Natural Catastrophe Insurance – In Conversation with Mr. Ulrich Hess

By Vipul Sekhsaria, IFMR Holdings

In the below video we share a brief conversation with Mr. Ulrich Hess, GIZ. Mr. Hess is currently a Senior Advisor, InsuResilience Initiative at GIZ, and has worked extensively in the field of natural catastrophe risk insurance market. In the video he shares his insights on the impact of natural disasters on the livelihoods of households and the risks associated with it. He also talks about the challenges in designing a natural catastrophe insurance product and addressing issues associated with both inefficiencies and effective delivery of the product.


Developing the Natural Catastrophe Risk Insurance Market for Low-Income Households in India

By Vipul Sekhsaria, IFMR Holdings

Natural disasters leave behind them a tale of death and destruction that affects the economy on the whole and severely impacts communities, especially low-income households, which bear its brunt. While little can be done to prevent natural calamities like floods, cyclones, drought etc. from occurring, what perhaps can and should be done is how best households, especially the vulnerable ones, can mitigate the financial losses that such calamities have on their lives.

Flood & Drought Risk

In terms of number of people affected, India tops the list of 163 nations affected by river floods as cited by World Resources Institute[1]. Close to 76% of India’s 7,516 km long coastline, is prone to cyclones with over 40 million hectares (12 per cent of land)[2] being prone to floods and river erosion. Floods can severely disrupt livelihoods, especially in low-resource settings. Flooded households are affected by a plethora of adverse conditions including food insecurity due to crop failure or affordability concerns due to sudden price changes. Daily care of children is importantly challenged during floods as in worst scenarios all basic services become disrupted, including water and sanitation conditions, or the provision of basic community health and social services.

Like flood, drought in India is also a major disruptor of financial well-being with 68% of the country being prone to it in varying degrees[3]. It is difficult to provide a precise and universally accepted definition of drought due to its varying characteristics and impact across different regions such as rainfall patterns, human response and resilience etc. Last year (2016) more than 300 million people living in 256 districts were affected by drought after two years of sparse monsoon rains[4]. The latest findings suggest that while there have been alternate dry and wet spells over the past three decades, the frequency and intensity of drought years has been increasing – for instance Tamil Nadu was declared drought hit in January 2017 after it recorded the worst rainfall in 140 years[5]. What’s important to note is that while the direct effect of drought could be on the farmer and the agriculture economy, but due to its high incidence, the local rural economy also gets severely affected thereby expanding its impact base beyond the farm sector to rural labourers and small rural businesses.

Natural Catastrophe (Nat-Cat) Insurance

Given the fragile economic livelihoods of the underlying households that microfinance institutions and small business lenders serve, even significantly diversified originators typically have a large percentage of their capital at risk in case of a localised natural catastrophe, resulting in a higher cost of capital. This leads to either no catastrophe cover or cover that is unaffordable to people living on low incomes. Further a majority of households never have access to any insurance that protect their assets and livelihoods in the event of a shock. The existing PMFBY (Pradhan Mantri Fasal Bima Yojana – Prime Minister’s Crop Insurance Program) is a restructured Weather Based Crop Insurance Scheme covering only Farmers – it does not take care of many other rural customer segments like Labourers, Small businesses that form 60% of the rural population. Even for farmers it doesn’t provide the much-needed liquidity during the constrained circumstances of a natural disaster like flood nor any protection towards assets other than crops (example: house & contents, livestock, other small holdings). The PMFBY structure is also highly subsidised by the government (to an extent of 90% subsidy)[6], which is a good first step to drive adoption, but without an exit strategy, the long term continuance of subsidy always remain questionable.

India was the first developing country to pilot weather indexed insurance and, despite the recent spread of weather indexed insurance programs across the world, more farmers purchase weather indexed insurance in India than in any other country. However, despite the large public subsidy, as mentioned above, a significant majority of India’s farmers have remained uninsured largely due to issues in design, particularly the long delays in claims settlement.

In terms of product development, designing an Index Based Parametric Cover is somewhat comfortable at a portfolio level rather than at the individual level (micro level), since at a portfolio level, rate makers have access to more managed data of the spread and concentration of assets across the geography. The return periods of the calamities and the portfolio data make it possible to arrive at a commercial rate for the Index Based cover. Recent experience suggest that while products are available but they are also limited to perils like Earthquake which are usually perceived as low-frequency event affecting a much smaller geography in India and therefore are of lesser demand as against for Flood and Drought.

More products for protection around Flood and Drought should also appear in the near future but cost of such solutions is yet to be evaluated. It’s worth mentioning here that, trigger of such portfolio level product results in a payoff to the risk originator (Micro Finance Institutions or similar) to cushion their own portfolio from delayed receipts of the loan repayments due to the stressed situation caused by the catastrophe. The challenge in this segment as it seems is that most originators who are already working on tight margins find it difficult to cover the cost of an earthquake protection product at a portfolio level and the high price still continues to be a dampener.

Designing a Nat-Cat Micro product

While the subject of Index Based Parametric cover is largely centred around loss of assets (whether fixed or movable), there has been very little or no work done so far as to protect the loss of Individual Income due to the incidence of perils like say, flood and drought, through an Index Based Parametric cover. The advantage of originating such cover is making the end consumer (micro level) ‘Nat-Cat-Resilient’.

The biggest challenge in developing the Nat-Cat Micro product is the absence of structured income data at the micro level. In absence of any close estimate of the different income profiles and the effect of Nat-Cat perils on this income, it is not possible to initiate the ratemaking of the risk – ‘Loss of Income’. Since the potential customers are mostly from unorganized sector, a great deal of primary research work will be involved in estimating the different income profiles of the constituent occupation classes.

To address this challenge we have undertaken a detailed primary research activity (details on which we will share in subsequent posts) to capture insights on the impact of natural calamities on income of rural customers, length of the impact as well as coping mechanisms. Joining in this detailed research work is a leading DFI (GIZ InsuResilience Direct Insurance Implementation Team) who has partnered with IFMR Holdings (IFMRH) in developing Catastrophe risk protection market along with weather based technical service provider based in India. In its current phase the goal of this project is to develop probability curves that can be externally assessed and then used to pilot differing approaches like the one detailed above as a “Micro Nat-Cat Product”. If successful, the aim would be to make these probability curves available to others to develop similar coverage and products to serve a much larger population in India.

As part of this blog series we intend to share insights from our research and interactions with expert stakeholders in subsequent posts.

[1] http://www.livemint.com/Politics/hjUVTrwyI0I4p4b4enBg1K/India-tops-list-of-nations-at-risk-from-floods.html
[2] http://www.worldfocus.in/magazine/disaster-management-in-india/
[3] http://www.ijesmjournal.com/issues%20PDF%20file/Archive-2017/Jan-Mar.-2017/4.pdf
[4] http://www.thehindu.com/todays-paper/tp-in-school/Reeling-under-dry-spell/article17052569.ece
[5] http://www.business-standard.com/article/economy-policy/ne-monsoon-worst-in-140-years-144-farmers-dead-tn-declares-drought-117011100782_1.html
[6] http://indianexpress.com/article/business/business-others/pradhan-mantri-fasal-bima-yojana-crop-insurance-plan-to-entail-rs-8-8k-cr-outgo/


In the Eye of a Cyclone

By Sucharita Mukherjee, IFMR Holdings

Even as the city of Chennai was grappling with the after-effects of the devastating floods of December 2015, exactly a year later, Cyclone Vardah unleashed its fury, leaving behind a trail of destruction and devastation. At least 16 lives have been lost and more than 12,000 trees have been uprooted due to heavy winds.

The impact has significantly hit the agricultural sector, destroying banana plantations, papaya groves and paddy-fields, causing widespread damage worth up to $1 billion, according to Assocham estimates. An estimated ₹1,000 crore was lost on a single day owing to the unscheduled closure of businesses across the State.

Need for protection

img_cycThe threat of natural calamities looms large in nearly 60 per cent of the Indian subcontinent today, with as many as 38 disaster-prone cities/towns. While little can be done to prevent natural disasters such as cyclones or drought, we can be prepared to mitigate their effects and minimise losses to a great extent.

Catastrophes such as drought, floods and earthquakes not only impact the economy of a nation but also affect the very subsistence of poor and vulnerable communities. Typically, it is the low-income households that are particularly susceptible to the risks. With little or no insurance on their assets and their livelihoods in particular, they have nothing to fall back on. The urgent need is to build catastrophe risk protection markets in India, so that households can manage risks and rebuild their lives and businesses in the aftermath of natural disasters

Natural calamities can severely impact physical assets such as farmland, crops, commercial vehicles, shops, livestock and other sources of livelihood of low income households, in addition to affecting power, transport and communication infrastructure. To make it worse, families incur exorbitant hospitalisation expenses due to injuries and death. The destruction of homes further impairs the household’s ability to use the asset as collateral for emergency loans or to revive other income generating assets.

Over the past decade, local financial institutions or ‘originators’, such as microfinance institutions (MFIs), have played an important role in providing access to finance to nearly 35 million low-income customers. But when it comes to protection against calamities, households in earthquake or flood-prone areas of the country are generally financially excluded by lenders owing to higher risk. For the few who do operate in the areas, a single catastrophe has the potential to erode a significant portion of their networth. The absence of catastrophe risk mitigation products forces the originators to self-insure by either bearing the risk themselves or geographically diversifying. This, however, is not always feasible given that even some of the largest and most diversified originators in the country have 30 to 50 per cent of their capital at risk to a single district.

When cyclone Phailin hit Odisha in 2013, flash floods destroyed large swathes of farmland, the primary source of livelihood for many low-income households. In the days to follow, loan repayments to local originators were affected severely due to hampered communication and heavy rains. Had catastrophe risk insurance been available to MFIs in the area, households would have been able to avail themselves of moratoriums for their existing loans or emergency liquidity support required to rebuild their livelihoods.

Catastrophe risk insurance transfers the risk from the household to local insurers either directly or via an originator like an MFI or a small business lender. It is similar to a typical insurance product where the premium is paid by the household in exchange for the cover. When calamity strikes, the insurance provider pays either the loss amount or a pre-agreed amount of compensation to the household. If the insurance cover is at the originator level, the premium may be priced into the financial services they provide and the household may receive an insurance linked payout or better loan pricing. Households could also receive loan moratoriums or credit access in areas that the originator would typically not service. The local insurers can then transfer part of the risk to re-insurers who benefit from the ability to pool risks across households in different geographies. Re-insurers are also able to further de-risk their portfolio by issuing Insurance Linked Securities (ILS), also known as cat bonds, to the capital markets.

Protective gear

Globally there are many products, public, private and via public-private partnerships, that exist to protect against the risk of catastrophes. In 2007, CCRIF or Caribbean Catastrophe Risk Insurance Facility was the first multi-country risk pooling facility, established by the Caribbean governments, to provide quick short-term liquidity to limit the financial impact triggered by a hurricane or earthquake. The idea came from the devastating impact of Hurricane Ivan in 2004 which caused losses in Grenada and the Cayman Islands amounting to 200 per cent of the national annual GDP.

Since inception the facility has made 13 payouts totalling over $38 million to 8 member governments for hurricanes, earthquakes and excess rainfall. In 2012, a bank in Peru purchased an insurance product to protect 3,560 agricultural loans of their farmer clients worth $27.3 million against the extreme weather phenomenon El Niño. Subsequently, late last year, the Peruvian government established a catastrophe insurance facility to protect 5,50,000 hectares of crops against El Niño that protects against losses up to $156 million. Ghana has a 2011 drought index insurance to cover all the growing stages of maize. Mongolia has an index-based livestock insurance programme that protects livestock against particularly strong winters. Of the 14,000 policies sold in 2009, local insurance companies made payments to all 2,117 herders eligible after the qualifying harsh 2009-10 winter.

The market for catastrophe risk insurance has matured in more developed financial markets, growing from $700 million in 1997 to $15.4 billion in 2012. However, the ILS market is dominated by catastrophe bonds that cover risks from North and South America. Not even 1 per cent of the market covers South Asia. The opportunity this presents is that cat bond issuances covering South Asian catastrophe risk clearly offers diversification in a global catastrophe risk market dominated by the Americas and the Pacific.

Understanding the geography

One of the key principles is that geographically specialised local originators that have a deep understanding of the customer base and the regions they serve can better help achieve the national goal of complete financial access. Currently, the risks they face in geographical areas vulnerable to catastrophes are increasingly too large to justify entry and even for the less risk-averse ones that do, the catastrophe risk may impact their survival as well as that of the households they wish to serve.

India’s 7,500-km long coastline poses multiple threats in the form of floods, cyclones, tsunamis, to millions of people living along the coastal areas. As we battle the adverse effects of climate change, our sensitive ecosystem faces further imbalance with 57 per cent of our land prone to earthquakes and 12 per cent vulnerable to flooding hazards. Given this context, building robust catastrophe risk protection markets, an important missing piece of market infrastructure, would undoubtedly benefit the whole economy.

Building resilience, where it matters the most, is particularly critical to making the road to recovery a less rocky path and ensuring that the BOP population which forms a significant part of our economy’s backbone can bounce back. The storm must not last forever.

This article first appeared in The Hindu Business Line.


Building Natural Catastrophe Protection for Low-income Households – Notes from the Joint Workshop hosted by Asian Development Bank and IFMR Holdings


By Vipul Sekhsaria & Nikhil John, IFMR Holdings

Natural catastrophes, whether in the form of the severe drought that regions like Bundelkhand are currently witnessing or floods, like the one which deluged Chennai in 2015, leave behind them a tale of destruction that is both unparalleled and deeply disturbing. Natural disasters cost India $3.3 billion in 2015[1], the figure not accounting a crucial factor – “loss of livelihood”.

Amongst the ones who are hit during a natural catastrophe, the impact is most severe on low-income households and ones living below-the-poverty line. Natural disasters such as floods, droughts, cyclones and earthquakes keep pushing a majority of these households back, curtailing their attempts to move to a higher financial path every time such a catastrophe strikes.

According to a report, “An annual global investment of $6 billion in disaster risk management strategies would generate total benefits in terms of risk reduction of $360 billion[2] (suggesting a 1:60 ratio of cost to benefit) but sadly it adds that this is equivalent to just a 20% reduction of new and additional annual economic losses due to natural disasters. In the Indian context, as a nation we will be spending close to $9 billion over the next 5 years towards disaster risk management, but the question remains, is that enough?

While government expense on disaster management will surely mitigate the effects of disasters in terms of preparedness, but how does one go beyond the insured assets and insured lives, particularly given that insurance penetration is very poor, especially in low income groups?[3]   Solutions for the low-income household and business should not only insure hitherto uninsurable assets, uninsured lives, but also protect livelihoods and income streams.

With an endeavour to think through the challenges & opportunities that catastrophic risk entails and take the first steps in finding a solution to protect low-income households in India from the aftermath of natural catastrophes, Asian Development Bank & IFMR Holdings organised a joint workshop on June 2-3, 2016 towards this. The workshop brought together high quality originators, data scientists, climatologists, insurers, reinsurers, social impact investors and the regulator under one roof.


Finding a solution to protect customer households and businesses as well as the originators that have a relationship with such households and businesses was the imminent theme of this workshop.What we can think of, we can do”, as Sucharita Mukherjee, CEO of IFMR Holdings put it, was the underlying spirit that drove the particiapnts. Delivering the keynote address P.J. Joseph, Member, Non-Life, Insurance Regulatory and Development Authority of India (IRDAI), very clearly suggested how insurance penetration continues to be extremely low – only 0.9% of GDP is protected by non-life insurance. He added how only 8% of economic losses were insured and thus there was a need for out of the box solutions for catastrophe risks. The premium collected by the non-life industry for natural catastrophes amounted to about INR 4,500 crore annually whereas the loss from the Chennai floods alone stood at about INR 14,000 crore said R. Chandrasekaran, Secretary General, General Insurance Council, in his opening address. He added, although tax rebates initially helped give impetus to product take-up, today tax rebates are not the foremost reason why people buy health insurance, a similar approach might be worth considering for catastrophe protection covers.

Udaya Kumar, MD and CEO of Grameen Koota, in his talk highlighted the difference an ideal natural catastrophe protection solution can bring to the lives of low-income customers served by his organisation. He expounded on how natural catastrophes initiate vicious cycles of poorer life to the already poor and how a safety net provided by catastrophe insurance can make clients more resilient and aid the organisation’s efforts on financial inclusion.

Bama Balakrishnan, CRO of IFMR Capital later shared analysis of how some of the originators had medium to very high risk exposure to their net worth owing to catastrophe risk and how this continues to be a barrier to financial inclusion, keeping originators away from high risk prone geographies.

In addition to having specialists present their insights on key issues and participants engaging themselves in group discussion on key themes, the workshop also provided for a couple of panel discsussions.


The first panel discussion was on the different types of catastrophe risk protection products that exist globally and in India. In addition the panel deliberated on what are the data, risk models and loss curves available and how can these be improved? The panel consisted of Dr. Murthy Bachu, Principal Hydrologist at AON Benfield Analytics, Alex Chen, CEO of Asia Risk Transfer Solutions (ARTS), Ulrich Heiss, Senior Advisor, Sector Project Insurance at GIZ, Pushpendra Johri, VP of Risk and Insurance at RMSI, Vineet Kumar, Head Cat Perils Asia at SwissRe, in a discussion moderated by Arup Chatterjee, Principle Financial Sector Specialist, Sustainable Development and Climate Change Department at the Asian Development Bank (ADB). Key learnings from the panel:

  • Natural catastrophe risk has been a subject under discussion in India for more than two decades; lack of robust data, event curves and loss models have prevented the development of holistic solutions, said Arup Chatterjee. The wait for perfect data might never be over, but there already exists a large understanding by data scientists and climatologists that is more than sufficient for natural catastrophe-specific products in India.
  • Pushpendra Johri suggested availability of flood model based on 50 years of river flow data and 109 years of rainfall data with RMSI. He added that there is enough data to begin, but data reporting in the future will be a key game changer to make products more affordable in the long-run.
  • Affordability is crucial; but one should also examine incentive-alignment of various stakeholders within a value chain to arrive at innovative ways of structuring the product premium payment. In one such example, while the cotton farmer is the end recipient within the value chain, it is the cotton buyer who pays for the premium. The increase in cotton produce directly affects the buyers business and a more resilient farmer means higher profit for the buyer entities.
  • Role of technology in e-delivery needs to be explored against best practices around the world and new innovations waiting to emerge.
  • A good starting point appeared to be in the form of a parametric insurance product that transcends the exposure only to assets and looks at items like loss of income and livelihood as the important factors in deciding the amount of insurance cover.
  • With a deep understanding of their customer needs, geographically specialised originators like microfinance institutions, small business lenders, affordable housing finance institutions and similar institutions in financial inclusion are aware of the impact of natural disasters on the lives and livelihood of their customers’ in absence of any financial protection.
  • Catastrophe risk affects credit markets including interest rates, losses on loan causes capital erosion for financial institutions. Re-capitalising and de-leveraging are two options in the aftermath of a disaster, though both with their negatives. Recapitalisation is not so forthcoming and deleveraging affects the financial institution’s capability to lend. Residual risk management can be supplemented by catastrophe risk insurance products. Insurance and re-insurance play an important role in the underlying catastrophe risk – linking credit, risk and savings can result in appropriate risk financing strategies said Christine Engstrom, Director, Private Sector Financial Institutions, Private Sector Operations Department of ADB.
  • Originators acknowledged the geographical risk they carry at an organisational level for operating in such markets and lending to customers highly exposed to natural disasters.


Another star panel moderated by Sucharita Mukherjee, which had Brahmanand Hegde, MD and CEO of Vistaar, Udaya Kumar, Vaibhav Anand, Head Risk Analytics and Modelling of IFMR Capital, Easwar Narayanan, COO of Future Generali, K. Venkatesh, CEO of IFMR Rural Channels, and Ulrich Hess deliberated on informal ways of managing risk by low-income households like income diversification, investing in gold (especially in South India), and investing in other assets like land. Key learnings from the panel:

  • The poor are much more risk resilient than what one can imagine and their ability to bounce back is very high if supported by the right tools, said Udaya Kumar. A catastrophe insurance product could just be that tool.
  • Greater concentration on a quick loss assessment and claim settlement is important.
  • Simplicity of the product cannot be over-emphasized, element of instant relief to the affected households will make it more receptive.
  • Customer contact post disaster is very important as the customer’s trust in the entity that serves them is critical.
  • One of the insurer panellists asked, “Why do people insure motor and health?” the group unanimously agreed that a large reason is that people feel the immediacy of the loss.
  • Idiosyncratic risks are much easier to perceive and customers avoid planning for more systemic risks like disasters world over.
  • Awareness programs can make a difference. Examples cited suggest that campaigns that continued for multiple years saw much higher uptake in other insurance schemes, as signs of losses emerged and more customers realised its value.
  • The use of technology for loss estimation – innovation at delivery and claim settlement can also be a game changer in faster and more accurate claim settlement. For example, if parameterised products are more cost effective than indemnity products, how can technology magnify the intelligence of the indices that parametric products are dependent on? Technology can have a role to categorise the income classes and the duration of the loss of income by studying these models and adding that to the index can be one such way as pointed by one of the panellists. Left to the customer for what cover to choose, they will always choose the cheapest product and hence intelligent indexing can be of good use.
  • Can the government and CSR activities of institutions contribute to a risk fund? Participating Development Finance Institutions (DFIs) committed their support in running pilots, building better risk and loss models and further in normalising prices in the short run with a goal to make the product affordable.
  • One of the points that came to the fore is that financial institutions are reluctant to sell these kinds of products – but the panel agreed that the profitability cannot be measured for each product line and as long as the product enhances customer resilience – the indirect beneficiary is the institution the customer borrows from.

Armed with all the inputs from the speakers and the panellist the entire group spent the first half of the second day working in multiple small groups to come up with product pilot ideas. It was as if all the participants had taken upon themselves to forge a definite way forward and so it was.

The group agreed upon critical design parameters for the pilot:

  • Simple to buy (could cover multiple perils, with simple options, structure could be parametric / indexed).
  • Affordable – capturing the pricing benefit of risk-pooling between different entities and different household profiles.
  • The magnitude of the cover should provide for the loss of assets, loss of livelihood, and a buffer at an organisational level to meet unplanned exigencies or provide for households who were affected but couldn’t get compensation since parametric solutions will carry basis risk (may not cover all actual damages).
  • The loan amount can be used as a proxy to determine the magnitude of cover.
  • To design the vulnerability index that can be used to determine the value of cover (one may need a pre-survey to arrive at such a vulnerability index), pre-defined hazard and loss triggers.

The group, including originators unanimously agreed to build protection for catastrophe risk and were ready to be a part of joint initiatives to bring some of the solutions to light.

[1] http://www.firstpost.com/india/natural-disasters-cost-india-3-30bn-in-2015-heres-why-we-should-be-very-worried-2622940.html
[2] http://timesofindia.indiatimes.com/india/Disasters-cost-India-10bn-per-year-UN-report/articleshow/46522526.cms
[3] http://timesofindia.indiatimes.com/business/india-business/Insurance-penetration-in-India-at-3-9-percent-below-world-average/articleshow/46518607.cms