Innovating and testing small business disaster microinsurance for urban resilience

Between 1990 and 2016 India suffered hundreds of natural disasters, causing over $48 billion in losses. Over the same period, the insurance sector contributed just 11–12% of total loss recovery. India General Insurance, ‘Vision 2025: Towards an Inclusive, Progressive and High Performing Sector’, FICCI, October 2013, http://www.ficci.com. Currently, the informal sector is the largest contributor to urban gross domestic product (GDP) in India, accounting for 48% of GDP Ramesh Kolli, ‘Measuring the informal Economy: Case Study of India’, n. d., http://www.cwsc2011.gov.in/papers/sna/Paper_4.pdf. and 69% of employment in 2004–2005. Preetam Kaushik, ‘is the Humongous Contribution of the Informal Sector to GDP Assessed Properly?’, Business Insider, 11 December 2014, http://www.businessinsider.in.  However, informal businesses’ access to risk transfer tools such as insurance is limited. The reasons are many, ranging from the unavailability of suitable products, the need for tailored products that meet small businesses’ specific risks, the inability of small business owners to pay high premiums, high risk pools for insurers and limited awareness and lack of contact by insurers with this client base. In the absence of any type of insurance coverage, following a disaster many informal businesses must resort to selling personal and business assets and taking out high-interest loans. Some are forced to shut for long periods, and many never reopen. This has significant implications for post-disaster recovery: local markets are an important source of goods and services for crisis-affected people in urban areas, and make an important contribution to the ability of communities to get back on their feet. Just as cash transfer interventions aim to revive local economies through increasing demand from local markets, microinsurance aims to ensure that the very small businesses that comprise these local markets can also recover rapidly.

Household microinsurance: the experience of Afat Vimo

The concept of Afat Vimo (Gujarati for ‘disaster insurance’) arose during community consultations on livelihood security following the 2001 Gujarat earthquake. At that time, only 2% of those surveyed had insurance of any kind. The All India Disaster Mitigation Institute (AIDMI) began discussions with Indian insurance providers around the possibility of offering a simple, single microinsurance Microinsurance serves low-income groups with low-cost premiums covering low-value assets. policy that would provide cover to poor policyholders for a wide range of disasters. AIDMI designed a micro-insurance scheme with two regulated public sector insurance companies on a partner agent model. A partner agent model is one in which the insurance company underwrites the insurance policy but another party takes responsibility for functions such as advertising, enrolling, collecting premiums, assessing damage and distributing payouts. Partner agents are usually micro-finance institutions but can be community-based groups, religious organisations or a private company. They allow the insurance company to reach people who may be difficult or expensive to access. The scheme covered five risks: (limited) loss of life, trading stock, livelihood assets, home and home contents, with an annual premium of around $4.50 (including administrative charges) and a total potential benefit up to $1,560 across the various components of the coverage.

The product was first sold in April 2004 to 3,700 policyholders in Gujarat, and was later extended to 800 families affected by the 2004 Indian Ocean tsunami in Tamil Nadu, and 171 families affected by the 2005 earthquake in Jammu and Kashmir. In 2011, the pilot scheme was extended to 950 families affected by floods and a cyclone in Odisha. In addition to the insurance policy itself, policyholders were supported with mitigation measures such as fire safety, seismic-safe construction practices and business development, as well as awareness raising and education on disaster risk reduction through training, focus group discussions, dissemination of case studies and the creation of a platform to share ideas within the community. Between 2004 and 2010, Afat Vimo payouts helped affected policyholders manage their economic recovery faster and better, demonstrating in the process that providing microinsurance is financially feasible and effective.

Action-based research

Given the potential benefits of microinsurance in supporting urban markets and livelihoods, AIDMI and Stanford University requested support from the Humanitarian Innovation Fund (HIF) to design and implement a microinsurance scheme for urban informal small businesses, and to study its impact on small businesses and its effectiveness in promoting local market recovery. Using a randomised control trial (RCT) design, the study team allowed half of the business owners that intended to buy insurance to actually purchase it. The other half – those not given the opportunity to purchase microinsurance – will serve as the control group. Because of randomisation, we can assume that both groups, those with insurance and those without, are similar in all other respects, and that any differences, such as time to recovery, method of recovery and risk reduction behaviour, can be attributed to the insurance. The study will compare how each group of owners is impacted by a disaster, if and how quickly they recover, what coping mechanisms they employ, how business and household finances are affected and what disaster risk reduction efforts they engage in before the event.

The study is being implemented in three cities: Puri in Odisha, Cuddalore in Tamil Nadu and Guwahati in Assam. The three cities were selected based on the high frequency of climate-related disasters they suffer and AIDMI’s pre-existing relationships with local community-based organisations (CBOs), which serve as partner agents for the insurance programme. An initial survey to assess demand among a sample of informal businesses was conducted at the beginning of 2015. In all three cities the majority of respondents reported that disasters, mostly of natural origin, not only affected their businesses and livelihoods, but also had downstream impacts on household finances and consumption patterns. The survey also confirmed that businesses commonly relied on negative recovery strategies after disasters, which are either exploitative, such as high-interest loans, or harmful for long-term growth and recovery, such as selling important assets or drawing down savings. There was very low awareness of insurance, particularly microinsurance: less than 1% of respondents in Guwahati and Puri knew about microinsurance, but, once explained to them, there was universal demand for the product if it was designed to meet their needs at a reasonable price.

CBOs help advertise the product and provide outreach to a group currently neglected by the big insurance companies. They will also facilitate the claim and payment process to improve cost- effectiveness for insurers. The CBOs also survey study participants to collect relevant data, including name, gender, income, risk reduction behaviour, post-disaster impact on recovery and coping strategies. Although the project will run for only 18 months, the individuals and institutions involved are committed to collecting evidence on its impact over the next five years.

Implementation

The study team is currently engaged in advocacy, negotiation and facilitation with stakeholders to address issues identified during the preliminary survey. Initially, insurance companies did not see the value in covering customers living in high- risk areas on the periphery of the city, in low-lying coastal zones or on undeveloped land with poor infrastructure and drainage. The premiums demanded by these companies were either prohibitively high or the amount and type of coverage was capped at an unfeasibly low level. The project partners have been negotiating with insurance companies to design a demand-based product catering to the needs of small- business owners, while still being financially viable. Through design workshops, an insurance product has been finalised for one of the study sites, covering a reasonable number of disasters for an adequate amount at an affordable premium. The project partners have also started raising awareness among small-business owners on the concept, process, available options and benefits of insurance.

The project has initiated engagement with the national disaster management authority and at least four disaster management authorities at state level. Two private insurance companies at the national level are directly engaged in the implementation of the project. The process of engagement is challenging and time-consuming as the concept of small businesses using insurance to manage or transfer risk related to humanitarian emergencies is new. Nevertheless, progress has been made. Three leading sub-national authorities have been involved in co-organising consultations, shaping demand and planning policy outreach. As interest and commitment among key stakeholders has grown, participating insurance companies are now interested in tracking the project for an additional 24 months, and the government authorities are developing a 3–5- year mainstreaming plan.

Moving forward

If disaster microinsurance for small businesses proves successful and beneficial, expanding the project will become a priority. Operationalising it where CBOs are not present or capable of serving as partner agents will have to be addressed. Microfinance institutions flourished rapidly in the fields of microloans and savings groups as evidence attested to their viability and, in the area of microloans, their profitability. The same may happen with microinsurance if the evidence proves its financial viability and profitability, with MFIs as partner agents instead of CBOs, and insurance companies acting to simply underwrite the policy. Similarly, private insurers will also be incentivised to tap into this customer base and spread the product. External advocacy support, however, will still be required. AIDMI will continue in that capacity to help scale up the innovation. Progressive policies will need to be adopted, including encouraging and requiring insurance companies to include the poor in their portfolio of clients. Reinsurance (essentially insuring the insurance) – through a private reinsurer, government or international facility such as the World Bank – will also be needed to manage the risk of a catastrophic event that could wipe out the entire risk pool and cripple insurance companies.

While uptake may be incremental, change could be radical. If taken to scale, growing urban populations would have an internal mechanism to allow rapid recovery, limiting the need for expensive and inefficient outside aid. Institutionalising risk transfer is important and time-consuming, requiring commitment beyond the project timeframe. However, the results from AIDMI’s pilots demonstrate that this process is crucial to building the evidence base and influencing policy-makers. Flexibility in the project process, from both agencies and donors, will be important.

Shifting from a pilot to a replication model is neither easy nor automatic. It needs planning, resources and continuous engagement and advocacy with key stakeholders. Consultations with UN, government and civil society organisations during the ISDR Asia Partnership meeting in Delhi in November 2015 indicate a wide range of interest in investing in a follow- up to the pilot. The diverse, decentralised and collaborative approach to the pilot was highlighted as a particular strength. The innovation was also cited as a ‘positive disruptor that could potentially help reorient the humanitarian system to focus on the fundamental causes of vulnerability’. What is needed is a facility that funds, builds capacity and engages continuously with key stakeholders. A survey conducted by AIDMI among private sector, donors, the UN system, sub-national authorities, researchers and international financial institutions suggests there is overwhelming demand for – and willingness to fund – such an initiative. The Indian government’s 100 Smart Cities programme offers the ideal platform for such a facility, which AIDMI aims to develop and launch at the Asia Ministerial Conference on Disaster Risk Reduction in Delhi in November 2016.

Ronak Patel is Clinical Assistant Professor, Emergency Medicine at Stanford University School of Medicine. Mihir Bhatt is director of the All India Disaster Mitigation Institute.