Farmers pool money to insure roads/wells. Protected if disaster hits, paid a premium if it doesn't. #communityinsurance #climatefinance
After Sandy severely damaged the NYC subway system, insurance costs for MTA rose dramatically. In order to cost effectively insure against future extreme weather events, MTA issued what are called catastrophe bonds. Catastrophe bonds (catbonds) are financial instruments that serve a purpose similar to traditional insurance coverage. In the case of the MTA catbonds, $200MM worth of bonds were issued with a three year maturity. If an event similar to Sandy (parameters legally specified) occurs within the the life of the bond, investors stand to lose their investment and the MTA is able to use that money to rebuild the damaged subway system. However, if no such event occurs, then investors receive a return on their investment when the bond matures. According to Thomas Prendergast, chairman and chief executive officer of MTA, this arrangement is highly cost effective.
Millions of New Yorkers depend on the subway system in their day-to-day lives, and because of this, it is critical that this infrastructure is protected against extreme weather events. While this is a large scale example of a shared infrastructure, the same relationship exists between people and common goods like roads and wells all over the world. However, in the developing world, particularly the parts most vulnerable to climate change and extreme weather events, critical infrastructure is much less likely to be insured. Also, those who directly depend on a road connecting two villages are not the ones in control of its insurance policy.
My proposal aims to empower communities to insure their shared infrastructure against extreme weather events by using a model similar to catastrophe bonds. My vision is to have small scale industries (ie. farmers from one particular region) pool their money to buy a catbond which will either a) restore their livelihood in the case of an extreme weather event or b) pay a small return if no such event occurs.
Category of the action
What actions do you propose?
Microfinance is a developing field. Organizations like the Grameen Bank have been allowing the world's poor access to financial services like loans for decades. Even the idea of small scale insurance is currently being explored by organizations such as MicroEnsure, whose purpose is "Helping the poor weather life's storms." However, the use of catastrophe bonds on a small scale and in the developing world has not yet been researched. I am proposing case study research to explore how structures similar to catbonds can be used to protect remote parts of the world against extreme weather events.
Administration of this type of product requires careful consideration. Whenever financial services are being adapted to the developing world, there is a risk that they will not be adapted appropriately and will in turn impose an additional burden on their participants rather than empower them. For that reason, an experienced board of advisors is essential to ensure this research is productive. Part of this proposal involves enlisting the services (pro bono if possible) of legal, insurance, and microfinance experts. Once a vetted structure of a small scale catbond is agreed upon by the group of advisors, I propose a case study is conducted to see how such a product would be received by communities.
It is widely accepted that climate change involves an increase in extreme weather events and/or shifts in weather patterns. Because of this, large scale disaster like Sandy and small scale disaster such as a powerful storm in a small village will become more common. An adapted form of catastrophe bonds--community insurance for short--is a way to manage the risks associated with these extreme weather events.
Because community insurance relies on individual investors purchasing the bonds rather than traditional insurance companies issuing a policy, it is a form of crowdsourcing. Having communities purchase the bonds associated with the infrastructure that they rely on locally has the added bonus of localizing ownership and investment. Also, it creates a win-win situation in theory where those that purchase the bonds get paid the premium or they benefit from the coverage should it be needed. However, this is not necessary for the product to be useful.
Communities can (through the help of an intermediary) issue the bonds to investors, activists, or concerned citizens from all around the world. Philanthropic investors big or small would surely find such a structure attractive as would mainstream investors looking for a good risk-weighted return.
This project would be a multi-phase process that ideally would lead to institutions like the IFC, MicroEnsure, Grameen Bank, etc. building off its findings. The first phase would be to select a community to conduct a case study and enlist legal, insurance, and microfinance experts to create the product. Once the product has been created, modeled to most appropriately serve the case study community, the bond would be issued.
In this second phase, sponsors such as the World Bank, governments, philanthropic organizations, or individuals would be needed in order to provide the return to investors should the bond reach maturity without a triggering event, ie. natural disaster occurring.
After this first issuance has taken place, the third phase of this project would entail carefully reviewing the case study and assessing how the product and implementation could be improved upon going forward.
Who will take these actions?
- Dedicated research team led my myself
- Legal, insurance, microfinance advisors
- Local governments or philanthropic organizations as sponsors
Where will these actions be taken?
- Phase one research and product development to take place remotely (NYC)
- Case study location to be selected in order to a) optimize chances for successful implementation and b) serve as a transferable model
What are other key benefits?
- Provides cost effective disaster risk mitigation
- Increases financial inclusion
- Provides insurance instrument to previously "uninsurable" area, at any scale
- Raises awareness among investors
- Builds community
What are the proposal’s costs?
Phase One: Legal, insurance, microfinance advisory services ($5-25K)
Phase Two: Travel ($2-5K)
Phase Three: Financial services/ brokerage ($1-3K)
Sponsor commitment of return ($TBD)
Total: ($9K - $38K)
Short term (5-15 years): Financial product developed; case study conducted; results assessed and product improved upon; findings presented to local governments, NGOs, etc.
Medium Term (15-50 years): Product adapted to a variety of climates, assets, scales and economic situations; additional sponsors begin to participate as a form of aid; variety of institutions use products; standards are created to ensure quality implementation and ethics
Long Term (50-100 years): No assets or corners of the world are thought of as "uninsurable;" community insurance is a widely used alternative to traditional insurance coverage; livelihoods are insured against extreme weather events
"MTA Obtains $200 Million of Protection With Catastrophe Bonds." <Bloomberg.com. Bloomberg, n.d. Web. 20 July 2014. http://www.bloomberg.com/news/2013-07-31/mta-obtains-200-million-of-protection-with-catastrophe-bonds.html>.
"Multi-Risk Insurance Products." - MicroEnsure. N.p., n.d. Web. 20 July 2014. <http://www.microensure.com/products-multiriskproducts.asp>.
"Preparing for Disaster by Betting Against It." Opinionator Preparing for Disaster by Betting Against It Comments. N.p., n.d. Web. 20 July 2014. <http://opinionator.blogs.nytimes.com/2014/02/12/preparing-for-disaster-by-betting-against-it/>.
Grameen Bank. N.p., n.d. Web. 20 July 2014. <http://www.grameen-info.org/index.php?option=com_content&task=view&id=25&Itemid=128>.
Warner, K., Yuzva, K., Zissener, M., Gille, S., Voss, J. and S. Wanczeck (2013). Innovative Insurance Solutions for Climate Change: How to integrate climate risk insurance into a comprehensive climate risk management approach.Report No. 12. Bonn: United Nations University Institute for Environment and Human Security (UNU-EHS).