A series on profiles of innovation
January 8, 2002 - The Development Marketplace
is about investing in people and ideas. It's about nurturing the visions
of social entrepreneurs around the world whose work has the potential to
reach beyond local communities and achieve far greater scale. It's about
building partnerships among the public, private, and civil society sectors
that foster dialogue, understanding, and truly sustainable solutions.
In 2000, Cambodia experienced its worst floods in 70 years. More than three million people were affected, half a million displaced, and close to four hundred lost their lives. Direct costs alone are estimated to be US$160 million, an amount equivalent to half of the government's recurrent budget for 2000. The most severely impacted were low-income farmers who have few choices in the face of frequent flooding other than to accumulate growing debt. At the national level, such disasters force the government to divert resources away from much-needed social and development programs to support recovery efforts. Additional assistance provided by relief agencies falls far short of meeting local needs.
The scenario in Cambodia repeats itself each year in countries around the world. In 2000 alone, 256 million people were affected by natural disasters, most of them occurring in developing countries, where the poor so often become caught in a vicious cycle of debt and dependency, being the least likely to have access to savings, credit, or insurance that might help them recoup their losses.
Seeking to explore ways of mitigating the affects of such disasters in flood-prone areas of Cambodia, a World Bank team, working in close consultation with the government, international relief agencies, the private sector, and poor farmer households, developed a proposal to research how private catastrophe insurance might be used to help the country finance the costs of natural disasters and provide relief to poor farmers. In 2000, the initiative-the "Cambodia Disaster Insurance Project"-received a Development Marketplace award of $165,000.
"One of the biggest problems faced by Cambodia's flood victims, as indeed so many of the poor in the developing world who are vulnerable to natural disasters, is that they lack the means to adequately manage the risks they face, and in particular to recoup their losses. Our main idea was to try and introduce private catastrophe insurance, whereby the financial risks of catastrophes could be transferred and spread internationally through reinsurers, providing an alternative to relying on relief agencies," explains the project's Task Manager Andrea Merrick.
"Donors and relief agencies respond as best they can but it's simply not sustainable. Private insurance, with clear contractual obligations, has the potential to deliver cash to affected people and organizations very quickly after a disaster has occurred. The private insurance sector in many developing countries, though, is very young and has generally played a minor role in the provision of financial compensation for natural disaster-related losses.... The DM award allowed us to carry out extensive research and answer some basic questions that needed to be addressed before proposing a large scale project."
Exploring the feasibility of a private disaster insurance scheme required extensive research and consultation with a host of individuals and institutions-insurers and reinsurers, government agencies, financial intermediaries, local NGOs, relief groups, community networks, and, not least, the farmers themselves-with many important findings emerging along the way. To fully assess needs and provide insurance companies with an adequate picture of the risk exposure, it was necessary to document current and historic flood data, climate conditions, and rice yields-a job made far more difficult as many such records were destroyed under the Khmer Rouge, with new systems still in their infancy.
Research was also conducted into reliable means of managing a disaster insurance scheme in Cambodia's poor rural areas-from collecting and managing premiums to assessing claims to distributing indemnities in the event of a catastrophe. To provide potential insurers with specific data on which to base their decision-making, additional surveys were carried out in the province of Takeo, one of the nation's most productive rice regions, but also prone to floods.
Fundamental to the initiative was determining whether farmers were interested in the concept of insurance and if so, how much they would be willing to pay. Surveys were conducted and research carried out on the impact of past floods, how farmers have coped, their savings behavior, and capacity to save. According to the team's findings, the average household would likely be able to save 1,000-3,000 riel/month (25-75 cents) for insurance purposes. While it had been anticipated that additional funding would be needed to supplement farmer savings to cover insurance premiums, the fact that farmers were willing to save, albeit small amounts, and communities as whole fully embraced the idea were significant findings.
With sufficient data in hand, consultations with commercial reinsurers confirmed that insuring impoverished communities where floods occur every two to three years was a greater risk than they are, at this point, willing to take. In the absence of a catch-all solution, the project team explored a variety of means of spreading the risk. "We looked at how we could layer the risk, to minimize the risk being assumed by an individual financier-a more attractive proposition for a reinsurer," says Merrick.
Among those options investigated were a public-private disaster insurance scheme, whereby government involvement in a national Catastrophic Insurance Pool would minimize the risk a reinsurer is being asked to assume. A local self-insurance scheme was also considered, whereby in the absence of private (re)insurance, a Catastrophe Fund would be established. Substantial progress was made in identifying potential networks and/or institutions that could support the various savings and insurance schemes under consideration. Among these are local commercial banks, rural associations, Village Development Committees, and other informal networks and associations.
While it is now clear that there is no single formula that can readily be applied to insure Cambodia's poor against natural disasters, possible solutions have been identified. Efforts are now underway to secure funding to initiate a pilot project or larger-scale initiative that would build on the valuable lessons learned throughout the project.
"My sincere hope is that our findings will assist and encourage other pioneering efforts in this area. In recent years, at least nine out of 10 natural disasters have occurred in developing countries, overwhelmingly affecting the poorest communities. There could be no clearer indication that this problem demands the wider attention of all donors committed to reducing poverty," Merrick concludes.
The next Development Marketplace will be held in the World Bank on January 9-10, 2002. For more information on the finalists and the event go to www.developmentmarketplace.org.