Regional Conference on Risk Transfer and Micro-Insurance for Resilience Building in the IGAD region

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1 Background Concept Note Regional Conference on Risk Transfer and Micro-Insurance for Resilience Building in the IGAD region Kampala, Uganda September 2-3, 2016 With the increasing number of disasters over the past decades, there is a growing interest among the public and private sectors, and development practitioners to develop sustainable risk transfer mechanisms and insurance products, especially for the vulnerable communities in developing countries. According to scholars, risk transfer is the process of shifting the burden of financial loss or responsibility for risk financing to another party, who typically is in a stronger financial position to pay the loss than the insured, examples would be through insurance, reinsurance, legislation, or other means. Thus, insurers can better manage pure risks than individual insured due to the application of central limit theorem and the law of large numbers. However, risk transfer mechanism and insurance markets in the entire Intergovernmental Authority on Development - IGAD region 1 are undeveloped, and coverage for natural hazards and risk is extremely limited. Where hazard and risk coverage exists, it is usually limited to major urban centers and commercial properties, and some well to do households. Previous analyses revealed that the demand for risk transfer instruments and insurance in most rural communities is often constrained by market gaps, lack of regulatory frameworks, inadequate panel data on disaster risk, a lack of a culture of risk financing, and the reluctance of large reinsurance companies to invest in the development of small risk markets 2. As the international community places increasing emphasis on disaster management, there is growing interest in the potential of risk transfer and insurance mechanism as part of an effective ex ante risk-management strategy. Although, insurance does not reduce the immediate impacts of disaster, by pooling risks in exchange for a premium payment it does provide indemnification against losses. People affected by a disaster benefit from the contributions of the many others who are not affected and thus receive compensation that is greater than their premium payments. For decades, reactive approaches to risk financing for the small risk markets are becoming increasingly unsustainable due to a number of factors if recent trends are anything to go by in the region. Vulnerability to disaster is increasing as pockets of emerging economies grow and accumulate more assets in most developing countries. Poorly planned urbanization, continued environmental degradation, and population growth contribute to further increases in vulnerability and growing 1 Djibouti, Ethiopia, Kenya, Uganda, South Sudan, Eritrea, Sudan and Somalia 2 The findings on disaster micro insurance schemes discussed here are adapted from a ProVention Consortium/IIASA review of micro insurance programs, Disaster Insurance for the Poor? Review of Micro insurance for Natural Disaster Risks in Developing Countries, July P age Risk Transfer and Micro- Insurance

2 disaster losses. The IPCC s Fourth Assessment Report confirms that climate change will bring more frequent and more intense extreme weather events. The increases in hazard exposure and vulnerability point to a continuing trend of increasing losses due to climate-induced disasters. Most countries in the region are yet to recover from the socio-economic and environmental losses from the 2010/11 drought in the Horn of Africa. Ethiopia is facing also its worst crisis in decades, with over 10.2 million people in need of emergency food aid by April 2016, due to 2015 El Niño related drought 3. From the foregoing, there is no doubt that disasters impacts have caused heavy damages and losses to all key sectors in the region. In most cases it is the public sector however that absorbs a large portion of the financial costs of disasters. Damages to public buildings and critical infrastructures for example, are considered contingent liabilities of the government which they are responsible to repair or replace. In addition, the government and international community spends huge amount of money for emergency response and relief, as well as in efforts for recovery and reconstruction. Oftentimes, these losses are disproportionate to the total annual financial allocation of national and local governments and guzzle up funds allocated for social services and development projects. It has been established that risk transfer mechanisms can be a viable tool to reduce losses of public and private sectors from impacts of disasters and climate change impacts. Several key players such as UN agencies, international financial institutions, national governments, local governments, business groups and insurance sectors are pushing hard to create an environment that can provide financial tools and products to protect every sector from losses and financial burden. Risk transfer as a financial protection and risk management strategy is slowly creating inroads in the Kenya, Ethiopia and Uganda. The viability of disaster risk transfers and insurance for poor households and businesses, however, remains tenuous, given that disaster losses can simultaneously affect whole communities and risk pools (so-called covariant risks). For example, the Philippines has a wealth of experience being recognized globally as the leading country in the design and provision of high-level financial risk transfer services. Recent mission by the IGAD team show that the Philippine Government has focused on the maintenance of an enabling environment and consumer protection ensuring that regulators are well involved in all aspects of the drafting of regulations and frameworks, as well as, product development and innovation, market deepening, etc. Part of the enabling environment is putting in place the right legislation, promoting partnerships on sustainable microfinance, facilitating the establishment of linkages between large financial institutions and retail microfinance institutions, and promoting financial literacy. Currently, there are 1,410 microfinance institutions in Philippines with a client base of more than 10 million clients and reducing the area unserved by a bank or by a non-bank financial service provider to only 12 percent of cities and municipalities in the Philippines. For effectiveness, the Philippine Government has put in place a set of criteria that micro-insurance companies must subscribe to. This set of criteria are: (1) Solvency and stability, (2) Efficiency, (3) Governance, (4) Understanding of the product by clients, (5) Risk-based capital, and (6) Outreach P age Risk Transfer and Micro- Insurance

3 Types of Disaster Risk Transfer Mechanisms The development and disaster risk management community views micro insurance, reserve funds, risk pooling, insurance-linked securities, and insurance (Box 1), as part of a broader, integrated disaster risk management framework involving risk reduction, disaster preparedness, and risk transfer. In most cases, micro insurance is normally distinguished from other types of insurance by its provision of affordable cover to low-income clients. By providing timely financial assistance following extreme-event shocks, it reduces the long-term consequences of disasters. However, while micro insurance is promoted as an efficient self-help and risk sharing strategy, there are questions about whether risk transfer in general is an efficient means of such financial transfer. More recently, index-based schemes have emerged, which feature contracts written against a physical trigger (parametric insurance). In the case of weather derivatives for crop risks, farmers collect insurance compensation if the index reaches a certain measure or trigger, regardless of actual losses. Indexbased weather derivative schemes have been undertaken in Ethiopia, Kenya, Sudan and other part of the world. Index-based insurance are seen to offer a viable alternative to traditional crop insurance, which has failed in many countries due to the high costs associated with settling claims on a case-by-case basis. The major advantages of index-based insurance are the reduction of moral hazard and of transaction costs. Index-based mechanisms are also more transparent, as they are based on a physical trigger and the payout is fixed in advance. The index-based insurance represents a potentially elegant solution to the challenges that have undermined provision of traditional insurance to rural poor communities in the IGAD region. There remain large unanswered questions regarding where, when and how index insurance will prove most useful and attractive to both local producers (especially smallholder producers and livestock keepers) and the institutions that serve them. Along with many encouraging success stories from pilot index-based insurance programme in the region, there have been puzzling failures and overall low take-up, suggesting that the full promise of index insurance has yet to be understood or realized. Box 1. Types of Disaster Risk Transfer Mechanisms Insurance: Insurance is a contractual transaction that guarantees financial protection against potentially large loss in return for a premium; if the insured experiences a loss, then the insurer pay out previously agreed amount. Insurance is common across most developed countries and covers many types of peril (e.g. fire and theft insurance to protect property, vehicles liability insurance). Micro-insurance: Micro-insurance is characterized by low premiums or coverage and is typically targeted at lower income individuals who are unable to afford or access more traditional insurance. Micro-insurance can cover a broad range of risks; to date, it has tended to cover health and weather risks (including crop and livestock insurance). Weather insurance typically takes the form of a parametric (or index-based) transaction, where payment is made if a chosen weather-index, such as 5-day rainfall amounts, exceeds some threshold. Risk pooling: Risks pools aggregate risks regionally (or nationally) allowing individual risk holders to spread their risk geographically. Through spreading risks, pooling allows participants to gain catastrophe insurance on better terms and access collective reserves in the event of a disaster. Reserve fund: Catastrophe reserve funds are typically set up by governments, or may be donated, to cover the costs of unexpected losses. Insurance-linked securities: Insurance-linked securities, most commonly catastrophe (cat) bonds, offer an avenue to share risk more broadly with the capital markets. Cat bonds are issued by the risk holder (usually a government or insurance company) and trigger payments on the occurrence of a specified event. This event may be a specified loss or may be a parametric trigger, such as the wind speed at a location (e.g. in 2006, the Government of Mexico issued a cat bond (the Cat-Mex bond) that transfers earthquake risk to investors by allowing the government to not repay the bond principal if a major earthquake were to hit Mexico). Such initiatives minimize administrative costs and moral hazard and allow companies to offer simple, affordable and transparent risk transfer solutions. 3 Page Risk Transfer and Micro- Insurance

4 In addition to an unanswered question on index-based insurance, the main challenge in the region is the need to create the enabling environment for risk transfer mechanisms to grow and mature. Several unsupportive laws, regulations and policies in the region are blocking the growth or entry of diversified insurance products, especially those covering losses from the impacts of disasters and climate change. Policy reforms in each member state and at the regional levels should be made specifically to create this enabling environment to promote the development of different types of financial tools and risk-sharing mechanisms at national, sub-national and local levels of government It s against this background that IGAD in partnership with the United Nations Development Programme (UNDP) are organizing a regional conference in Kampala, Uganda on September 2-3, The high-level meeting will bring together Technical Experts and key decision makers to discuss, share experiences on main lessons from risk transfer programs in the region and globally, and examines prospects for extension and scaling up of financial risk transfer mechanisms to promote sustainable development in the IGAD region. The objectives of the meeting are two-fold; i) To understand better the enabling environment and practices on risk transfer and microinsurance for resilience building and to develop an agreed course of action on its wider adoption in the HOA; and ii) To provide a platform for private sector companies and the public sector to interact, learn, network, and establish partnerships with each other on risk transfer and microinsurance. Events/Activities This regional conference is divided into three main events running concurrently with each other. Conference: The conference will provide the platform for the sharing and discussion of experiences and practices in the region and globally with the intent of determining the appropriate business model that is best applicable to the Horn of Africa. Plenary presentations, group work and guided roundtable dialogues and experiential sharing are the main methodologies to be used during the conference. Exhibition: An exhibition will be organized and is open to organizations attended the regional conference. Booths and poster areas will be provided to allow organizations to showcase their products related to risk transfer and micro-insurance. The exhibitors will display a full spectrum of products, software, publications and services. 4 P age Risk Transfer and Micro- Insurance

5 For exhibitors, it will mean an excellent opportunity to meet the right clients and disseminate information effectively. For conference participants, the exhibition will offer the convenience of visiting with multiple agencies and organization all under one roof. It will be a perfect opportunity to pick-up some literature on risk transfer, enjoy a hands-on product demonstration or meet face-to-face with micro-insurance company representatives. Match-Making Platform. The platform is a facilitated exercise where organizations will be matched with each other for the purpose of facilitating the establishment of partnerships and cooperations. It is also intended to develop south-south partnership between private sector companies from the Horn of Africa and globally (Asia and South America) to allow for the promotion of risk transfer and micro-insurance in the Horn of Africa. Participants Profiles for all participants including, speakers, sponsors, exhibitors and other participants will be compiled and made available through the platform. The platform will make it easy for the participants to continue to interact as you stay updated with the latest information at the regional conference. This high-level meeting is being organized by IGAD in collaboration with UNDP to bring together relevant senior officials from IGAD Member States, selected countries where risk transfer programs are working, African Union (AU), INGOs and international partners. These include but not limited to the following: - Key line ministries and agencies from the IGAD member states - IGAD specialized institutions ICPAC, ICPALD, CEWARN - Relevant research organizations/universities ILRI, World Agroforestry, - Local and INGOs Oxfam, Mercy Corps, - UN agencies UNDP, UNISDR, WFP, UNICEF, UNOCHA, FAO, UNCDF, UNEP, etc. - Private sector - Insurance companies and micro-finance institutions in IGAD member States and other countries in Asia and Latin America - Regional bodies - African Union - Africa Risk Capacity, East Africa Community - Donors - USAID, World Bank, EU, DFID and Embassies - Producers representatives farmers cooperatives, or pastoralists groups - Resource Organizations from Asia, South America, etc. Dates The regional conference will be hosted by the Government of Uganda and will be held in Kampala, Uganda on 2-3 September P age Risk Transfer and Micro- Insurance

6 Program for the Regional Conference Risk Transfer and Micro-Insurance for Resilience Building in IGAD region September 2-3, 2016, Kampala Uganda Opening Ceremony Executive Secretary, IGAD Director, UNDP Regional Service Center for Africa Representative of IGAD Member States Guest of Honor, President of Uganda or the Prime Minister of Uganda SESSION ONE: Where are we on disaster risk transfer and micro-insurance in the IGAD region? i) To understand the baselines and experiences with disaster risk transfers pilot initiatives in IGAD member states. ii) To examine disaster risk transfer and insurance options available at different scales. iii) Set the scene for interactive discussion in risk transfer from broader perspective Structure of the session 1. Introduction and outline of the session objectives by moderator. - Session chair/moderator IGAD 2. Keynote Speaker ICPAC 3. Panel Presentation (15 minutes each for presenter) - Government representatives of Kenya, Sudan and Uganda - Lesson and experiences (international best practices) - UNDP - Insurance agency (from the HOA) - Research Institute - ILRI 4. Interactive guided plenary discussions (30 min). SESSION TWO: What are the prospects of Risk Transfer and micro-insurance in resilience building? i) To expand awareness as to how the development and implementation of risk transfer and micro-insurance mechanisms public, private, cooperatives and mutual can build resilience of households, communities, nations and region often affected by frequent hazards; ii) To explore the opportunities, options and gaps with the disaster risk transfers and insurance in building resilience to disasters globally. 6 P age Risk Transfer and Micro- Insurance

7 Structure of the session 1. Introduction and outline of the session objectives by moderator. - Session chair/moderator UNDP 2. Keynote Speaker - Africa Union (Africa Risk Capacity) 3. Panelist plenary discussions (5 minutes each) - Global perspectives - GIZ - Experiences from Asia Department of Finance, Government of the Philippines - Local reflections by INGO - Cross border issues by a UN agency - WFP 4. Guided plenary discussions (30 min) SESSION THREE: Roles of Governments, Private sector, Cooperatives/ farmers networks in the risk transfer and micro-insurance. Challenges and Opportunities i) To understand the roles of national and local governments, private sector players and farmers networks in the disaster risk transfers and insurance. ii) To examine bottlenecks, challenges and opportunities by the government, private sector, and local organization. iii) Institutional and policy reforms necessary for effective disaster risk transfer schemes in the IGAD region. Structure of the session 1. Introduction and outline of the session objectives by the moderator. - Session chair/moderator GIZ 2. Keynote Speaker - Private sector insurance player 3. Discussants (10 minutes each) - Government representative from Ethiopia - Insurance regulatory agency (Africa, Asia, and others) - Private sector Insurance companies and microfinance institutions (Kenya, Sudan and Ethiopia) - Cooperatives/ Farmers networks - Research Institute 4. Guided plenary discussion (30 minutes) SESSION FOUR: Applications, technologies and research initiatives for the risk transfers i) To understand the existing application, technologies and research initiatives for risk transfers and insurance ii) To explore how risk transfer and insurance mechanisms can be an incentive for disaster risk- 7 P age Risk Transfer and Micro- Insurance

8 sensitive public and private planning and investment Session Structure 1. Introduction and outline of the session objectives by the moderator. - Session Chair/moderator IGAD/ICPALD 2. Keynote Speaker - Mobile company - Safaricom 3. Round table discussants (10 minutes each) - ICPAC - IFRC - Livestock Insurance Company (Work in North Kenya) - ILRI - University - Insurance company /MBA from the Philippines and (another country) SESSION FIVE: What can we do differently in promoting risk transfer and micro-insurance in the IGAD region? How risk could be valuable business opportunity? Objective i) To make recommendations as to how risk transfer and insurance mechanisms can support the achievement of sustainable development in the HOA. ii) Share the lessons of existing experiences by both public and private providers Structure of the session 1. Introduction and outline of the session objectives by the moderator - Session Chair/moderator Ethiopia IGAD Chair 2. Keynote Speaker - UNDP 3. Open Guided plenary discussion (30 minutes) Closing Ceremony 8 P age Risk Transfer and Micro- Insurance