Guest post from Debbie Hillier, Oxfam’s Senior Humanitarian Policy Adviser
There is a lot of enthusiasm for insurance right now in a range of different sectors
- humanitarians are particularly excited, hoping this is a quick win to fill the aching chasm in humanitarian aid
- climate change experts hope it will be an easy fix for the problems of Loss and Damage and polluting countries hope that this will avoid the insistent calls for compensation
- in the financial inclusion sector, it’s the Next Big Thing after savings and credit.
Donors are exhilarated by the opportunity to leverage the private sector; insurers are revelling in the potential market opportunities. But I suspect we are at the peak of the hype curve (left). We may want to learn the lessons of micro-credit, which was also once at this heady peak but experience over several decades now finds “modestly positive, but not transformative, effects.”
The Hype Curve
Yes, insurance clearly does have a role, but as with all things we need to carefully understand its limitations. I have been trying for several months to try and get to a more nuanced conversation about insurance: perhaps one small success has been changing the subtitle of the Payout for Perils report from ‘how insurance can solve the problems of emergency aid’ to ‘radically improve.’
Insurance advocates are careful to say that it is not a panacea/silver bullet and it needs to fit within a comprehensive risk management framework, but too often this feels a little empty. Precisely how should it fit within a comprehensive framework, and more significantly, what if there isn’t one? When faced with flood risk, solutions could include ensuring that vulnerable people have insurance, or the government has a line of credit available for response, or investment in strengthening flood defences, or implementing construction and planning controls or providing early warning and evacuation systems. A clear-sighted analysis of all of these options and others needs to be undertaken, and help is needed on how to do this.
Advocates say that insurance instils ‘risk discipline’ and incentivises risk reduction. Whilst clearly possible and eminently plausible, the empirical evidence in developing countries isn’t really there yet. One study reviewing 27 flood insurance schemes found few links and less success. Most examples of insurance schemes that supported risk reduction quoted in a report written ten years ago no longer seem to be functioning – which in itself is illustrative.
Most insurance experts say that standalone microinsurance is not suitable for the poorest people who have little income, many risks and few assets to insure – yet no one seems to have worked out what the threshold is. Surely bringing some clarity here would be a quick win, and would allow the development and promotion of other mechanisms that do work for people in extreme poverty.
Perhaps the next argument is whether insurance could be a useful tool for middle-income people, thereby freeing up
government and donor resources for people in poverty? While attractive in principle, the lessons from health insurance is that this leads to a stratification of services and support, such that inequality is deepened further. And this certainly seems to be the case for livestock insurance in Mongolia – the designers of the scheme knew it was better placed for the middle-sized herders and pushed for a social protection scheme for the poorer ones, but this did not materialise. Inequality looks to have increased.
What frustrates me is the lack of investment in M&E – yes, we need to explore new and innovative schemes, take a punt on promising ideas, but this must come with solid learning, evidence building and robust M&E. And up to now, this has been notably lacking. While it is perhaps not surprising that insurance companies have neither the skills nor interest in considering the impacts on gender, equity, social cohesion, female-headed households, the landless, or whether there are negative unintended consequences – the donors funding these schemes really should.
I feel pushed into being negative about insurance, purely to balance out all the over-excitement from elsewhere. A classic response to this is – yeah, but you have insurance! Well yes, but firstly, my insurance is not based on models, and therefore is not subject to ‘basis risk’ which bedevils many schemes in developing countries. And secondly, I use insurance where I believe it is cost-effective in addressing my risks – eg for my household possessions but not for my dog’s vet bills. The high excess and rising costs of insurance as my dog gets older mean that the cost/benefit argument just doesn’t stack up for me (I am however putting money aside – saving – for the likely health bills).
A sensible approach to get us to the hype curve’s ‘Plateau of Productivity’ would involve a much increased focus on:
- M&E for impact, not just coverage – this requires investment, perhaps adopting the Oxfam standard of a minimum spend of 5% of programme costs on M&E.
- Developing a tool to evaluate both risk reduction and risk finance options, enabling governments (national and local) to better understand costs, benefits and opportunity costs of a range of measures, enabling appropriate investment. Perhaps building on this.
- Ensuring quality. The G7 has a target to get insurance to 400m more poor and vulnerable people in developing countries by 2020, but it could well be argued that this target on quantity – without an equally clear focus on quality – is premature.
- Pro-poor business models – such as cooperatives/mutuals and putting the missing ‘p’ into Public-Private-People Partnerships.
- Who is going to pay the premiums. Insurance is not free money. It is sobering to note that Haiti’s maximum payout for cyclones under CCRIF is $35m whereas a ‘more adequate’ coverage of $328m, according to the World Bank, would require annual premiums of $15m – any offers to pay?
Even so, the bottom line is that in our rapidly-warming world, much greater investment is needed in proven solutions of risk reduction and adaptation.