Disaster Insurance for the Poor? A Review of Microinsurance for Natural Disaster Risks in Developing Countries (Draft)

This desktop study reviews microinsurance schemes that provide cover for natural disaster risks in developing countries. It gives an overview of the potential and the challenges of microinsurance for the poor.

The paper presents:

• Background information and a discussion of the benefits and limitations of risk transfer and pooling;
• The different organizational and institutional forms that microinsurance can take;
• Available evidence on the organization, scope and operations of the disaster microinsurance programs that it reviews.

The paper examines the viability of disaster microinsurance with regard to four criteria:

• Contribution to risk reduction;
• Financial robustness;
• Affordability;
• Governance.

The paper concludes that:

• Microinsurance programs provide post-disaster liquidity to poor households, help secure livelihoods and facilitate disaster recovery and reconstruction;
• Index-based schemes are valuable in improving the creditworthiness of farmers;
• Reducing disaster-related poverty through microinsurance presents the following challenges to local, national and international communities:
  • Assurance of the financial sustainability of microinsurance providers while providing affordable premiums to poor and high-risk communities,
  • Lack of direct links and incentives on the part of present microinsurance programs to reduce direct losses from disasters,
  • Need for transparency in the financial back-up arrangements of private market providers.

The paper recommends:

• Integrating microinsurance into risk management programs that combine regulations and citizen oversight to assure incentives and effective regulations;
• Creative alliances among various actors and institutions in pioneering microinsurance programs.