake, it was ill
equipped to provide instant liquidity after earthquake disaster and it took over a year for
liquidy to become available;
- Reliance on the World Bank retroactive lending and emergency donor relief is
unsustainable due to frequency of catastrophes.
The disaster risk management community views micro-insurance as an important emerging tool for
disaster management in developing countries. This form of insurance is also viewed as a means
to keep households out of a cycle of poverty as it provides post-disaster liquidity to households and
farmers. Provision of microinsurance in developing countries has attracted the attention of
international stakeholders, but insurance coverage for this market segment worldwide is still low
(but growing rapidly). Nevertheless, many microinsurance schemes have successfully been implemented
to manage weather-related risks.
For example, a scheme in Bangladesh (see below) has been providing insurance against flooding since
the early nineties. The success of the Bangladesh project was the incentive for a similar
project established in India which is known as Afat Vimo system. Details on both case studies
can be found in the report, “Micro insurance for natural disaster risk in developing countries:
Benefits, limitations and viability” produced for the IIASA in 2006.
Voluntary microinsurance schemes that have become successful in insuring clients against the risks
posed by natural disasters include: The Self-employed Women’s Association (SEWA); , the Working
Women’s Forum (WWF) in India; and the Centre for Self-Help Development (CSD) in Nepal.
Organizations involved: Proshika (NGO), the Government of Bangladesh
Background: As a response to the 1988 floods in Bangladesh, which affected
over 73 million people, a natural disaster management program was established, by
Proshika. Proshika, one of the largest NGOs in Bangladesh, offers a Participatory
Livestock Compensation Fund (PLCF) that targets farmers.
Success so far and still on going: Since the scheme was introduced in 1991,
it has won over two million clients in over 20,000 villages and 2000 slums in 57 districts of
the country. It covers 10% of the population of Bangladesh for property insurance and
25% for life insurance. Until 2004, 20.06million taka (Bangladeshi currency) were paid
from the compensation fund to the affected families of 4,448 deceased group members, and
20.29 million taka to 14,525 members for property losses due to cyclones, river erosion, and
Limitations: Despite efforts being taken to try and upscale the scheme by
Proshika and the government, it still does not cover the entire population and area of
Bangladesh, leaving large areas of the country and much of the population vulnerable and
uncovered by insurance.
C. Index-based insurance
Index-based insurance has been used at different scales: from small-scale farmers and herders,
property owners and small businesses to sovereignty level, by governments, for transfering their
risks to the international capital markets. Index-based insurance has proven to be one of the
most popular and promising insurance instruments to facilitate improved emergency response to
weather-related catastrophes. As of 2008 over two-dozen weather index-based insurance schemes
were successfully piloted in a number of developing countries, including Malawi, Mongolia, Peru,
Mexico and in the Caribbean countries. These case studies are presented below.
Micro index-based insurance
Micro-index based insurance for agriculture can target either farmers (crop index insurance) or
herders (livestock index-based insurance).
Crop index-based insurance
Crop index-based insurance to date has been the most popular form of insurance being utilized by both
developing and developed countries in order to assist farmers dealing with the risks posed by weather
related calamities. The World Bank and UNDP have so far been the main supporters for developing
crop risk management models as well as providing finance, technology and training for country
projects. To date, over a dozen countries most notably in Africa and Central America, have
successfully implemented crop index-based insurance. These countries include Senegal,
Mauritius, South Africa, Tanzania, Peru, Nicaragua, the Philippines, Thailand and Ukraine.
Swiss Re has also piloted projects in Kenya, Mali and Ethiopia. According to the 2007
‘Scaling up index insurance’ paper by the Micro Insurance Center, a number of developed
countries such as the United States of America and Canada have also developed such insurance
schemes. Box 3 below presents the case study of Malawi that has had considerable success in
providing insurance to farmers against the lack of rainfall in various parts of the country. A
similar pilot project in India, BASIX, was developed in 2003 and has expanded its support from an
initial umber of 230 farmers to more than 250,000 farmers.
Malawi: crop insurance
involved: International Bank of Malawi (OIBM), Malawi Rural Finance Corporation (MRFC)
and the World Bank
Background: Malawi is one of the most drought-prone countries
in Southern Africa. The livelihoods and food security of various population groups are greatly
worsened by drought.
Success so far: In
2005, the Malawian government along with technical assistance and training provided by the
World Bank, introduced an innovative pilot drought insurance scheme that was targeted at local
groundnut farmers. The pilot scheme is currently being utilized by over 900 farmers in
four different areas. The scheme has enabled them to purchase hybrid groundnut seeds,
thereby increasing the productivity of groundnuts significantly.
Lessons learnt: Malawi
was the first African country to implement such index-based insurance policies which were sold
to small-scale farmers. Despite the benefits of the insurance scheme there still remain a
number of concerns. For example, the instrument presumes that all farmers use the same
farming techniques and have the same soil type when considering crop yield production.
Lack of education and knowledge about index insurance among herders remains a major challenge
for the development of the insurance scheme.
Livestock index-based insurance
This form of micro index-based agricultural insurance is targeted at herders, and provides insurance
against the loss of livestock caused by such catastrophes and extreme weather events as drought or
flooding. To date only two countries have successfully implemented the scheme. MARSABIT project
is based in the arid and semi arid areas in Northern Kenya. The livestock index based
insurance in Mongolia is presented below.
Mongolia: livestock insurance
involved: World Bank
Background: Some 11 million animals were lost in Mongolia between 2001–2002 due to
severe winter weather (known locally in Mongolia as dzud). As a result the Mongolian
government, aided by the World Bank developed an Index-Based Livestock Insurance (IBLI).
The IBLI protects Mongolian farm herders against livestock loss due to extreme cold
Success so far: The
pilot project is the first attempt by a developing country to provide security against
livestock losses for farmers due to extreme climate/weather conditions.
Despite the success of the project, certain challenges remains. The index payouts
reported sometimes do not match the individual livestock loss. Another concern with the
IBLI is that it does not cover the loss of all types of livestock, which has left some herders
uninsured against the loss of other livestock. The lack of knowledge about the existing
index insurance among herders remains a challenge.
Meso-index based insurance
In meso index-based insurance schemes, payouts are made by a reinsurer either to national banks or to
NGOs so that they can respond to economic losses that might have resulted from a natural
disaster. An example of such a scheme is being implemented in Peru and is elaborated in the box
below, in which the an El Niño–Southern Oscillation (ENSO) related climate indices are
used as a proxy for extreme rainfall in Piura district. Similar projects that have been
implemented in Vietnam and Mexico use different climate indices such as sea or river level rise as a
proxy to issue insurance payments.
Peru: schemes against natural disasters
Organizations involved: Microfinance institutions
Background: Severe rains and floods associated with El
Niño are economically the most significant catastrophic risk in Peru. Extreme rainfall may
cause widespread loss to agriculture as well as to infrastructure and often cause landslides
which lead to deposits of large amount of sediments in rivers, which undermines the ability to
manage droughts. El Niño and its related climate indices are used as a proxy for
extreme rainfall in one of the districts of Peru called Piura. A strong El Niño can
bring rainfall that is more than 40 times the average in Piura.
Initiation: In 2007, a private company began offering a
weather-index insurance product in the northern department of Piura. This insurance
scheme was based on the ENSO (El Niño Southern Oscillation) index that measured the
sea-surface temperature off the Peruvian coast. This index is a good predictor of extreme
rainfall resulting from El Niño events.
Macro-index based insurance
At a macro level, a government, institution or an international charity might use index insurance
for a disaster relief fund or to fund relief activities following a natural disaster as illustrated in
Ethiopia, Mexico and the Caribbean Community (CARICOM).
Mexico: Catastrophe Bond
involved: World Bank, Inter American Development Bank.
Mexican government in 2006 insured its catastrophe reserve fund, the Fondo de Desastres
Naturales (FONDEN), against natural disasters with a mix of reinsurance and a catastrophe
bond. The resulting contract is linked to a parametric trigger in terms of magnitude
and depth of seismicity for the three-year period 2007 - 2009.
In 2008, the Mexican government spent $1.2 billion from the
reserve fund to cover rescue and rebuilding operations after Hurricanes Stan and Wilma. The
government is planning to issue a similar kind of catastrophe bond for insurance against
is no mechanism in place to ensure that the post-disaster bond payments reach those that need
the payments most. Moreover, the catastrophe bond transaction has proved to be of a
very high cost.
Caribbean Catastrophe Risk Insurance Facility (CCRIF)
Organisations involved: CARICOM (the Caribbean
Community), donors, World Bank
Background: The Caribbean islands are extremely
vulnerable to natural disasters. On average, one major hurricane affects the regions
every two years. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) was set up in
2007. It is considered as a system in which a number of Caribbean countries combine
emergency reserve funds into a common pool, so that there is a regional insurance facility
which will trigger payments to tackle the economic losses caused by natural disasters.
The schemes also provide easy access to affected countries to obtain liquidity to implement
both long- and short-term recovery efforts. Claimed payments are based on parametric
triggers such as wind speed. The CCRIF is the first multi-country risk pool in the world.
Success so far: In November 2007 an earthquake
devastated Dominica and St. Lucia. The CCRIF paid out approximately US$1 million to the
countries to reover their economic losses. The advantages of this scheme include
efficient risk transfer mechanisms, optimal pricing from reinsurance through risk-pooling and
economies of scale, and sharing of administrative and operational costs of the insurance
Lessons learnt: The scheme has faced some challenges,
Similar projects: The World Bank is beginning the
process of implementing other regional insurance pools in Romania (to cover Eastern
Europe) against harsh winters and in the Pacific against severe weather related
- The CCRIF policy covers a small portion of the risks retained by governments;
- The CCRIF is designed as insurance against large catastrophic events, such as when
country-wide impact threatens the entire economy;
- Parametrics are difficult to be designed for smaller magnitude events.