A Manual for Public and Private Decision Makers Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other

Transcription

1 A Manual for Public and Private Decision Makers Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors

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3 A Manual for Public and Private Decision Makers Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors

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5 Content Abbreviations iii Foreword iv I Introductory Notes for Manual Users 1 SMEs and Climate Change 1 SMEs and the Economy 2 SMEs NatCat Risks and Insurance 2 Why a DRIM? 3 Objectives 4 Content Structure and Flow 4 Three Days Seminar-Conference Format 5 Delivery Modes 5 Target Users 8 Summary 8 Boxes 8 Useful Links 8 A Practical Guide on Using this Chapter 8 II 4-Step Analytical Framework: Step 1 Risk Assessment 9 Analytical Framework 11 Step 1: Risk Assessment 12 Hazards Analysis 14 Vulnerability Assessment 16 Impact Estimation 20 A Practical Guide on Using this Chapter 22 III 4-Step Analytical Framework: Step 2 DRM Analysis 24 Evergreen Criteria 24 Three Categories 25 A Practical Guide on Using this Chapter 27 IV 4-Step Analytical Framework: Step 3 Gaps Identification 29 Prioritization 29 Information Outputs 30 A Practical Guide on Using this Chapter 31 V 4-Step Analytical Framework: Step 4 DRF Options (Insurance) Exploration 33 Purposes 33 Three-Tiered Layered Approach 33 A Practical Guide on Using this Chapter 35 VI Insurance as DRF Instrument: Multi-Level Approach 37 Direct and Indirect Damages 37 Government s Role 37 A Practical Guide on Using this Chapter 39 VII Institutional Arrangements and Policy Issues 40 Government Policies: Social Protection and PPP 40 High Risk in Disaster-Prone Regions 40 Product Development Factors and PPP 41

6 ii Regulation and Supervision 42 A Practical Guide on Using this Chapter 43 References 44 Annex 1 Template for Applying a Holistic Approach OECD Framework (2009) 44 2 Data and Measuring Impacts of Damages and Losses 45 OECD Recommendation on Disaster Risk Financing Strategies 48 Tables No 1 Other Findings of the Potential Effect on Business of Small and Medium 2 Enterprises (SMEs) Due to Climate Change 2016 Global Survey Report. 2 Face-to-Face Training Format Using the Manual as a Learning Companion Guide 5 3 Practices DRM Mechanisms Matrix 26 Figures No 1 Manual Content Structure and Flow Paradigm 5 2 The Four-Step Analytical Framework 11 3 Risk Assessment Process Flow 12 4 DRM Analysis Process Flow 24 5 Gaps Identification Process Flow 29 6 DRF Options (Insurance) Exploration Process Flow 33 Boxes No 1 What Is An SME? 3 2 The Protection Gap 3 3 Flood Risk Assessment in Fanteakwa District, Ghana 12 4 Flooding, homes and loss: insurance as a risk-transfer mechanism in Vietnam 13 5 Hazards Analysis: Cross-Sectoral MSMEs, Philippines Earthquake Plan: Khyber Pakhtunkkhwa 15 7 Vulnerable Sectors in Typhoon-exposed Laguna, Philippines 17 8 Risk Mapping Indonesia Sector Disaster Risk Reduction and Emergency Aid 18 9 Impact Analysis of Flood in Accra, Ghana SME DRM Strategic Focused on Severe Damage to Property Mining 25 Sector, Mongolia 11 Identification of Insurance Gaps SME Sector, Mongolia Drought Index Insurance Product, Ghana Three-Level Insurance Approach, Caribbean Excerpt from the Kenya Insurance Bill 2011 (draft) 41 Links No 1 Useful Links A 14 2 Useful Links B 16 3 Useful Links C 19 4 Useful Links D 23 5 Useful Links E 26 6 Useful Links F 30 7 Useful Links G 35 8 Useful Links H 38 9 Useful Links I 43

7 iii Abbreviations BMZ DRM DRI DRIM EDF FAO GDP GIZ IAIS IFAD IRM German Federal Ministry for Economic Cooperation and Development DCA Development Cooperation Agency Disaster Risk Management Disaster Risk Insurance Disaster Risk Insurance Manual Environmental Defense Fund Food and Agriculture Organization Gross Domestic Product Deutsche Gesellschaft für Internationale Zusammenarbeit International Association of Insurance Supervisors International Fund for Agricultural Development Integrated Risk Management MEFIN Mutual Exchange Forum for Inclusive Insurance MSME Micro, Small and Medium Enterprise NatCat Natural Catastrophe OECD Organization for Economic Cooperation and Development PPP RFPI SME Public-Private Partnership Regulatory Framework Promotion of Pro-Poor Insurance Markets in Asia Small and Medium Enterprise Copyright Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH 2017 First published 2017 Publications of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to GIZ Publications (Rights and Permissions), Friedrich-Ebert-Allee Bonn, Germany, or by info@giz.de. The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH welcomes such applications. Libraries, institutions and other users registered with reproduction rights organizations may make copies in accordance with the licences issued to them for this purpose. Visit to find the reproduction rights organization in your country.

8 iv Foreword The insurance market is steadily growing in developing countries for the past seven years. Regulators and Insurance Supervisors have created supportive environments for risk financing to thrive and expand. Nevertheless, the market is still concentrated on established products such as in credit-life, commonly attached with the loan portfolios of Micro Finance Institutions (MFIs). On the other side, significant risks from other sectors such as in agriculture and micro, small and medium enterprises (MSMEs), two of the main providers for employment in rural and urban areas are largely unexplored and undeveloped. The German Development Cooperation Regulatory Framework Promotion of Pro-Poor Insurance Markets in Asia (GIZ RFPI Asia) with our partners from Indonesia, Mongolia, Nepal, Pakistan, the Philippines, and Vietnam are expanding through the creation of the MEFIN network the reach of the program to pooled risks that have significant impact on the economy. The Manual for Public and Private Decision Makers: Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors is created to link and align the development of Disaster Risk Insurance products targeting the Agriculture and Micro Small Medium Enterprises (MSMEs), with Disaster Risk Management Plans. It seeks to streamline all efforts towards the Sendai Framework for Disaster Risk Reduction , and contribute to the G7 Climate Risk Insurance Initiative of increasing access to disaster risk insurance for up to 400 million most vulnerable people by As development in urban areas pools risks and increases the exposure of local economies to the impacts of climate change, while posing a threat to agriculture production among the most vulnerable in rural areas, GIZ through the RFPI Asia Program is working towards the empowerment of multi stakeholders from partner countries to utilize insurance as an option to manage risks. We encourage the users of this manual to utilise local contexts and resources in assessing disaster risk management plans and proposing insurance options, to promote sustainability. Combined expertise on disaster risk management and disaster risk insurance will not stop natural catastrophes, but can cushion their impacts through financial inclusion. The battle against the impacts of climate change and natural catastrophes can be managed using the right tools and coping mechanisms. Dr. Antonis Malagardis Program Director, GIZ RFPI Asia II

9 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 1 I Introductory Notes for Manual Users This introductory chapter provides important background information on the Manual s subject and design to prepare the user for a more meaningful learning journey. SMEs and Climate Change Four out of five small and medium-sized enterprises (SMEs) fear the impact of climate change on their businesses. The Zurich Insurance Group s 2016 Annual Global SME Survey found this with nearly 78 percent of surveyed SMEs expecting risks associated with climate change to have a significant effect on their business [1]. It is a fact that climate change is affecting our planet in enormous ways. The Environmental Defense Fund (EDF), in its website, summarizes in three broad categories these scientifically supported effects 1) erratic climate and weather extremes, 2) altered ecosystems and habitats and 3) risks to human health and society [2]. The first erratic climate and weather extremes - are the abnormal and infrequent harsh weather conditions which have become the new normal. The increasing earth s temperature raises water evaporation, thus making weather conditions more extreme, e.g. stronger typhoons and hurricanes. Rising sea levels, in turn, precipitates greater coastal flooding. In drier locations, the incidences of droughts and wildfire are on the upswing. Indeed, these and many more climate change induced natural catastrophes (NatCat) pose rising business risks to SMEs globally as they can bring significant damages to smaller enterprises should they actually happen.

10 2 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors The second altered ecosystems and habitats, results from the fast changing climatic patterns that cause an ecosystem to become unsupportive to some biodiversity species while allowing others to move in and take over, thus threatening the survival of the former and risking in certain instances the collapse of such ecosystem as a whole. Biodiversity, whether flora or fauna are sources of vital raw materials for SMEs on which many of their businesses depend. As such, alterations in ecosystems, in many cases, adversely affect the SMEs economic plight. And the third risks to human health and society highlights the food security risk as NatCats take their toll on agriculture. Farmers are challenged to keep production high amidst rising unpredictability of weather conditions and water supplies. Their farm yields are also affected by the growing attacks from uncommon weeds, pests and diseases that are induced by climate change. Table 1. Other Findings of the Potential Effect on Business of Small and Medium Enterprises (SMEs) Due to Climate Change Global Survey Report. Percent of Findings Respondents SMEs consider the following as the critical risks to business due to climate change - 36% Material damage, 26% Business interruption, 14% Supply chain interruptions, 14% Higher costs for energy and water, 14% Impact of climate extremes on employees health. Virtually none of the SMEs surveyed see avenues to profit from climate change. The global survey revealed regional differences in terms of how climate change is perceived and the potential impact it might have. Source: [1] SMEs and the Economy The impact of SMEs on the economy of a country and of the world has long been recognized. Studies have shown that SMEs contribution to the economy in terms of income, output and employment is significant. SMEs contribute to economic growth in both high and low income countries by sustaining employment and contributing to GDP (D Imperio in [3]:3). Given the important role that SMEs play in national and global economies, it is plain to see that any impediment (e.g., effects of climate change induced NatCat) to the expected performance of the sector may also affect the economic order at various levels. The limited resources of SMEs particularly in many developing and emerging countries make them highly vulnerable to NatCat as the former challenges the easy and quick continuation of smaller enterprises business operations following a devastating weather disturbance. These NatCats adverse impacts on agriculture and food security are highlighted in the November 2015 Food and Agriculture Organization (FAO) study report that presents the results of 78 needs assessments undertaken after major disasters from 2003 to 2013 in 48 countries in Africa, Asia and the Pacific, Latin America and the Caribbean. For a digest of the study report, please see Box 1 in [4]:12. SMEs NatCat Risks and Insurance In order to improve SMEs disaster resilience, especially in countries with high climate change vulnerability, the promotion of insurance as a NatCat risk mitigation instrument is now being aggressively explored and

11 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 3 pursued. Increasing frequency and severity of NatCat... can be counterbalanced by the timely adoption of national strategies of insurance and other forms of disaster risk management (DRM) mechanisms ([4]:12). BOX 1 What is an SME? There is no one definition of SME for all countries worldwide. The table below shows these variations. VARIOUS COUNTRIES BRICS EU USA Asia Malaysia Egypt Ghana Brazil (industrial) Brazil (commercial) Russia India China South Africa Name Small and Medium Enterprise Number of Employees Small and Medium Enterprise Small and Medium Enterprise Micro, Small and Medium Enterprise Micro, Small and Medium Enterprise Small and Medium Enterprise Small and Medium Enterprise Small and Medium Enterprise Micro, Small and Medium Enterprise Small and Medium Enterprise Micro, Very SMall Small and Medium Enterprise Micro <10 - < <5 Small <50 < < Medium <250 < Annual Turnover Micro < 2 0 RM $10k <Rs50m - <R200k Small < 10 0 RM <RM10m Medium < 50 0 RM10m- RM25m 0 $100k m RUB max 0 $1m 0 0 1bn RUB max Rs50- <Y30m R3m- R32m Source: South African Institute of Public Accountants (SAIPA), Information drawn from NCR (2011:23) and South African national Small Business Amendment Act, Rs60- Y30- Y300m R5m- R64m As such, the conduct of any research on SMEs with a global scale would always be a challenging proposition and undertaking. To promote greater awareness on risks of NatCats affecting SMEs, the MEFIN 1 Network and the GIZ RFPI Asia 2 have embarked on a learning manual Bridging the Natural Catastrophes Insurance Protection Gap for SMEs in Agriculture and Other Sectors: A Manual for Public and Private Decision Makers. This shall be simply referred to henceforth as the Disaster Risk Insurance Manual or the DRIM. The Protection Gap BOX 2 Protection gap --- a technical term used in insurance, can be explained by an arithmetic formula given below Protection Gap = Insurable Assets of SMEs Current Level of Insured Assets For example, if the amount of insurable SME assets in the Philippines is PHP 5 Billion and the insurers only have a total sum insured of PHP 1 Billion, then the protection gap is PHP 4 Billion. Source: RFPI Asia. Why a DRIM? The need for the Manual became evident when another MEFIN Network and GIZ RFPI Asia publication entitled Diagnostic Toolkit for Insurance Against Natural Catastrophes for MSMEs in the Agricultural 1 Mutual Exchange Forum on Inclusive Insurance. 2 Deutsche Gesellschaft für Internationale Zusammenarbeit - Regulatory Framework Promotion of Pro-Poor Insurance Markets in Asia

12 4 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors and Mining Sectors [4] - was published. While enthusiastic feedback for the publication s theme, content and relevance from many readers was received, requests for a simpler, easy-to-follow learning manual written in a layperson s language was likewise expressed. DRIM is the response to that call. Objectives A successful study and completion of the Manual will enable the user to 1.1 Explain the importance of the recommended four steps analytical framework towards using insurance as a disaster risk insurance (DRI) option; 1.2 Undertake risk assessment by conducting hazards analysis, vulnerability assessment and impact estimation; 1.3 Perform DRM analysis that considers prevention and reduction, mitigation and coping measures; 1.4 Identify gaps in consideration of DRM strategies their scope and characteristics, conducting performance analysis and matching risks and strategies; 1.5 Explore insurance as a DRF option through the appreciation of its scope within the integrated risk management (IRM) approach. Content Structure and Flow Figure 1 resembles a house that illustrates the content and flow of the DRIM. Serving as the means of entry to the structure is the Manual overview entitled Chapter 1: Introductory Notes for Manual Users. This presents the foundational concepts, its objectives, content structure and flow, delivery modes, users and evaluation. The livable part of the structure features the DRIM s main content the Four-Step Analytical Framework. This is supported by its four component pillars of Risk Assessment; Disaster Risk Management Analysis; Gaps Identification; and Disaster Risk Management (DRF) Options (Insurance) Exploration, which are individually presented as study Chapters 2, 3, 4 and 5, respectively. For the Manual users to gain deeper learning on these component steps, real life cases and experiences from representative countries are summarized and briefly provided in these chapters with links to fuller versions of source articles, reports and/or studies. Completing each of the chapters are opportunities for the Manual users to 1) think of their own sector and country realities, 2) reflect on the life cases presented and 3) describe and propose an application mechanism framework to apply each of the specific steps in their own sector and country contexts. Completing the structure and serving as the roof are two topics Insurance as DRF Instrument: Multi- Level Approach, Policy Issues and Institutional Arrangements. These topics presented in Chapters 6 and 7, respectively, provide the necessary overarching frames that will ensure the smooth promotion and implementation of NatCat insurance for SMEs as risk mitigation instruments.

13 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 5 Figure 1. Manual Content Structure and Flow Paradigm. Three Days Seminar-Conference Format On the basis of the given content and flow, a three days seminar-conference format in a physical venue is recommended below (Table 2). Said format design may be used flexibly for participants coming from a single country or many countries. In every case, the representation of the three focal Manual users SMEs, insurers and regulators - is highly encouraged to optimize information, knowledge and experience exchange; insights building for policy, product, process and practice generation and networking for prospective ways forward. Delivery Modes The Manual was envisaged to be a stand-alone learning companion for any decision maker/user from the SME, insurer and/or regulatory sectors. Designed team or group learning contexts in either face-to-face study mode in a physical setting. Table 2. Face-to-Face Training Format Using the Manual as a Learning Companion Guide. DAY H 1000H 1030H 1130 SME Stream Risk Assessment Case Presentation and Discussion SEMINAR Session 1: Joint Opening Ceremony Welcome and Opening Remarks Overview: Seminar-Conference / Manual Introduction of Participants Keynote Message Coffee Break Session 2: Joint Plenary Input Presentation A Background of MSMEs using country context Impact of Natural Catastrophes on country s MSMEs Four-Step Analytical Framework + Risk Assessment First Breakout Session Per Stream Regulator/Government Insurance Stream Development Org. Stream Risk Assessment Case Presentation and Discussion Risk Assessment Case Presentation and Discussion

14 6 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 1230H LUNCH 1330H Session 3: Joint Plenary Input Presentation B Disaster Risk Management Mapping Second Breakout Session Per Stream 1430H SME Stream Disaster Risk Management Analysis Case Presentation and Discussion Insurance Stream Disaster Risk Management Analysis Case Presentation and Discussion Regulator/Government Development Org. Stream Disaster Risk Management Analysis Case Presentation and Discussion 1530H COFFEE BREAK 1600H Session 4: Joint Plenary Input Presentation C Gaps Identification Third Breakout Session Per Stream 1700H SME Stream Gaps Identification Case Presentation and Discussion Insurance Stream Gaps Identification Case Presentation and Discussion Regulator/Government Development Org. Stream Gaps Identification Case Presentation and Discussion 1800H Wrap Up and Announcements Per Stream DAY H 0930H 1030H H 1300H 1500H 1530H 1800H SME Stream DRF Options (Insurance) Exploration Case Presentation and Discussion SME Stream Joint Seminar Paper of SME Stream Participants SEMINAR Session 5: Joint Preliminaries Day 2 Day 2 Overview Day 1 Recapitulation Session 6: Joint Plenary Input Presentation D DRF Options (Insurance) Exploration Coffee Break Fourth Breakout Session Per Stream Insurance Stream DRF Options (Insurance) Exploration Case Presentation and Discussion LUNCH Session 7: Joint Plenary Input Presentation E Insurance as a DRF Instrument: Multi-Level Approach Institutional Arrangements and Policy Issues COFFEE BREAK Fifth Breakout Session Per Stream Insurance Stream Joint Seminar Paper of Insurer Stream Participants Wrap Up and Announcements Regulator/Government Development Org. Stream DRF Options (Insurance) Exploration Case Presentation and Discussion Regulator/Government Development Org. Stream Joint Seminar Paper of Regulator Stream Participants DAY H 0930H SEMINAR Session 8: Joint Preliminaries Day 3 Day 3 Overview Day 2 Recapitulation Session 9: Conference A Presentation of Seminar Paper of SME Stream Participants

15 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors H 1015H 1100H 1130H 1200H 1215H 1230H 1330H 1400H 1415H 1430H 1500H 1700H Feedback from Insurance Stream Participants Feedback from Regulator/Government Stream Participants Coffee Break Session 10: Conference B Presentation of Seminar Paper of Insurance Stream Participants Feedback from Regulator/Government Stream Participants Feedback from SME Stream Participants LUNCH Session 11: Conference C Presentation of Seminar Paper of Regulator/Government Stream Participants Feedback from SME Stream Participants Feedback from Insurance Stream Participants Coffee Break Session 12: Concluding Session Impressions from a Representative Participant per Stream Way Forward Agreements Reading of Conference Resolutions Closing Message End of Seminar-Conference For flexible use, the Manual can fulfill the varying requirements of individual, venue (just as recommended above) or in a virtual online study mode via the internet. Depending on needs and purposes, the three-day face-to-face seminar conference format described above may be collapsed to Break and separate the three streams into two-day independent offerings for each targeted stream participants less the third conference day. This means that the objectives, basic topics and tasks for the first two days will still be achieved and covered in separate stand-alone seminars among SME stream participants only, Insurance stream participants only or Regulator/Government participants only. Remove the third day conference from the given format and offer it as a distinct and separate activity on its own. In this instance, the conference participants from the three streams will have to do pre-work prior to the conference to prepare their respective position papers for presentation and discussion at the conference proper. The pre-work can be the individual seminars for each of the three streams described in the first bullet point above or it could also result from online study, interaction and work of participants coming from each stream doing the course on line. Use and offer the Manual as, for instance, a one day or two days (depending on what is seen best by the organizers) internal training to develop a specific output, for example, a NatCat insurance product, a piece of regulatory policy or legislation, or a NatCat mitigation plan for SMEs in a sector-specific value chain concentrated in a particular community or geographic area. In this instance, the four-step Analytical Framework can simply be presented in a brief and concise way at the beginning of the training before proceeding to the planned output development process for the remainder of the day or two. Indeed, the possibilities are endless in optimizing the benefits of using the Manual. The boundaries will simply have to be set by the perceived need of the time, the requirements of the users, the amount of available resources, and the creative imagination of the activity organizers together with the engaged training facilitator(s).

16 8 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Target Users The intended users for the DRIM are individuals and/or institutional decision makers from three target entities that have clear stakes in the promotion of NatCats insurance for SMEs. These institutions are 1) the SMEs themselves, 2) the private insurance and reinsurance providers/companies and 3) the government regulatory and line agencies. Specifically for the private insurers and the government regulators, potential DRIM users may come from their national, regional or, in some instances, even local operations or offices, and as such may have distinct learning expectations. Aware of this possibility, the DRIM, whenever relevant and feasible, provides opportunities for differentiated, multi-level learning experiences to cater to varying users needs. For the seminar-conference format described in Table 2, it is recommended that participants per stream be kept to a minimum of five to a maximum of ten participants, or a total of minimum 15 to a maximum of 30 participants for the entire activity. The participant numbers are suggested to heighten individual engagements toward optimum course productivity and learning. Summary A summary is presented at the beginning of each chapter to highlight the key concepts used to derive the planned results. These may include approaches, processes, technologies, terms, etc. The target users may refer to the summary for the highlights of the chapter, while the details are found in the succeeding texts. Boxes Each chapter is provided with a Box that contains an illustrative case of an actual experience, initiative and/ or an excerpt from a document from a particular country. This is provided to aid the Manual users in 1) concretizing the concepts being learned in each chapter, 2) linking the case to their own country, sector or level (e.g., national, regional or local) contexts and 3) drawing insights and lessons from reflecting on the connection and instructive synergy between and among the chapter topic, the case and their own reality. This way, the users are supported to experience and achieve a more useful study journey through a greater interface and interaction with the materials provided in each chapter. Lastly, the chapter case is also meant to offer the users with a guide for applying the chapter lessons in addressing a real-life need, challenge or constraint. Useful Links Each major topic found in Chapters 2 to 7 is provided with links that will enable the Manual users to access a variety of materials that are relevant and/or related to the topic at hand. The links are meant to broaden the users grasp of each of the topics by looking at documented experiences, initiatives and knowledge from a number of countries. This feature responds to the information need of all Manual users, particularly those who are learning mainly through an online platform. A Practical Guide on Using this Chapter Each chapter is capped with a group activity that will assess actual scenarios on the ground. Guide questions are formulated for three distinct stakeholders: 1) MSMEs; 2) the Insurance Industry; and 3) Regulator/ Government/Development Organization, except for chapter VI and VII that requires a shared response or the Government s perspective.

17 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 9 II 4-Step Analytical Framework Summary The analytical framework on disaster preparedness has four steps: (1.) Risk Assessment, (2.) Disaster Risk Management Analysis, (3.) Gaps Identification, and (4.) Disaster Risk Insurance Options. The basis for a responsive and effective Disaster Risk Insurance Instrument specific to a target group (household, municipal, provincial or national aggregation) is the disaster risk assessment of target areas, and the gaps which cannot be addressed by the disaster risk management plans. As a financial product, Disaster Risk Insurance is designed to provide financial protection against extreme shocks due to natural catastrophes at various levels. The analytical framework on disaster preparedness may use different terms based on the context of specific areas, but with the same intention to document, assess and understand disasters or natural catastrophes. 4-Step Analytical Framework: Step 1 - Risk Assessment Summary The main goal of chapter 2 and this manual is to align the conceptualization of all Disaster Risk Insurance options with the analytical framework on disaster preparedness of each target area. Analytical framework on disaster risk is not strictly prescribed as a requirement in the design of Disaster Risk Insurance instruments. However, this preparatory process positions disaster risk insurance to respond to residual or remaining risks as an ex ante initiative, following risk assessment, disaster risk management analysis, and gaps identification. Different yet interdependent interfaces of risks. This highlights the importance of a comprehensive assessment, such as the four-step analytical framework being recommended here, as a prerequisite to policy, product, process and practice formulation at various levels national, regional or local. Such assessment equips decision makers and development planners with the ability to understand the complexities of the environments, analyze the challenges they face and, develop informed and insightful solutions that will address identified challenges in the environments ([4]:17). Preparatory Task for the Trainor The Trainor shall secure the addresses of all SMEs establishments participating in the DRIM training, at least two weeks prior. Upon receipt, these addresses shall be inputted into to access risk maps sanctioned by UNEP, PSI, Global Risk Map and NICTA. The Trainor shall investigate whether internet connection is available at the training venue. In case of lack of internet connection, the Trainer shall capture the maps (CTRL + PRTSC SYSRQ + CTRL V to Paint) indicating the exposure of risks to SMEs prior to the training. These photos shall be edited in photo and saved as jpeg files. On the day of the training, these addresses shall be entered in the Search portion of nicta.com.au/. National and local disaster risk management plans of host countries shall also be collected, printed and used as reference during the training. Separate meetings with Government Agencies, Insurers and Development Partners may be held prior to the DRIM training to clarify the discussions and data requirements. Analytical Framework Assessing the needs and promoting access to insurance entail a methodological approach comprised of four key steps presented in Figure 2. The four steps are Step 1: Risk Assessment. The conduct of hazards identification and analysis, vulnerability analysis and impact analysis. Details of this step are discussed in the second section of this chapter.

18 10 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors

19 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 11 Step 2: Disaster Risk Management Analysis. This involves the consideration of prevention and reduction, mitigation and coping mechanisms. This step is elaborated in Chapter 3. Step 3: Gaps Identification. This step scans the inventory of DRM strategies, considers the scopes and characteristics of these strategies, undertakes performance analysis and matches risks and strategies. Step 4: DRI Exploration. This step explores the scope of insurance and tests alignment with the Integrated Risk Management Approach under Chapter 5. Figure 2. The Four-Step Analytical Framework. The Analytical Framework Recognizes the vital interface between risk assessment and the various DRM mechanisms as an enabling condition toward the development of suitable DRF strategies; Considers the potential impact of climate change while emphasizing institutional capacity as a critical factor in successful implementation of risk management under varying conditions and contexts; Offers a holistic and generic approach to risk assessment and DRM; Is illustrated in DRIM by application examples or cases from representative countries focusing on risks that SMEs face against natural hazards. Acknowledges the complexity of NatCat insurance and DRM brought about by the several interdependencies and spill overs that affect, among others, market risks and macroeconomic conditions of a country (see Box 3 in [4]:18). This explains the Analytical Framework s comprehensive scope thus ensuring that not one critical aspect is left out in the analysis that may eventually undermine the effectiveness of the designed measures; Offers flexibility in assessing risks and its consequences based on the user s objectives and priorities. As such, the relevant aspects to be included in the analysis may be limited for the time being but may be expanded in due time if necessary.

20 12 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Step 1: Risk Assessment Summary Understanding the impact of various risks to natural catastrophes has different approaches. In seeking the financial impact of risks to SME value chains, the manual advocates a (1.) hazards analysis for the collection of data on risks, and prioritization for those affecting a majority of the SME value chain. (2.) Vulnerability assessment to measure the susceptibility of SMEs to the identified risks. While (3.) impact estimation models and quantifies the possible effect of identified risks to SME value chains in specific locations. Development efforts at various levels can be jeopardized by climate change and other socioeconomic uncertainties. As such, the conduct of a country risk assessment is a critical foundation for developing a comprehensive DRM. Figure 3. Risk Assessment Process Flow. Risk assessment entails the collection of data on hazards, vulnerabilities, losses and potential impact of disasters. These data and their analyses are crucially important in defining the most suitable DRM strategies, whether they are for risk prevention, risk reduction, risk mitigation (e.g., contingency planning and financial preparedness) and/or risk transfer (e.g., coping with NatCat impacts) ([4]:18). Most development cooperation agencies (DCAs) have developed their own risk assessment methodologies (see Box 4 in [4]:19). Although differentiated by the number of steps and the scope of tasks to be undertaken, the content of these risk assessment procedures are nonetheless similar (ibid.). This Manual endorses a three-phase risk assessment methodology, which is complemented by a generic questionnaire given in Annex 1 ([4]:88-90). The phases are 1) Hazards Analysis, 2) Vulnerability Assessment, and 3) Impact Estimation (Figure 3). Each phase is described below. BOX 3 Flood Risk Assessment in Fanteakwa District, Ghan In 2012, the Flood and Draught Risk Mapping Project in Ghana, involving five AAP Pilot Districts, was undertaken. All of the five pilot districts, including Fanteakwa, were subjected to a flood risk assessment. Excerpts of the findings of the risk assessment for Fanteakwa District follow. Cause of Flooding. 81.1% of respondents consider rainfall as the major cause of flooding. They reason that the area has been experiencing heavy precipitation of late. Other contributory factors to flooding are soil texture, altitude, slope, flow accumulation, land use and proximity to water bodies. Type of Rainfall. 62.1% of respondents suppose that the rainfall pattern has become very severe within the District. There has been a change in the annual rainfall pattern with severe rainfall being the highest followed by moderate and low rainfall, in that order. Predominant Soil Type. 42.9% of respondents claim that clayey soil is the predominant soil type in the District, while 35.7% consider loamy soil as a dominant soil type. Clayey soil has the ability to hold water for a very long time. It is typically not free draining; hence, it allows all the water deposit to run-off causing floods. This suggests why majority of the areas in the Fanteakwa District easily gets flooded.

21 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 13 BOX 3 (continuation) Vulnerable Sectors. 63% of respondents regard Agriculture as the most vulnerable sector to flooding. Clayey soil strips away some vegetation and top soil thereby adversely impacting plant/crop growth. Flood-prone Areas. Dansor in Begoro Township tops the list of flood-prone areas. Others in the list are: Zion-Begoro, Nsutam, Zongo-Begoro, Adakope, Odortom, Ahomahomaso, Akrumuso, Nayinfong, Nkankanma, Zongo community, Zion and Bosuso. Safe Havens. Respondents selected either a nearby school or church as a safe haven. 16% of respondents choose a church in Bosuso and a school at Ahomahomaso as safe havens. It was recommended that further research into mapping these safe havens and drawing evacuation plans to build community resilience to flooding Source: Flood and Draught Risk Mapping in Ghana, EPA, 2012; BOX 4 Flooding, homes and loss: insurance as a risk-transfer mechanism in Vietnam Climate change is exacerbating flooding events in Vietnam, intensifying the impacts, losses and damages experienced in urban areas, especially by the poorest and most vulnerable community members. Low-income households in urban communities in particular face increasing costs due to more intense flooding and inundation. As a result, the need for capacity-building mechanisms that will assist these households to better cope and recover after floods is quickly growing. Two studies conducted in Vietnamese cities investigated flooding costs borne by households and explored index-based flood insurance for vulnerable communities as a possible risk-transfer mechanism against future flooding in Vietnam. Vietnam is under extreme threat from flooding related to sea-level rise and climate change. Under the more severe projections for the region, the maximum inundation depth may reach up to 1.51 metres.1 A recent study1 examined the costs borne by households as a result of floods like these in Can Tho City, which experiences fierce flooding from several sources: the Mekong River, high tides, heavy rains and due to the infrastructural pressures of urbanisation. These floods can inundate up to 50 per cent of the city at one time. In the study, a survey of 250 households showed that urban residents incur both direct and indirect costs as a result of this flooding (see Box 1). These costs are experienced at different stages: before, during, and after a flood event. And these costs are consuming a significant and increasing portion of household income. In Can Tho City, residents know that flooding usually occurs between August and November: the most severe floods occur in October. During these times, 50 per cent of households surveyed are heavily inundated (with water coming inside the house), with 73 per cent of inundated homes experiencing 20 50cm of water. As a result, three quarters of all survey respondents agreed that flooding had become very serious in the last five years. Over half believed that urban flooding would continue to be a serious issue over the coming decade. While some flood warnings are provided in Vietnam through the media (weather forecasts and news), most respondents were aware of impending floods based on their own past experiences and knowledge of heavy rains and high tides. This awareness is frequently shared with family, friends and neighbours through word of mouth. Flooding affects not only homes, but health as well. Rising waters can exacerbate existing issues such as polluted environments and poor hygiene, increasing the occurrences of illnesses like influenza and skin diseases. The resulting stress after flooding also negatively affects individuals mental health. Of the surveyed households, 65 per cent had coping strategies in place before a flood occurred. These strategies included raising the base of their homes, constructing walls around their homes made of concrete or sandbags, moving furniture to higher places, constructing concrete shelves to store valuables and food higher up, repairing or clearing drainage systems and installing pumping machines in homes. The average annual direct costs for a household due to flooding were US$64, comprised of US$29 spent before, US$19 during, and US$16 after the flood. The majority of the before-flood costs were fixed (72 per cent), while costs of repairs and cleaning in the during- and after-flood period were all variable. The total annual indirect costs to a household totaled US$578, of which US$19 were incurred before, US$440 during and US$118 after the flood. Lost income, both as wages and revenue in the case of small business owners, is the greatest contributor to these significant costs (42 per cent), followed by health costs (23 per cent). There is a significant difference between investments in before flood costs for flood preparation (totaling US$48) and the costs during floods and for postflood recovery ($593). This highlights the importance of investing in protective measures before a flood to prevent a costly recovery. The results of the study demonstrate that overall public awareness and levels of concern about flooding, the respondents education level, and their household s location were all statistically significant factors relating to economic losses incurred due to floods. Source: Flooding, homes and loss: insurance as a risk-transfer mechanism in Vietnam, Asian City Climate Resilience, 2015.

22 14 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Useful Links A TITLE Ghana launches disaster risk maps UNDP, Oct 20, 2015 Flood and Draught Risk Mapping in Ghana EPA, 2012 Ghana s Disaster Profile NADMO, 2016 Africa: seismic hazard map Hazard Mapping Ghana UNDPNADMO, 2007 Ghana agricultural sector risk assessment (English) World Bank, 2016 TITLE Residential Building Suitability Map for Leyte Island Philippines - GIZ, 2015 Mapping Philippine Vulnerability to Environmental Disasters -Center for Environmental Geomatics - Manila Observatory, 2005 Nababaha.com flood maps produced by DOST Project NOAH Hazard maps for the Philippines Climate- and Weather-Related Risk Maps Geophysical Risk Maps -Center for Environmental Geomatics Manila Observatory, 2005 Risk Analysis Maps, PAGASA DOST Ghana LINKS Philippines LINKS Hazards Analysis Data Collection. Insurance markets require good quality data in order to underwrite hazards-related risks ([4]:19). Hazards analysis, therefore, begins with data collection. A spreadsheet is provided in Annex 2 to identify the type of data needed and suggest who should do what at the macro, meso and micro levels (ibid.). Environmental Scanning. The availability of the required data segues into the identification of NatCat hazards and other agricultural risks. The two are often interrelated and could have detrimental impact on the SMEs employees and assets as well as on the economy as a whole. Environmental scanning should lead to the identification of the following types of risks. Production risks are hazards caused by adverse weather, pests, disease, human error and misuse of new technologies that may peril, for example, agricultural production [5]. Risks of this kind includes 1) weather events (e.g., droughts, floods, hurricanes), 2) production- affecting environmental factors (e.g., deforestation that damages soil quality or causes landslides), 3) pests and diseases and 4) input availability and access to raw materials ([4]:20). Market risks present the likelihood that the value of an investment will decrease due to moves in market factors [6]. Market risks include 1) price volatility, 2) international market fluctuations, 3) stocks level, 4) SMEs organizational structure, 5) infrastructure and logistical risks (e.g., storage capacity) and 6) access to financial services ([4]:20). Public policy and institutional risks focus on the domain of the enabling environment. These include - 1) legal environment for business (e.g., financial and insurance policies, agricultural and mining policies), 2) trade restrictions, 3) government services etc. (ibid.).

23 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 15 Prioritization and Characterization. Once the applicable hazardous events have been identified, they ought to be prioritized and characterized following the following two simple steps. Analyze the identified NatCat risks in terms of, for instance, 1) frequency, 2) severity, 3) duration, 4) location, 5) probability 6) immediate causes and sources of hazards (e.g., Does the hazard originate from national or international territory? ), 6) interlinkages (e.g., Will the earthquake lead to a tsunami? ) and 7) internal drivers (e.g., climate change, deforestation) that could affect exposure and vulnerability ([4]:20). Assess the priority risks as they relate to the SME value chain being considered (e.g., in the agriculture, mining and other sectors) based on the possibility of occurrence and severity of losses. BOX 5 Hazards Analysis: Cross-Sectoral MSMEs, Philippines The Philippines was among the first country-users of the four-step Analytical Framework endorsed by the MEFIN Network and the GIZ RFPI Asia Toolkit. The full report is part of the Diagnostic Toolkit for Insurance against Natural Catastrophes for MSMEs in the Agricultural and Mining Sectors (2015). For an illustration, the hazards analysis part of the report is featured below. Hazards Analysis The GIZ-RFPI insurance demand study (2014) for MSMEs in the Philippines indicated that the following risks affected the businesses in the manufacturing, services, food processing and trading sectors. Production risks. Natural disasters (with the highest financial impact 83% of respondents); fire (67%); no timely delivery of raw materials (56%); high cost and intermittent supply of electricity (33%); financial claims from customers such as goods not delivered on time or of low quality, issues related to quality and increased cost of raw materials (33%); and quick staff turn-over (11%). Market risks. Loss of potential income from business such as cancellations of reservations and bookings (56%); theft (61%); banks loans with high interests, etc. (6%); others such as vulnerable electricity infrastructure and transport system and insufficient supply of gasoline. At the end of the hazards analysis, it is advised to prioritize the risks with the highest financial burden to the MSMEs i.e. typhoons with the related effects of wind speed and prolonged inundation and floods cause. Source: MEFIN Network and GIZ RFPI Asia Toolkit ([4]:45). BOX Earthquake Plan: Khyber Pakhtunkkhwa A powerful earthquake of magnitude 7.5 on the Richter scale (USGS) struck Badakhshan Province in Afghanistan on Monday October 26, 2015 and also affected Pakistan including Khyber Pakhtunkhwa (KPK), Gilgit-Baltistan (GB), Federally Administered Tribal Areas (FATA), Punjab, Kashmir and Balochistan. The earthquake struck at 09:09 UTC (14:09 PST) and was 196 kilometers deep. The epicenter was 82 kilometers southeast of Fayzabad, Afghanistan in the Hindukush mountain range. Overall impact of this seismic event includes 280 deaths, 1700 injuries, 107,389 damaged houses1. The jolts of the earthquake were severely felt in many districts of KPK and GB; however, the intensity in Chitral was extraordinary because of its close proximity to the Hindukush range. The strong ground shaking in Malakand Division resulted in undeniable damage to 85,255 houses, 2402 government buildings and public infrastructure facilities2. Death toll in Malakand Division reached 170 besides 1142 injured. These massive losses concentrated in mountainous remote communities of seven districts including Chitral, Dir Lower, Dir Upper, Swat, Shangla, Malakand and Buner. Seismic hazard of the region is un-questionable as evident from past events like 2005 Kashmir Earthquake including numerous aftershocks of 26th October Earthquake and very recent earthquake of 5.2 magnitude which happened on 22nd November with its epicenter in the same vicinity as of the October 26 earthquake.

24 16 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors BOX 6 (continuation) On the other hand, inherent vulnerabilities of the affected population have become significantly worse in post-earthquake scenarios. People already live in conditions of poverty, inequality and with limited economic opportunities. The land is fragile and sloping, housing structures are weak, access to public infrastructure and services is generally limited, mountains are generally prone to landslides, flash floods, and other natural calamities. Food grains that had been stored for the whole year have been destroyed under the debris. This has undoubtedly worsened the food security situation in earthquake-affected villages. People here are living in unsafe areas and houses, due to lack of choices and limited capacities. In addition to the challenges of daily living, women and children are now at high risk as they are compelled to dwell under tents in open spaces. Widespread poverty, vulnerability, and remoteness, combined with increased environmental stress and limited economic opportunities, are seriously challenging the ability of mountain people to make a living. Source: 2015: Earthquake Recovery Plan: Khyber Pakhtunkhawa, Provincial Disaster Management Authority, Pakistan, Useful Links B TITLE Hazard Mapping in Ghana, UNDPINADMO Project, 2012 Forum for Agricultural Risk Management in Development Agricultural Sector Risk Assessment Ghana agricultural sector risk assessment (English) World Bank, 2015 Agriculture and Social Protection in Ghana: A LEAP in the Dark? 2009 TITLE Residential Building Suitability Map for Leyte Island Philippines - GIZ, 2015 Calculating Risk - Hazards -Center for Environmental Geomatics - Manila Observatory, 2005 Seismic hazard analysis for the Philippines Natural Disasters - International Decade, Natural Disaster Reduction (IDNDR) Flood Hazard Maps, PAGASA DOST New Agriculturist Country Profile: Philippines Ghana LINKS Philippines LINKS Vulnerability Assessment Vulnerability assessment in this context focuses on the susceptibility of the exposed SMEs. In general terms, the susceptibility and impact analysis of NatCat should include more factors than those considered here. In practical terms, however, susceptibility analysis may focus only on those factors that are of particular relevance and importance to the set purpose and scope of the analysis while skipping other factors (i.e., social dimensions or limited only to the key institutional policies). Inasmuch as government policies, infrastructures, financial and other services, among other factors, do affect the SMEs, they should all be taken into account in accordance with the particular predetermined assessment objectives (ibid.).

25 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 17 Vulnerability assessment may be undertaken by observing the two-step approach described below. Identify exposures. This step entails the identification of assets and environmental resources that are exposed in terms of magnitude and importance. Furthermore, the distinction between the vulnerability of government, SME/private sector and microenterprise/household is required. It will be noted that microenterprise and household have been lumped together as one. This is because microenterprises hardly distinguish between personal and business risks (ibid.). Classifications of exposures or vulnerabilities are given below (ibid.). Physical takes into account the quality and strength of buildings, infrastructures and prevention infrastructures [i.e., housing, stock, production sites (e.g., workshops, storerooms) and productive assets (e.g., machinery, harvest, fields, livestock, means of transport and flood defenses)]. Economic and financial includes capital stocks, savings, (projected loss of) incomes, productivity/ growth, level of financial protection (e.g., insurance), access to finance and increased unemployment. Environmental considers the quality and availability of natural resources (more importantly - water and soil). Social looks at society s social dimensions including government support services (e.g., agricultural extension services), employment policies and employee protection, social protection, and people s networks and organizations. Institutional takes into account the quality of governance, knowledge base and decision making processes (e.g., collective decision making capacities, responsiveness, transparency), and security issues whenever relevant. BOX 7 Vulnerable Sectors in Typhoon-exposed Laguna, Philippines A research on social vulnerability and gender was conducted under the project Building Capacity to Adapt to Climate Change in Southeast Asia. The province of Laguna in Southern Luzon, Philippines, was the locale of the study that aimed to answer the questions; 1) Who are vulnerable?, 2) Why are they vulnerable?, and 3) How are they adapting to the risks of climate change and climatic hazards?. To chronicle its findings, Maria Emilinda T Mendoza wrote a book in 2014 entitled Faces of Vulnerability: Gender, Climate Change and Disaster. Among the study s findings reported in the SEARCA website on an article about the book are the ones given below. Typhoons and floods are the main exposures of communities in the study area, with lakeshore barangays having a higher exposure to flooding and prolonged inundation. However, it was noted that human, social and economic sensitivity to these hazards has a major contribution to overall vulnerability. The number of vulnerable barangays increased significantly based on sensitivity and adaptive capacity indicators, compared to just exposure indicators. The elderly, women in various circumstances, farmers and fisherfolks, lakeshore residents and those living near bodies of water, and the poor were found to be vulnerable sectors. The agricultural sector is also significantly vulnerable to climate change-related hazards and disasters. Typhoons and floodwaters brought damages and difficulties in rice farming, hogs and livestock raising, poultry and duck egg production, aquaculture, and vegetable and fruit farming. The elderly was also a sector indicated as highly vulnerable to the impacts of climate change induced hazards mainly because of their physical and health conditions. Women are also adversely affected by typhoons and flooding due to greater demands on their traditional roles in the home, and the disruption in the gender division of labor both in the household, in the farm, as well as the community level. Source: 2015: Earthquake Recovery Plan: Khyber Source:

26 18 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors BOX 8 Risk Mapping Indonesia Sector Disaster Risk Reduction and Emergency Aid Natural Hazards Earthquakes Indonesia is located where three tectonic plates meet. The country experiences frequent seismic activity. In the case of Indonesia they also frequently occur at sea which may add to the danger of tsunamis. During the period from there were 110 incidents of tsunami waves where 90% were caused by tectonic earthquakes. The tsunami of December 26 in south-east Asia was caused by an earthquake under water with a magnitude of Around 5% of Indonesia s large population is directly exposed to earthquakes, which is about 11 million people and makes it one of the most hazardous countries regarding earthquakes. Around 2,5 million people are exposed to tsunamis in the country.3 Floods Floods are also a common phenomenon in Indonesia with several floods occurring yearly. About 1 million are directly exposed to flood hazard in Indonesia which ranks the country very high regarding this hazard. Due to the tropical climate heavy rainfall in short time periods is common place. Indonesia holds more than 5 thousand rivers and 30% run through major densely populated areas. Particularly the west is susceptible to floods because of the heavy precipitation and shallow rivers.5 Rainy season runs from December to March in the north-east and from June to October in the southwest. Floods may occur all year. Volcanoes Indonesia contains the most volcanoes of any country in the world, around 80 are active and threatening. Significant volcanic activity happens mostly on the Java, western Sumatra, the Sunda and Halmahera Islands, Sulawesi, Sangihe and in the Banda Sea. The most active volcano in Indonesia is the Merapi or Decade Volcano (Java). This volcano has had over a dozen known deadly eruptions. From , there were 52 volcanic eruptions recorded. Other notable volcanoes are Agung (Bali), Awu, Karangetang (Sangihe Islands), Krakatau (Sunda straight), Makian (Maluku Islands), Raung (Java) and Tambora (Sumbawa). Drought Another threat from nature is related to scarcity of food during a long, extended dry season, especially in the eastern part of Indonesia. Such conditions can be aggravated by the symptoms of El-Nino. About 2 million people are exposed to droughts. Droughts are common when the dry season is exceptionally long, areas such as West Nusa Tenggara, Nusa Tenggara Timor and some areas in Sulawesi, Kalimantan, and Papua. Landslides and mudslides Landslides often occur in the rainy season in the Bukit Barisan mountain range (Sumatra) and the mountain slopes of Java, Sulawesi and Nusa Tenggara. Due to the loss of the natural ecosystems buffer by logging the effects have become much more severe. Added to that the porous volcanic soil is very prone to land and mudslides.10 Landslides can occur all year round. Hurricanes According to Government of Indonesia data, from , there were 325 floods incidents and 143 hurricanes which displaced at least 400,000 persons and caused damaged/loss up to 1 trillion rupiahs (USD 1 billion).12 However, most of Indonesia is not positioned in a hurricane prone area; this actually runs just north and south of the country.13 Generally, the period of tropical storms is from October to April. Environmental hazards Indonesia is also threatened by environmental hazards such as deforestation, this leads to the intensification of certain natural disasters. Logging, mining, and the creation of large plantations have reduced the natural environment s capacity and human capacity to withstand the challenges posed by nature, as well as that of communities whose livelihood is based on access to natural resources. Water pollution from industrial wastes and sewage as well as air pollution are a problem in urban areas. Forest Fires Forest fires occur in Indonesia. Recent patterns of logging and grazing have left large areas of Indonesia particularly susceptible to fire. Widespread fires in 1997 and 2006 blanketed Southeast Asia in incredible smog for several months, causing an estimated $1.3 billion in damage to the region. Fire hazards are said to be largest in south Sumatra, south Kalimantan, Java and Nusa Tenggara Timor. Sidoarjo Mud Flow The Sidoarjo mud flow is a mud volcano in east Java that has been in eruption since May This biggest mud volcano in the world is said to be created by the blowout of a natural gas well drilled by PT Lapindo Brantas, although company officials contend that it was caused by a distant earthquake. At its peak Lusi was spewing up to 180,000 m³ of mud per day. In mid-august 2011, mud was being discharged at a rate of 10,000 cubic metres per day. This was a significant decline from a year previous year. It is expected that the flow will continue for the next 25 to 30 years. Although the Sidoarjo mud flow has been contained by levees since November 2008, the flooding still regularly disrupts local highways and villages and further breakouts of mud are still possible. This phenomenon is displacing many hundreds of families.

27 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 19 BOX 8 (continuation) Epidemics The degree of risk for contracting a disease in Indonesia is very high. The main in diseases in the country are bacterial diarrhoea, hepatitis A and E, typhoid fever, chikungunya, dengue fever and malaria. Epidemic occur often in Indonesia, a large dengue epidemic in 2004 killed more than 600 people, it was allowed to spread so easily due to situations created by different natural disasters at the time. Source: Risk Mapping Indonesia Sector Disaster Risk Reduction and Emergency Aid, Cordaid, Assess susceptibility to damage (vulnerability). This step is concerned with the analysis of the factors that create vulnerability and, as much as possible, the quantification 3 of their magnitude. It also includes the assessment of the trends and the potential underlying factors that influence vulnerability (e.g., urbanization, climate change and technological change). When stipulated in the assessment purpose, the analysis may also consider the society s capacity to respond to longer-term trends through, for example, appropriate policy and regulatory responses, self-protection capabilities and coping capacities ([4]:21). Useful Links C TITLE Agricultural Stress Index map, Ghana FAO, 2016 Assessing drought probability for agricultural areas in Africa with coarse resolution remote sensing imagery Community vulnerability assessment index for flood prone savannah agroecological zone: A case study of West District, Ghana Vulnerability Assessment maps for communities in Northern Ghana Evapotranspiration to the doorsteps of the farmer - A case of Kokoligu Community in the Upper Region, Ghana Participatory Poverty And Vulnerability Assessment (PPVA) TITLE Impacts Of Natural Disasters On Agriculture, Food Security, And Natural Resources And Environment In The Philippines, 2012 The impacts of disasters on agriculture and food security Environmental And Social Management Framework (ESMF) Mapping Philippine Vulnerability to Environmental Disasters Ghana LINKS Philippines LINKS 3 The quantification of NatCat-related risks is quite useful in generating interest not only from the Ministry of Agriculture but also from the Ministry of Finance and Planning. Such interest stems from the frequent and unexpected large losses to the government s budget and the country s trade balances resulting from agricultural and NatCat risks ([4]:21).

28 20 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors TITLE The impacts of disasters on agriculture and food security - FAO, 2015 Agricultural Stress Index map, Philippines FAO, 2016 Faces of Vulnerability: Gender, Climate Change, and Disaster SEARCA 2014 International LINKS Impact Estimation The estimation of the SMEs (including their personnel and assets) exposure value is important as it provides for a more precise and comprehensive understanding of potential damages and losses. Additionally, such quantification of potential impact makes possible the preparation and calculation of risk matrices, i.e., expected annual loss or probable maximum loss that are particularly useful for 1) risk financing purposes, 2) designing risk transfer instruments, i.e., insurance, and 3) enabling governments to assess potential insurance premium costs versus later eventual costs for relief and reconstruction measures (e.g., cost-benefit analysis) (ibid.). The distinction between direct impact and indirect impact needs to be understood as well since it helps to clarify roles and responsibilities of different actors especially between the government and the private sector. The two types of impacts are explained below (ibid.). Direct Impacts on SMEs refer to stock effects, i.e., damage on buildings and other assets or temporarily disrupted resources (e.g., momentarily non-available workers). Indirect impacts on SMEs refer to flow effects arising, for example, from reduced operation due to damage in government and financial services. Additionally, the following factors need to be considered ([4]:22). Disaster chain refers to an expected sequence or chain of events that may result from a disastrous event or a number of subsequent events. The following two cases are illustrative. 1) An SME, for example, may be able to cope with a one-shock event, but if another severe event comes, the business could be forced into insolvency and its owners into poverty. 2) In another instance, an SME may be able to access an emergency loan, but if it incurs default loan repayment after subsequent shocks, this SME will have no further access to credit. Amplifiers - factors that can accelerate, intensify or spread destructive impacts are referred to as possible amplifiers. These may be illustrated by the following cases. 1) An SME will obviously suffer from damaged critical infrastructure and central services, i.e., disruption of energy and/or water supply, 2) A farmer who lacks the required agricultural inputs or their untimely provision may either experience a lower harvest of altogether miss the opportunity of a second cropping season and 3) Traders who did not receive their expected agricultural produce, due to a NatCat, will most likely incur income and reputation losses something that traders in non-disaster prone region are generally spared from.

29 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 21 Impact Analysis of Flood in Accra, Ghana BOX 9 On 3 June 2015, a never-before-experienced flash flood event occurred in Accra. An explosion at a Goil filling station aggravated the situation and left 152 people dead. In time, a study was made to analyze the causes of flood in Ghana s capital and to examine suitable structural measures to mitigate the impacts of flood. The conclusion of the study is quoted in part below. Conclusion In this study, an impact analysis of flood in Accra, Ghana was done. A secondary data on the size of the basins in Accra, the run-off coefficient, storage coefficient and the rainfall intensity was derived from Ghana Meteorological Service. Meteonorm 7 software was used to generate meteorological dataset from to determine the average monthly precipitations for past and present years. Future dataset for flood forecasting were also generated based on Intergovernmental Panel on Climate Change (IPCC) emissions scenario A1B, A2 and B1. Flood risk in Greater Accra was analysed using World Resource institute s AQUEDUCT Global Flood Analyzer. A ten (10) year flood protection level was employed to model the rate of urban damage, estimate affected Gross Domestic Product (GDP) and the population at risk in Accra Findings from the study are summarized as follow; Intense rainfall events in the eight drainage basins in Accra namely; Kpeshie, Korle, Densu, Sakumo, Lafa, Osu, Songo Mokwe and Chemu triggers flash floods due to very short response time and high specific peak discharges. Precipitation patterns in Accra have changed considerably within this few decades. According to scenario B1, A1B and A2 forecasting, there will be an increase in the average monthly precipitation from 160 mm in to 200 mm in May-June in each year will continuously experience the maximum average precipitations. Accra has a high flood occurrence rate of 17-20% in any given year. Accra has more than 20% probability of inland flooding in any given year. Communities living closer to the coast are more susceptible during intense rainfall. If there is no flood protection in any given year in Accra, a 10-year flood has a 10% probability of occurring and could cause $98.5 million urban damage, $50.3 million affected GDP and 34.0 thousand affected population in Accra. To adopt a sustainable approach for flood risk management, practitioners in Ghana which comprises of: the Ministry of Works and Housing, City Engineers of Accra Metropolitan Assembly and Lands Department needs to consider a mixture of measures for managing flood risk and plan these measures across the whole catchments. Flood risk management plans will be required to select the most appropriate mixture of measures for a particular location. In light of the uncertainty about the future, flood management plans should adopt strategies that are flexible, resilient and adaptable to changing conditions. Such strategies would be multi-faceted with a mix of options Source: Samuel Asumadu-Sarkodie et al Adv. Appl. Sci. Res., 2015, in Pelagia Research Library website Interdependencies and spill-over effects may be elucidated by the following scenarios 1) SMEs in a particular community are affected by momentary dysfunctional networks, i.e., covariant shocks affecting the neighborhood thus restraining community borrowing or limiting immediate mutual help mechanisms as everyone gets preoccupied with clearing up damages after a NatCat, 2) SMEs are indirectly affected by destroyed infrastructure in another region, i.e., communication and/or transportation interruptions caused by environmental damages, 3) The rotting of perishable agricultural products due to damaged cooling facilities/warehouses lead to income loss, 4) SMEs experience financial strain in the aftermath of a NatCat due to significant increase in prices of food items, agricultural inputs, transport etc. Role of government In the aftermath of a devastating NatCat, the government takes responsibility for providing public good, relief services, and repair of public infrastructures. In conjunction with other stakeholders, roles and responsibilities will have to be defined vis-à-vis the affected communities and businesses. The result can be used as a basis for defining contingent liabilities. Ex ante categories, in general, imply 1) setting aside reserves for NatCat events, 2) risk transfer, i.e., insurance and re-insurance and 3) capital market solutions, i.e., catastrophe bonds. Meanwhile, ex post mechanisms include 1) budget reallocation, 2) loans from the capital market (depth), 3) tax increases and 4) international aid from donors. The above-cited mechanisms can lead governments to taking on the role of insurer of the last resort and stimulator of economic recovery ([4]:23).

30 22 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors A Practical Guide on Using this Chapter: For MSMEs: 1. Access Enter the address of your MSME in the Search section. Questions: a. Where is your business located? b. Are you alone or within a community in this area? c. What business establishments are near you? 2. Using the same map, indicate the presence of hazards within or near the location of your business. Rank the hazards in terms of severity of impact in relation to your SME business operations. Questions: a. What are the hazards that could affect your business? b. What hazard/s could stop your operation? c. Which hazards are small or negligible? 3. Assess the financial cost on your business if the identified risk or Natural Catastrophe did happen in the area where your business is located. Group your losses per risk. Questions: a. What would you lose, for which NatCat? b. How much would you lose? c. What Government Programs respond to any of the NatCats? What do these provide? For the Insurance Industry: 1. This section will document the linkage of various stakeholders to the Analytical Framework in accessing insurance. Questions: a. Are you aware of any Risk Assessment, Hazard Analysis, Vulnerability Analysis, Impact Estimation, done by established organizations in your country? What are these? (Refer to Annex 3 for definitions) b. Are you aware of any DRM plans produced by Government Agencies? c. Provide a brief overview of all these documents. 2. The use of Risk Assessment has implications on insurance products related to natural catastrophes. It ensures localized analysis of risks and ideally, the calculation of location-specific insurance premiums. Questions: a. Have you used Government-sanctioned Risk Assessment, Hazard Analysis, Vulnerability Analysis, Impact Estimation studies in your business? b. How were any of these documents used? c. Were these documents used in product development related to natural catastrophes? How? 3. The linkage of Risk Assessment with the Insurance sector can also be determined by Government policy, and Private sector linkage. Questions a. Is the current Government policy on the use of Risk Assessment data clear in linking with the private insurance industry? Why? b. What support might be needed further to emphasize this link? c. Who can lead action on this sector?

31 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 23 For the Regulator/Government/Development Organization: 1. Governments lead the implementation of Risk Assessment studies. This session will document its status, use and future actions. Questions a. Has the Government prepared a Risk Assessment in your country? What was the level of the exercise (national, Provincial, Municipal, etc.) b. When was this done? Who were involved? c. Was there a role for the private sector? What was it? 2. It is important to pin down the target users of Risk Assessments to know if these documents are used by them. Questions a. Who are the target users of the Risk Assessments? b. Are these documents available to them? What was their general feedback? c. Who else should be the users of the Risk Assessment based on your current experience? 3. Actions need to be done to maximize the use and impact of Risk Assessments Questions a. What policies and actions need to be done to widen the user base of Risk Assessment reports? b. Which areas are still needed to be targeted? Which sectors need further action? c. Are these policy actions part of a Government plan? What is the timeline for these actions? Useful Links D TITLE Environmental And Social Management Framework (ESMF) Ghana: Disaster & Risk Profile Impact analysis of flood in Accra, Ghana The Political Ecology Of Environmental Hazards In Accra, Ghana TITLE Impacts of Natural Disasters On Agriculture, Food Security, And Natural Resources and Environment in the Philippines -Philippine Institute for Development Studies, 2012 The impact of disasters on agriculture and food security -Food and Agriculture Organization, UN, 2015 The Economic Impact Of Natural Disasters In The Philippines, 1997 The impact of natural disasters on income and poverty: framework and some evidence from Philippine households Philippines: Disaster & Risk Profile Ghana LINKS Philippines LINKS

32 24 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors III 4-Step Analytical Framework: Step 2 DRM Analysis Summary Public and private plans and actions that reduce the occurrence or likelihood of disasters, mitigate their impacts and used as coping mechanisms by SMEs, are assessed in relation with effectiveness and efficiency. This simple exercise will document sustainable efforts while identifying the unattended risks towards the identification of insurance products for SMEs. On completion of the risk assessment, disaster risk management (DRM) analysis follows. This second step, in the Analytical Framework, starts with a broad analysis then proceeds on to a deeper assessment by setting priorities ([4]:24). Figure 4. DRM Analysis Process Flow. The step involves the selection among tools with bias to one or two that will offer the largest scope of use and potential to respond to the main risks that SMEs face. Possibly, the tool selection process could bring to fore interaction between or among the tools that could swing on either direction one of reinforcement on mutual use or one of crowding out in favor of one over the other. Evergreen Criteria The evergreen criteria of effectiveness and efficiency of DRM strategies serve as key twin factors for - 1) determining the suitability of applied DRM mechanisms and/or 2) identifying DRM gaps. Each of the twin criteria is defined below. Effectiveness the degree of reduction of risks/losses and the reconstruction/repair of the damages in the status as before the shock in a given time (ibid.).

33 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 25 BOX 10 SME DRM Strategies Focused on Severe Damage to Property Mining Sector, Mongolia Mongolia applied the Four-Step Analytical Framework in analyzing its Mining Sector. The report was featured in the MEFIN Network and GIZ RFPI Asia Toolkit. Below is the completed DRM Assessment Matrix from the said report. Prevention and Reduction (No information available) Mitigation DRM Assessment Matrix Informal/ Community Effectiveness Efficiency Private Effectiveness Efficiency Public Effectiveness Efficiency Savings Depending on severity of flood Affordable Business Loans, Credit with mandatory insurance Insurance (property, accident) Index livestock product Useful Affordable, Accessible Credit by District Government Very useful -- Coping Strategy Informal/ Community Effectiveness Efficiency Private Effectiveness Efficiency Public Effectiveness Efficiency Family Support Reducing food intake Limited Usefulmedium Moderatedifficult Limitednegative Temporary closing of business Negative Banckruptcy Negative -- The matrix is not based on a real time assessment and presents only an effectiveness ranking reflecting general responses. As there are no systematic indications on the efficiency (and access), the matrix provides very limited information and keeps most of the boxes open (--). For a real time assessment, it is useful to define appropriate distinctions reflected by numbers e.g., very useful mechanism (1), useful (2), medium successful (3), limited (4), negative effects (5). For a real time assessment, useful distinctions could be the following, e.g., easily affordable (1), affordable (2), moderate (3), expensive (4), very expensive (5), Access could be distinguished in four categories, e.g., easy access (1), moderate (2), difficult (3), almost impossible (5). Source: MEFIN Network and GIZ RFPI Asia Toolkit, ([4]:59-65). Efficiency the amount needed for the required action compared to the amount to be spent when coping with the shock (to derive at a position to restart/continue the business). The access to the required services and financial means forms a part of the calculation (ibid.). Three Categories There are three categories that are used to classify the integrated risk management measures 1) risk prevention and reduction [ex ante], 2) risk mitigation [ex ante] and 3) risk coping [ex post]. These categories apply for DRM mechanisms/systems involving the informal/community, private and public sector. Each category is explained below (ibid.). Risk prevention and reduction [ex ante]. These are action/measures developed with the intension of reducing the possibility of risk or to decrease the degree of losses (e.g., water harvesting and irrigation infrastructure, crop diversification, market information systems, contract farming, extension services and trade risk management (i.e., warehouse receipt systems, relevant government programs and policies).

34 26 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Risk mitigation [ex ante]. These are actions/measures that aim to reduce or cap the negative effects of hazards and related disasters. They include 1) risk transfer to a third party (e.g. insurance, reinsurance and financial hedging tools), 2) financial services and 3) access to markets (e.g., link to supportive business associations). Risk coping [ex post]. These are actions/measures that will assist the affected actors to cope with the loss. They include 1) compensation (cash or in kind), 2) social protection programs and 3) livelihood recovery programs (e.g., government assistance to farmers, debt In order to facilitate the DRM analysis process, the following matrix (Table 3) provides a template for generating perspective of the practices DRM mechanisms in a specific context. This template will have to be completed for all risks and organizations concerned (e.g., SME value chain). Table 3. Practiced DRM Mechanisms Matrix. Prevention and Reduction Strategies Informal/ Community Mitigation Strategies Informal/ Community Coping Strategies Informal/ Community Cash for work after Effectiveness Efficiency Private Effectiveness Efficiency Public Effectiveness Efficiency River embankment project Reduces impact of flood events for MSMEs near river Cost of embankment lower than actual damages encountered by MSMEs. Effectiveness Efficiency Private Effectiveness Efficiency Public Effectiveness Efficiency Property Insurance Triggered after floods. Compsensates MSMEs based on insured articles. Depends on the premium. Cost benefit depends on policy coverage. Effectiveness Efficiency Private Effectiveness Efficiency Public Effectiveness Efficiency Provides cash to communities for work done, after triggered by NatCats. Not very effective. Cash for work may not cover for entire cost of stocks among MSMEs. Source: ([4]:25) As adopted from OECD (2012) and World bank (2012). Useful Links E TITLE Advocacy and capacity building for disaster risk reduction and preparedness in Ghana - The GFDRR project Agricultural Value Chains 101, 2011 Food and Agriculture Sector Development Policy, 2007 Environmental and Social Management Framework (ESMF) NADMO to reduce disaster through early warning systems Ghana LINKS

35 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 27 National Platform For Disaster Risk Reduction And Climate Change Adaptation (DRR & CCA) Ghana: National progress report on the implementation of the Hyogo Framework for Action ( ) TITLE Disaster Management Practices in the Philippines: An Assessment, Commission on Audit, Environmental Impact Assessment for Developing Countries in Asia National Disaster Risk Management GMMA READY Hazard maps NDRRM Plan Philippines: The national disaster risk reduction and management plan (NDRRMP) 2011 to 2028 Satellite images map rice damage from typhoon IRRI, Nov Philippines LINKS A Practical Guide in Using this Chapter: For MSMEs: Use Table 3 in answering the questions below. 1. Identify the main NatCat affecting the SME, and specify an activity or activities that can prevent damages or reduce the cost of damages. If none, go to the next item. Questions: a. Can risks on the SME be prevented, reduced or mitigated? b. What can an SME do to prevent and reduce damages from the main identified NatCat? c. What are required to prevent and reduce damages on SMEs? How much risk or losses are reduced by doing these actions, based on past experience? How much does the action cost the SME? 2. In case the risk or loss to an SME is expected due to the significant impact of the NatCat, specify actions that you use before the event (ex-ante) to reduce your losses. If none, go to the next item. Questions: a. Have you accessed insurance, reinsurance, and similar products, for your SME business? List down these. b. Have you accessed financial services after the main NatCat happened? c. Have you linked with business associations following the main NatCat? How much financial loss was avoided because of your access to these products and/or services? List down the financial proceeds from each of your identified activities. 3. Identify the post NatCat programs of Government, NGOs and Development Organizations (ex. Red Cross, Red Crescent; GIZ, EU, etc.) that provide assistance to your business. Questions a. Did you receive any Government compensation as assistance to your SME? How much was it? b. Were there food distribution, health services, etc. provided by the Government after the NatCat? c. Did you receive any assistance that helped your business recover, including trainings, low interest loans, etc.? What were these?

36 28 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors For the Insurance Industry: 1. Knowledge of the county s Disaster Management Plan is important in situating the role of insurance, towards the strategic use of public/government and private resources. Questions a. In general, is the Insurance Industry aware of the country s DRM Plan? b. What actions did the Government take to inform the private sector, particularly the insurance industry? c. What portion of the DRM is unclear for the insurance industry? Why? 2. The use of DRM Plans by the private insurance industry is crucial in aligning default actions and limited resources among public/government resources and private sector to create sustained and critical impact towards resiliency. Questions a. Do insurance companies use the Government s DRM Plan in their insurance business? How? i. If not, why? b. Is the use of the country s DRM Plan effective for the insurance industry? Why? c. Did the DRM plan change the way insurance business is done in your country? How? 3. The training seeks to gather recommendations to increase and update the value of the DRM Plan. Questions a. How can the DRM provide more value to the insurance industry? b. What new policies can increase the use and value of the country s DRM Plan to the insurance industry? c. How can the DRM Plan be improved to link with the insurance industry, including on the development of insurance products for natural catastrophes? For the Regulator/Government/Development Organization: 1. Awareness on the use and impact of the country s DRM plan is important to improve its value, and address the needs of users, including the insurance industry. Questions a. Is the Government aware how the country s DRM Plan had been used by the private sector, including the insurance industry? b. Is there a feedback or monitoring and evaluation mechanism for the country s DRM Plan? c. What is the feedback of the insurance industry on the DRM plan? 2. The goal of the DRM Plans is actual usage by various stakeholders, including the insurance industry. Questions a. How was the DRM Plan used by the insurance industry? Specify case/s. b. What is the feedback of the private sector, particularly the insurance industry, on the DRM plan? c. Is the DRM plan relevant to date? 3. The training seeks to gather recommendations to increase and update the value of the DRM Plan. Questions d. How can the DRM provide more value to the insurance industry? e. What new policies can increase the use and value of the country s DRM Plan to the insurance industry? f. How can the DRM Plan be improved to link with the insurance industry, including on the development of insurance products for natural catastrophes?

37 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 29 IV 4-Step Analytical Framework: Step 3 Gaps Identification Summary The third process focuses on areas which are not completely addressed by disaster management plans. These are the remaining losses and damages that bypass risk mitigation, management or coping. An assessment of Government programs and private sector efforts is useful to connect with these unattended risks. DRM gaps identification involves the prioritization of results generated from the risk assessment and the DRM analysis/mapping. This step is important as it supports the government s 1) DRM policy decision making for agriculture and other sectors and 2) selection process for appropriate DRM tools for SMEs. Figure 5. Gaps identification Process Flow. Prioritization The prioritization process may employ such tools/methodology as - 1) the consequence/probability matrix and/ or 2) the scenario analysis (IFAD 2015 in [4]:25). The prioritization is based both on aggregated figures (e.g., overall losses to GDP) and on disaggregated figures that affect SMEs (e.g., events that may not severely affect the overall GDP but may affect many producers at the same time, thus, creating major consequences for large number of SMEs producing specific commodities, particularly those non-traded ones. Governments generally assess comprehensively the identified dimensions and define DRM gaps accordingly. SMEs, in turn, may simply focus on physical damages, economic and environmental effects, which are seen relevant for their businesses when carrying out an assessment for their own purpose.

38 30 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors BOX 11 Identification of Insurance Gaps SME Sector, Mongolia As mentioned, Mongolia applied the Four-Step Analytical Framework in analyzing its Mining Sector and prepared a report. Below is an excerpt on Identification of Insurance Gaps from the said report. Insurance for SME Sector. Although property products against fire, explosion and implosion, natural hazards, water damage, electrical surge damage, and theft exist, no insurance specifically caters to the SME sector. The Mongolian government issued laws pertaining to Mandatory Drivers Liability Insurance and Social Insurance for SME employees (primarily SMEs management staff). Insurance Gaps. Inclusive insurance is just developing in Mongolia and no insurance products have yet been offered. Currently, three products are considered as inclusive insurance for the study: 1) Ger insurance by a UNDP initiative, 2) Tenger s accident and hospitalization product, and the Index Based Livestock Insurance Program (IBLIP), a collaboration between the government and the World Bank. The market studies revealed a demand for the following products (AFC 2014) in [4]. 1) Business property risks (35% of responses) covering damages of industrial buildings, theft and equipment damages. Currently, no insurance provider offers products for expensive equipment; 2) Life, accident, and health risks (35%) especially those resulting from accidents caused by the environment (grass fires) or in the workplace. Employers are willing to facilitate health coverage for employees and families; 3) Accident risks due to weather-related shocks (9%) particularly fire, flood, natural disasters, including earthquake; 4) crop insurance for agricultural SMEs against hail stone, freezing, grass fire (9%); and 5) Other risks including, professional liability, livestock (not covered by IBLIP), patent and agreement responsibility and meso level loan risk insurance of Savings and Credit Cooperatives (14%). Source: MEFIN Network and GIZ RFPI Asia Toolkit, ([4]:59-65). Information Outputs At the end of the day, the DRM assessment and gap identification will yield and make available the following information. Inventory of identified agriculture and other sector-related DRM tools and strategies. Description of the scope and characteristics of each mechanism. Analysis of the performance and matching between existing tools and risks. Useful Links F TITLE Illustration of the Analytical Framework in the Agricultural Sector, Ghana - MEFIN Network and GIZ RFPI Asia (2016) TITLE Illustration of the Analytical Framework in the Mining Sector, Mongolia TITLE Illustration of the Analytical Framework on Cross-Sectoral MSMEs, Philippines - MEFIN Network and GIZ RFPI Asia [4]:27-41; [4]:59-65; [4]:43-58; LINKS LINKS LINKS

39 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 31 A Practical Guide on Using this Chapter: For MSMEs: 1. Identify the activities in the Government Disaster Risk Management Plan addressing SMEs. If none, go to the next item. Questions: a. Do you think that the Disaster Risk Management (DRM) Plan of Government for SMEs is effective and adequate? b. How did the activities of the DRM plan reduce the losses of SMEs? c. How much of the losses were averted due to these DRM plans? State in percentage (%). 2. State the DRM activities that have significant impact on your SME. If none, go to the next item. Questions: a. Which portion of SME resources or operations did this cover? b. What did it address? Did it cover its Value Chain? Did the actions minimized risks / damages on the Building/Structure? Did it protect the Workers? c. Who led in implementing these activities? The Government? NGOs, Development Organizations? 3. Assess the effectivity and efficiency of the DRM activity on your SME. Questions: a. What portion of the risk / damage did the activity / ies addressed %, 75%, 50%, 25%? b. How was the timing of activity? Was the risk reduction done before the event? Did the preparatory activity observed adequate lead time prior to the NatCat? c. What risks remained and were not addressed by the DRM plan and activities? List down these risks. For the Insurance Industry: 1. Awareness of Government DRM programs for MSMEs can inform the development of insurance products for natural catastrophes. Questions: a. Are you aware of Government programs targeting MSMEs pre and post natural catastrophes? What are these interventions? b. Are these MSME DRM interventions effective? c. Do the post DRM interventions address all needs of MSMEs? If not, what are not addressed by these interventions? 2. Use of DRM interventions is important for the resiliency of MSMEs against natural catastrophes. Questions: a. Does the insurance industry complement the DRM interventions before, during and after natural catastrophes? How? b. Does the insurance industry have strategic plans, programs or products that complement the DRM activities for MSMEs? c. Are these complementary products effective (reduced the risks?) and efficient (cost of coping is lower than MSME actions post NatCat)? 3. The country s DRM Plan can be assessed and improved to highlight the bigger role of insurance on risk mitigation (ex ante) Questions: a. What can be done to improve the insurance industry s alignment with and use of the country s DRM Plan?

40 32 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors b. What can the insurance industry contribute in improving the country s DRM Plan? c. What actions involving the insurance industry can be done to initiate these improvements, if any? For the Regulator/Government/Development Organization: 1. Awareness of insurance products that respond to Natural Catastrophes can inform the Government and Development Organizations on the type of Government programs and activities targeting resiliency among MSMEs. Questions: a. Are you aware of insurance products for MSMEs? Or insurance products that respond to NatCat events? b. Is there a regular dialogue between Government and the insurance industry on the country s DRM plan, to situate the respective role of each stakeholder? c. Do you think information on respective programs between Government, Development Orgnaizations and Insurance companies on response to NatCat events is sufficient? 2. Resource and role sharing can promote private sector inclusion and strengthen the DRM plan, including those for MSMEs. Identifying the components that will suit the capability and interest of the insurance sector before, during and after NatCats is important. Questions: a. Do Government and Development Organizations see any component in the DRM plan which can be transferred to the insurance industry? What are these, if any? b. Can these components be transferred to the private sector within the current legal framework? If not, why? c. What could deter the transfer of the identified components? How can this be managed? 3. What is the process in increasing the involvement of the insurance industry for protecting MSMEs within the DRM plan? Questions: a. What is the process in increasing the involvement of the insurance industry for protecting MSMEs within the DRM plan? b. Who can lead these actions? What are the milestones? c. When can these changes be initiated?

41 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 33 V 4-Step Analytical Framework: Step 4 DRF Options (Insurance) Exploration Summary The final process focuses on the identified risks that have not been completely addressed or linked with disaster management plans of Government and the private sector. These types of risks can create significant losses and damages that cut through risk mitigation, management or coping mechanisms. Disaster risk insurance products are designed to supplement Government budget for natural catastrophes, or top-up funds of financial organizations. The completion of the first three steps shall establish the foundation for the fourth and final step in the Analytical Framework - the exploration of the most appropriate DRM options. Purposes The step is meant to complement available risk management tools for achieving a number of purposes that include the following Achieve higher protective effectiveness. Strengthen governments and SMEs resilience. Meet the diverse needs of the SME value chain. Provide information for the insurance industry to define their business potential. Figure 6. DRF Options (Insurance) Exploration Process Flow. Three-Tiered Layered Approach This chapter takes off from the World Bank framework for disaster risk financing and insurance [WB (2012) in [4]:26). It endorses a three-tiered layered approach to risk mitigation strategy. Risks that are frequent but do not imply large losses are usually left to the SMEs to manage or by the governments through regular annual budgetary allocations.

42 34 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Risks of medium frequency and medium magnitude are expected to be managed by Governments through post-disaster reallocation of budgetary resources and the realignment of national investment priorities, potentially at a slightly higher opportunity cost. Governments may also introduce temporary, post-disaster tax increases, or borrowing from international market (e.g., contingency credit arrangements and post-disaster reconstruction loans), and/or insurance solutions. SMEs through a combination of preventive, mitigation and coping strategies including appropriate insurance solutions (including index products). Risks of low frequency but high severity that cause large damages to SMEs and to governments falling under the catastrophic risk layer. Such risks should be transferred to third parties (insurance, reinsurance, catastrophe bonds and, in extreme events, pan-national insurance pools). These mechanisms complement various coping strategies and complemented by international assistance and social assistance programs. Insurance against NatCats is not suitable as a standalone risk transfer mechanism, hence, should complement other preventive and financial mitigation strategies. As indicated in the DRM matrix, government institutions apply public strategies. Private sector and informal mechanisms are within the scope of SMEs, recognizing that the variety options for microenterprises are limited compared to the available options for SMEs (ibid.). BOX 12 Drought Index Insurance Product, Ghana Similar to the IIPACC Project, the GAIP in collaboration with relevant stakeholders, also introduced the Crop Drought Index Insurance (CDII), as a risk-mitigating mechanism, which works on the basis of rainfall measured at weather stations operated by the Ghana Meteorological Agency (GMet). Thus, it provides protection to beneficiaries against the negative effects of extreme weather events; thereby helping farmers and their financiers to manage drought risks. It also provides a comprehensive insurance cover for all the growth stages of crops. With a focus on the local farmer, the product employs simple language terminologies to interface with beneficiaries to ensure message clarity and thus, avoid ambiguities with claims expectations. Expected gains from GAIP The current membership of the GAIP comprising 19 non-life insurance companies in Ghana and operating under the guidance of the GIA remains unchanged. While making access to loans from the banks a lot easier for farmers, the pool also ensures that crop revenue, particularly during adverse weather, is not lost and thus, the farmer will remain in business in spite of the disaster. Invariably, in the event of losses owing to adverse weather, the farmers will not directly be liable as the banks will fall on the insurers to recoup the credits advanced. Moreover, the pool offers protection for the investment of agricultural-input suppliers in relation to inputs such as seeds and fertilisers. Thus, in the event of crop failure owing to bad weather conditions, these input suppliers would be paid claims by GAIP, based on their contract. Claims under GAIP In October 2012, about 140 farmers mainly in the Northern and Upper regions of Ghana were the first to receive claims under the Drought Index Insurance product, offered by the GAIP. The farmers received compensation for losses due to inadequate rainfall within their areas. For instance, farmers around Pong Tamale did not have adequate rainfall during the growth stage of their maize. The weather station, thus, measured 17 consecutive dry days during which the farmers hardly received any rainfall, which consequently affected the maize harvest. Unlike conventional crop insurance that requires many physical inspections and risk assessments of every individual farmer s field, the Drought Index Insurance uses rainfall measured at a weather station as a proxy for determining the basis for claims. Instructively, the GAIP kept faith with its obligation to the farmers by paying their claims promptly in order to demonstrate to all stakeholders about GAIP s preparedness to be a trustworthy partner in the agric sector. Source Read more at:

43 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 35 Useful Links G TITLE Bank of Ghana launches risk-sharing scheme to boost agricultural lending, Ghana Business News, 2016 Agriculture insurance: freeing farmers from extreme weather risk Agricultural Insurance in Ghana, 2011 Mitigating Greenhouse Gas Emission, IKI Ghana - How protected is the farmer? Agro-insurance, 2015 Education for Disaster Risk Reduction (DRR): Linking theory with practice in Ghana s basic schools TITLE The Philippine Disaster Management System, J.Porcil, OCD-NDCC, 2009 National Disaster Risk Reduction and Management Plan (NDRRMP) National Disaster Risk Reduction and Management Council Regional Plan of Action for Disaster Risk Reduction in Agriculture Ghana LINKS Philippines LINKS A Practical Guide on Using this Chapter: Plenary for all participants: SMEs will lead the discussion, while Government Agencies and Development Organizations shall provide guidance based on the existing DRM Plan to clarify the inputs. The insurance industry shall guide the discussions on insurability, insurable interest, and existing insurance products. 1. Recall and list down the Natural Catastrophes (NatCat) and the resources, assets, structures, SME components that were not addressed or inadequately protected by the Disaster Risk Management (DRM) Plan. Questions a. What are these assets and components? b. What is the estimated financial value of each asset, equipment, or SME component? c. Why is it still at risk despite the presence of DRM plan and activities? 2. Among the identified assets exposed to risk, and the Natural Catastrophes that may affect them, rank the importance of each asset, equipment or resource according to their financial value; and importance to the SME operations. Questions: a. Which asset, equipment or SME component has the highest financial value? b. Which asset is most detrimental to the operations of the SME? c. If you were to protect the top three assets of your SME, what are these?

44 36 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 3. Identify the NatCat that will affect your SME operations with the highest degree of impact, and will not be addressed by the current DRM Plan. Questions: a. What risks or NatCats have the lowest frequency but highest severity of impact on your SME business? b. Which SME asset, equipment or component is highly exposed to this type of NatCat? c. What current strategies are you observing to manage these risks? Do you think these are efficient and effective?

45 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 37 VI Insurance as DRF Instrument: Multi-Level Approach Summary Disaster Risk Insurance products secure the liquidity of Governments (macro), cooperative loans (meso) or households (micro) after natural catastrophes. DRI is a direct support to the risk of Loss and Damage to climate change under the 21st and 22nd Conference of Parties (CoP 21 and 22). It is also aligned with the goal of insuring 400 million most at risk people under the G7 InsuResilience initiative. Index-based insurance is used for faster response during extreme loss and damage. Natural Catastrophes adversely affect the SMEs and bring significant, cumulative damages on agriculture and society. Direct and Indirect Damages Direct damages frequently include the partial or total destruction of vital agricultural infrastructures and assets, e.g., irrigation systems, marketing facilities, electricity, communication, transportation facilities (i.e., landing sites), buildings, pieces of equipment and government facilities including agricultural services. These losses and damages may stem from the impacts of erratic weather phenomena due to climate change. Indirect damages include interruptions on food supply, market access, and changes in agricultural trade flows, which can lead to increases in imports of food and agricultural commodities that usually trigger inflation in food prices. Government s Role To counterbalance negative consequences of NatCats, the governments are expected to formulate appropriate policies, products, processes and practices at various levels national, regional and local. Contributions of other institutions are important, e.g., financial institutions can play a vital role in both ex ante and ex post mechanisms, since these institutions are directly affected by NatCats. Other than the preventive measures, multi-level insurance solutions are becoming more attractive and important among stakeholders. The Disaster Risk Insurance options support the G7 InsuResilience initiative which aims to cover 400 most vulnerable people, particularly the poor.

46 38 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors BOX 13 Three-Level Insurance Approach, Caribbean The Caribbean model combines an integrated three-tier approach at the macro, meso and micro levels. Each level is described below. Macro level. CCRIF helps to mitigate the short-term cash flow problems small developing economies suffer after major hurricanes, earthquakes and excess rainfall. Policies are issued individually to governments based on their individual requirements and risk profiles and then reinsured in global markets. CCRIF s parametric insurance mechanism allows it to provide rapid payouts to help members finance their initial disaster response and maintain basic government functions after a catastrophic event. Since the inception, the facility has made twelve payouts totaling over USD 34 million to eight member governments transferred to the respective governments within 14 days (and in some cases within a week after the event). Meso level. When extreme weather events affect many borrowers at the same time, financial institutions (e.g., credit unions, cooperatives, etc.) often experience the double blow of heavy withdrawals from savings accounts and the inability of borrowers to repay their loans. The parametric insurance against extreme wind speed and/or rainfall protects loan portfolios, helps financial institutions better manage their credit risk, expand their funding base and lending capacity to vulnerable, low income individuals and MSMEs. Micro level. The Livelihood Protection Policy (LPP) is a weather index insurance policy designed to help vulnerable, low income individuals recover from the damage caused by strong winds and/or heavy rainfall during hurricanes and tropical storms. In addition, the SMS-based warning system will mitigate future losses by informing clients of approaching events so they can employ risk reduction strategies. In contrast to many other index products, any person can buy the LPP as it is not related to defined crops or other specific damages but any impact caused by typhoon or excessive rainfall. This simplifies the trigger modeling and enables scaling up across the islands Source: CCRIF (2007) in [4]: Useful Links H TITLE Insurance as DRM Instrument: Multi- Level Approach - MEFIN Network and GIZ RFPI Asia The impact of disasters on agriculture and food security -Food and Agriculture Organization, UN, 2015 The impact of disasters on agriculture and food security -FAO, Nov 2015 Inform Index for Risk management The International Disaster Database - Centre for Research on the Epidemiology of Disasters (CRED) - Emergency Events Database (EM-DAT) Setting, measuring and monitoring targets for reducing disaster risk, October 2014 The human cost of natural disaster, CRED, 2015 International Links and Sources LINKS [4]:67-76;

47 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 39 A Practical Guide on Using this Chapter: For National Government Agencies: 1. List down the Government s active insurance policy covering short-term cash flow problems at the macro level. If none, go to the next item. Questions a. What macro level insurance policy has the Government availed? b. What does this macro insurance policy cover? How is it triggered? c. How will the insurance pay-outs be used? In what sectors? Will a portion of the insurance proceeds be used for SMEs? For Provincial Organizations: 2. List down the existing insurance policy used to protect meso level loan portfolios. Questions a. What insurance policy has your organization availed to protect your loan portfolio? b. How is the insurance cover triggered? c. How will the insurance pay-outs be used? For SMEs: 3. List down the active insurance products used to protect SMEs. Questions a. What existing insurance products are availed by your SME to protect its assets? b. What are the features of these products? How is the insurance cover triggered? c. How will the insurance cover assist the recovery of the SME?

48 40 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors VII Institutional Arrangements and Policy Issues Summary The development of Disaster Risk Insurance is dependent on the quality of policies and regulations supporting market growth. The combination of insurance by the private insurance industry as ex ante mechanism, with Government disaster response and social protection programs ex post, creates a strong and sustainable response to natural catastrophes. Government subsidies are best used to support the market, complementing insurance delivery by the private sector With DRIM s focus on insurance, this chapter showcases examples on the private insurance industry s participation under 1) a consideration of the protective role the governments have, e.g., in food security, and 2) in stimulating a suitable policy environment for the insurance sector to enter the SME market with NatCat insurance products Government Policies: Social Protection and PPP There are many factors that can explain the underdevelopment of the insurance industry: High risk is one, and this is expected to accelerate even more with climate change, which, in time, could even render certain regions or places not insurable. The perennial lack of sufficient and needed data, aggravated by the potential mismatch between customers expectations and sustainable products, had slowed down the product development process. The two factors given above already create higher risk for the insurer compared to other products. This forces the premium prices to go up making the products unaffordable or harder to sell things that will entail additional cost for awareness building and marketing campaigns. Other government policies, i.e., taxes on products and long approval processes of index insurance either stimulate or discourage the development of NatCat products for SMEs. It has been proven that ex post mechanisms are the least effective and efficient. This explains, the growing preference for a systematic shift in favor of preventive (ex-ante) and mitigation measures. It is possible that a common interest between the government and the private insurance sector will emerge to work together, under the banner of public-private partnership (PPP), in facilitating the development of inclusive insurance markets and reducing some of the core issues in the development of NatCat insurance services. High Risk in Disaster-Prone Regions High risk-prone areas bring a particular challenge to SMEs and on the affordability of insurance products. A number of approaches have been suggested to address the challenge e.g., risk-layering, where SMEs can retain the frequent-low severity risks or installing preventive measures at the local level as a means of reducing the risks. Still, there are several measures the government can do to make insurance more affordable in the event of more frequent shock of medium magnitude and low frequent disasters of high severity. Combination of insurance with social assistance. This has succeeded remarkably well, especially when public works programs were used for prevention measures, i.e., construction of small dams, irrigation facilities, improved roads, cleaning of canals etc.

49 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 41 Premium subsidies versus smart subsidies. The effort to make products affordable automatically raises the issue of subsidies. Smarter ways than subsidizing the end premium include 1) provision of quality data (including agricultural production, livestock and weather), 2) financial and disaster risk management education, 3) technology (including early warning systems), 4) catastrophic reinsurance or tax exemptions on inclusive insurance products will reduce the premiums, and 5) integrate NatCat products into their social assistance programs and other policies (see Box 16 in [4]:80). It should be noted that a good social protection scheme delivers timely, multi-year, guaranteed and predictable transfers to the poor without undermining the business environment for investment in risk management tools [FAO (2013) in [4]:79]. Product Development Factors and PPP SMEs can easily become bankrupt and their owners and employees deep in debt when calamitous events come by their areas with increasing frequency. While expectations on the potential of insurance products are high, the insurance industry has shown some degree of reluctance in entering this market. The PPP offers a bright light at the end of the tunnel and can very well be the key in bridging the gap ([4]:79). BOX 14 Excerpt from the Kenya Insurance Bill 2011 (draft) Interpretation: Index-based Insurance Contract means an insurance contract (a) under which the liability of the insurer to make a payment to the policyholder is triggered by, and the amount of that payment is determined in accordance with, one or more indexes, rather than on an assessment of the policyholder s actual loss; and (b) where the payment is designed to provide a level of compensation, although not necessarily and indemnity, to the policyholder is respect of either or both of the following (i) losses, including consequential losses, that the policyholder is expected to suffer, or (ii) costs, including mitigation costs, that the policyholder is expected to incur, in the event that payment is triggered by the index. The Authority shall, after consultation with the Cabinet Secretary, make Regulations for giving effect to this Act. The Regulations shall specify or provide for index-based insurance contracts. The Index Insurance Policy Paper objectives are to Reduce the legal and regulatory risk Increase the speed and reduce the costs for insurers to get approval and launch Ensure sufficient and accurate prudential provisioning and reporting Protect the interest of customers Source: Peter Wrede, World bank Group MCII regulators WS Mexico 2014 in ([4]:84). Demand analysis is important and is poised to benefit all stakeholders. Surfacing SMEs real needs and demands can lead to - 1) a better understanding of the market (insurer s benefit), 2) an enhanced understanding of insurance products and their development process (customer s benefit), and 3) greater transparency and trust in the insurer. The high cost of conducting demand analysis as well as other insurance investment costs may be shared with the government (with some assistance, perhaps, from the international development partners). This cost sharing scheme will reduce costs for the insurer while at the same time enable the government to understand better the customers. This way, the government gains the knowledge it needs to be able to craft and issue an appropriately shaped agriculture and climate change policy (government s benefit) (ibid.). Data requirements are significantly important to be able to design suitable NatCat products at a fair, affordable price. Detailed historical meteorological, land use and agricultural production data are essential. Government could finance the systematic collection and provision of such data as a public good ([4]:79-80).

50 42 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Awareness building and financial/drf education. Majority of the owners and personnel of SMEs lack insurance and DRF literacy (e.g., They 1) distrust insurers, 2) are unfamiliar with risk sharing concepts and 3) clueless about index products). The government can play a vital support role in addressing these constraints by possibly collaborating with organizations that are close to and familiar with the potential customers. DRF and insurance literacy modules can, perhaps, be embedded in training programs conducted by the agricultural extension services or by a disaster management organization. Such initiatives can be supplemented by information, education and communication (IEC) campaigns in public media. Furthermore, public-funded insurance materials could be distributed through business membership organizations (BMOs) to reach out, in particular, to their SME members ([4]:80). Incentive structures for the insurance industry. Product taxes, for many insurers, are burdensome. It is a disincentive for traditional insurance and hinders the development of inclusive insurance products where taxes are seen as additional cost. Taxation is one area where the government could offer suitable incentives to the industry. Another promising area could be in research and development (e.g., improved seeds, satellite technology, improved facilities for weather forecasts and NatCat related data banks). These can create direct and indirect incentives for the insurance industry to enter the market. Other hindering factors, i.e., licensing of delivery channels that service SMEs, their attendant commission structures, flexible claims settlement processes etc., are subject to appropriate regulation and supervision (ibid.). Regulation and Supervision Traditional insurance is governed by well-developed regulatory structures. But not entirely for inclusive insurance, especially for SMEs and for index insurance products. When addressing the insurance demand of SMEs, some features will have commonalities to the clients of inclusive insurance, i.e., delivery channels of products, awareness and knowledge of insurance as a possible DRM tool, and the affordability of products ([4]:81). Regulation is critical because it determines who can enter and operate in the market (ibid.) This is relevant to the inclusive insurance markets, 1) there are organizations that operate but are not necessarily regulated, 2) delivery can involve institutions outside the traditional insurance actors with different payment systems, 3) micro insurance products may have cost implications for insurers that may influence their willingness or otherwise to operate in the low-income market. This can also have implications for a) the provision of certain types of insurance related to the definition of micro insurance with partially defined benefits and b) the creation of compulsory insurance schemes such as social health insurance for the low-income sector. For greater information and insights on regulation and supervision, the International Association of Insurance Supervisors (IAIS) in cooperation with the a2il have developed several guidelines, e.g., 1) IAIS Insurance Core Principles and Standards, 2) Regulatory and supervisory framework in the low-income business segment, and 3) Microinsurance Country Diagnostic Studies Toolkit 1 (ibid.). To model how a Microinsurance Country Diagnostic may be developed, see Box 17 in (ibid.). Furthermore, topics on index insurance and key issues to be addressed in regulating index insurance provide interesting and insightful read in ([4]:83-85).

51 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 43 Useful Links I TITLE Institutional Arrangements and Policy Issues - MEFIN Network and GIZ RFPI Asia The Impact Of Natural Hazards And Disasters On Agriculture And Food Security And Nutrition A Call For Action To Build Resilient Livelihoods, FAO 2015 Global Estimates 2015 People displaced by disasters Global risk data platform Managing risk in agriculture: A holistic Approach Disaster Risk Assessment and Risk Financing A G20 / OECD METHODOLOGICAL FRAMEWORK International Links and Sources [4]:77-85; LINKS en-v1.pdf A Practical Guide on Using this Chapter: 1. Indicate how insurance and social assistance are used by Government for effective Disaster Risk Management. If none, go to the next item. Questions a. How does Government use the complementation of insurance and social services to manage Natural Catastrophes, particularly responding to the SME sector? Name specific Government programs to support your case. b. Was this approach effective and efficient? Why? c. How does this complementation benefited your SME business? 2. Identify the various Government Policies and Regulations that promote the development of and access to Disaster Risk Insurance (DRI). If none, go to the next item. Questions a. What Government Policies and Regulations assisted on the development and access to DRI by SMEs? b. Were these policies effective and efficient in supporting DRI? Why, or why not? c. What changes/improvements can be done to improve these Disaster Risk Insurance Policies and Regulations further to benefit both the consumers and the insurance industry? 3. Identify the activities that will further support access to DRI. Questions a. Have studies been done on DRI for SMEs to inform insurance companies? Who made these studies? When were these studies done? b. Is data available and accessible by the insurance industry to create relevant DRI products? c. Does the Government provide incentives for the insurance industry to venture into DRI? What are these incentives? Are these incentives appropriate, effective and efficient in encouraging the industry to engage in DRI? If not, what could Government offer?

52 44 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors References [1] ZIG (2016). Climate Change is Major Concern for 78% of SMEs: Zurich Report. insurancejournal.com/?p= [2] EDP. Climate Change Impacts: A Warming Atmosphere Leaves Little Unscathed. org/climate/climate-change-impacts. [3] EG (2012). Growing the Global Economy Through SMEs. edinburghgroup.org/ media/2776/edinburgh_group._research_growing_ the_global_economy_through_smes.pdf. [4] MEFIN Network and GIZ RFPI Asia (2016). Diagnostic Toolkit for Insurance against Natural Catastrophes for MSMEs in the Agricultural and Mining Sectors. Manila: GIZ-RFPI Asia (www. inclusiveinsuranceasia.com). [5] USDA-RMA. Risk Management Planning: Production Risks. index.aspx?action=riskman.prod_risk. [6] HFCI. Market Risks. Annex 1 Template for Applying a Holistic Approach OECD Framework (2009)

53 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors 45 Annex 2 Data and Measuring Impacts of Damages and Losses

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56 48 Bridging the Protection Gap on Natural Catastrophe Insurance for MSMEs in Agriculture and Other Sectors Annex 3 OECD Recommendation on Disaster Risk Financing Strategies

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