Innovative Disaster Microinsurance for Small Informal Urban Businesses by Risk Transfer and Insurance
Adding a 3rd arm to an ongoing randomized controlled trial of disaster insurance for urban slum informal businesses with social protection
Since 2015, All India Disaster Mitigation Institute and the Harvard Humanitarian Initiative, with initial funding from the Humanitarian Innovation Fund, have started a trial in Puri, Odisha to test the impact of disaster microinsurance to an array of threats that urban business owners face due to climate change. These small and informal enterprises comprise one of the main sources of livelihoods for the urban poor throughout India in addition to contributing a significant portion of the GDP while also serving as the primary markets for goods and services that the urban poor relies upon (1&2). Unfortunately, traditional insurers do not cover these businesses, as they do not penetrate into this subset of the market (3). As a result, communities that rely upon these markets for goods and livelihoods are further dependent on aid or cycles of high-interest debt after a shock and many of this business never recover (4&5). The micro-insurance product was designed to form the ground-up after surveying the needs of the target population in collaboration with a public insurance company (UIIC). The product was then marketed and sold to these business owners using a partner-agent model with a local community-based organization, SWAD, serving as the link. We have already shown that the demand (4) for a low-cost insurance product to serve this need is high and enrolled over 3000 small business owners splint into two arms, one with insurance coverage and the other without (5). The outcomes of interest between the two groups include time to business recover, time for inventory recovery, sales and profit at various intervals after the shock, household coping strategies and disaster risk reduction behavior. As yet, there has not been a large enough shock to invoke enough of the insurance to test the impact of this innovation. The proposal here is to add a 3rd arm to this study with a social protection attached to the insurance product in form of a cash transfer to small businesses.
What actions do you propose?
Combining risk transfer through insurance and cash transfer is increasing value with multiple effects in the past and current efforts. This may incentivize risk-reduction behavior through by making the cash transfer conditional based on engaging in such behavior pre-disaster thereby reducing and transferring risk. Some believe disaster microinsurance dis-incentivizes risk reduction and the current study is designed to help answer that question. Adding a third arm with a cash transfer to incentivize risk reduction may help inform future program and policy to ensure viability and scale for this innovation going forward. Finally, given the needs of this highly vulnerable population, the disaster microinsurance is not meant to meet all their needs in a post-disaster context as this would be difficult to achieve for this hard to serve the population. Their needs are often in excess of the coverage provided and meant to mitigate the impacts of a climate-related disaster. A key focus of the research is to study the use of various coping strategies and specifically any reduction in negative coping strategies that a cash transfer addition may or may not impact but is important to study and help fine tune a more comprehensive strategy for addressing the risk that the urban poor face.
The actions proposed are relatively straightforward:
1. Work with the local community-based NGO, SWAD, to design a cash transfer programme for the current study population based on local knowledge to determine the appropriate sum. Involved partners have previous experience conducting a cash transfer for a rural population it also serves and the same methods would be used to develop a programme for these urban participants.
2. Use the same purposive sampling technique used to identify study participants that would wish to enroll in such a programme from the same community that was used previously.
3. Perform the initial survey of the 3rd arm of study participants collecting information on their household and small business income, expenditure, savings and historical coping strategies as well as risk reduction behavior.
4. Randomly assign a portion of them to the 3rd arm that includes both a disaster insurance product and a cash transfer that would be triggered by the same collection of events.
5. After a shock that invokes the insurance in the insurance arm and insurance plus cash transfer in the third arm, perform post-stock surveys in the first 2 weeks as well as 6 months among the control, insurance, and insurance plus cash transfer arm to assess the impact of the two interventions.
6. Technical support with facilitation and knowledge management among stakeholders - including the Community-Based Organisation (SWAD), Disaster Risk Reduction organisation (AIDMI), Insurance company (UIIC), government authority (District and State Disaster Management Authority - DDMA and OSDMA; and Puri Municipal Cooperation), and technical supporter (HHI) - for process documentation (from 2015), tool design, field consultation (bi-monthly), training and capacity building (2), knowledge product (operational guideline), business plan (for CBOs), monitoring and evaluation mechanism.
7. Two Round Table events (city and state level) will be organized to promote the risk transfer and insurance agenda with an engagement of above-mentioned direct stakeholders. The voices of small businesses on insurance and social protection will be captured and disseminated strategically among policymakers.
8. Participation in policy dialogues (at least 10) at state and national level to promote and strengthen risk transfer and insurance for vulnerable populations.
The literature on disaster microinsurance is not yet completely clear and one of the commonly theorized risks has been that insurance will create a more hazard that will actually dis-incentivize risk reduction behavior. The above-actions of the proposal will also help to study the question by incorporating an assessment of risk reduction efforts by those randomized to insurance and those without. The third arm with a conditional cash transfer linked to the insurance would now allow us to study the cash transfer as a method to incentivize risk reduction behavior (the additional cash transfer would only be available to the third arm of the study if those participants engaged in pre-defined risk reduction efforts) exactly as the judge proposes as a complementary measure.
The proposed action is also about utilizing an opportunity to review the insurance product with stakeholders, particularly clients, and insurance companies in this case. This is important as the current design has no index trigger for the business losses but we are planning to have discussions with the stakeholders to turn this into a parametric insurance product. This will support the scale-up process that involved agencies are planning strategically. The risk transfer and insurance is AIDMI's key area of action to promote and strengthen risk transfer mechanism in favor of poor and vulnerable population. Thus, the proposed actions are having long-term implications.
Who will take these actions?
All of the actions, from enrolment to final survey, will be taken by the local community NGO, SWAD, with support from the All India Disaster Mitigation Institute along with research study and instrument design as well as data analysis by the Harvard Humanitarian Initiative.
The insurance company (UIIC and others) will be involved for designing, renewing, and assessment process related to the insurance product and claim settlement.
Government authority (District and State Disaster Management Authority; Puri Municipal Corporation) will be consulted strategically to build partnerships for informing to consulting to involvement and collaboration.
The partners and stakeholders are aware and understand the past efforts. The system is already existing with the understanding of role and functions. The most important is understanding of community perspectives and gender equality. The local partner agencies, SWAD - Society for Women Action Development, and AIDMI have used a gender-sensitive approach with the engagement of women in the implementation. Two proposed round table events will be used as a platform to share the voices on women leadership in instruments like cash transfer and risk transfers. The actions has already planned to study the differential impacts on girls and women, both in the family (whether girls are taken out of school as a coping mechanism for example) and as business owners. We are unclear how to address the final recommendation, however, to use this project as an instrument to encourage women into urban businesses but would be happy to take suggestions (training and capacity building support).
Where will these actions be taken?
The actions will be taken in the seaside urban informal settlements in Puri, Odisha. The rapidly growing city receives a high number of tourist from within India as well as abroad due to its coastal location and multiple religiously significant temples.
The current proposal very simply links to the ongoing study by adding a third arm to the study that includes both the disaster microinsurance coverage as well as a conditional cash transfer program. AIDMI has used cash transfer as a tool in early recovery work in different disasters particularly in floods with the help of donor agencies. AIDMI will apply the same in this Odisha case to support SWAD with a cash transfer program. AIDMI can provide further details of these previous cash-transfer programs as needed. The proposed project will also serve as an opportunity to engage and re-engage stakeholders (new and existing) particularly in government such as the municipal cooperation, disaster management authorities, and insurance companies. The government channel will be prioritized with this proposed project to explore the use of government social protection programs with the existing insurance mechanism for future design.
What are other key benefits?
The key benefits of the disaster microinsurance for small businesses in urban informal settlements, with or without the cash transfer, programme are potentially numerous for the resilience of the urban poor and the markets that serve them:
1. Rapidly available funds for rebuilding inventory and business assets after a climate-related disaster.
2. Shorter time to restarting business/ livelihood and income generation as compared to longer duration or no recovery of business.
3. Less or no dependence on other forms of outside aid and high-interest loans that trap the urban poor in a cycle of poverty.
4. Less reliance on negative coping strategies such as reduced consumption of basic goods, selling assets, withdrawing children from school to avoid fees, purchasing lower quality or quantity of food, need for borrowing.
5. Faster recovery of the local market as related to #2.
6. All of the above benefits have further downstream benefits within households and throughout these communities.
What are the proposal’s costs?
1. Design a cash transfer programme: 2000 Euro.
Stakeholder consultation; the concept note; guideline note for SWAD; Orientation on cash transfer programme.
2. Purposive sampling technique to identify study participants: 1000 Euro.
Applying for cash transfer programme. Specify third arm and selection formula.
3. Community survey study: 4000 Euro.
Community survey reaching our 3000 small and informal businesses. The thematic focus of the survey will be disaster insurance and cash transfer.
4. application of disaster insurance and cash transfer: 15000 Euro.
5. Post stock surveys (immediate and at 6th month): 5000 Euro.
6. Facilitation and stakeholder engagement: 5000 Euro + 12000 Euro.
7. Two Round Table Events: 8000 Euro.
8. Participation in policy dialogues at state and national levels: From project partners contribution.
As with all cash transfer programs, sustainability can usually only be achieved through a government-run and committed program. Even these are subject to abrupt ends as exemlified by Finland's decision to end its basic income program. There is no way any such program can be financially sustainable on its own. This project offers two pathways to attempt some sustainability. One is with engaging national and regional disaster management authorities which have already shown support for this project and evidence from this project may spur just such a government program to use conditional cash-transfers as an adjunt to disaster insurance for incentivizing risk-reduction. Second, the program may show some financial viability for either a reduced premium or higher payout through the insurance companies themselves for clients that engage in risk reduction behavior to mimic the impacts of the cash transfer. There is no currently planned commitment for a permanent cash transfer program.
The initial project and the actions described above will be developed and activated in the very near term with a conclusion to the randomized controlled trial within 5 years.
Beyond this timeframe, through current ongoing discussions with insurance companies, the plan will be to scale the innovation based on the findings to nationwide carriers and further into South Asia through those same companies.
Within this same time frame, the team will be creating knowledge products, documenting findings and presenting the innovation to wider audiences that can replicate the innovation all over the world.
A component of this scaling within the short term (5-15 years) will be to discuss the creation of larger re-insurance mechanisms or other funds for catastrophic events to ensure the sustainability of this innovation on such a large scale.
Beyond the 15 year timeline, the goal will be to continue to expand coverage through new adaptations and exploring new types of vendors to serve as partner agents or distribution through cell phone company kiosks, other MFIs among others that can reach the target population.
The team will produce several outputs time-to-time such as blogs, articles in public domain access to share the findings and progress. This is particularly important during policy round-tables results; demand survey findings; at the time of implementing cash transfer programme; community voices particularly women and informal business owners.
The following proposals are found related to this proposal (part of the action).
1. Poor Slum Women Investing in Resilience Through Savings cum Microinsurance/ Mahila Housing SEWA Trust Team.
2. Protecting Vulnerable Coastlines of Tanzania and Building Urban Resilience/ Ghaamid Hatibu.
- Patel R, Walker G, Bhatt M, Pathak V. The Demand for Disaster Microinsurance for Small Businesses in Urban Slums: The Results of Surveys in Three Indian Cities. PLoS Curr. 2017 Mar 01; 9. PMID: 28357153.
- Shri M Shashidhar Reddy, Vice ChairmanNational Disaster Management Authority (NDMA) 2012. Press relese: “Industries draw their subsistence from community and must contribute to community disaster preparedness”. NDMA: New Delhi. http://ndma.gov.in/ndma/pressrelease/Press%20Release%20National%20Summit%20on%20Disaster%20Management.pdf
- South South Cooperation in Action: Urban Resilience and Risk Transfer https://reliefweb.int/report/world/south-south-cooperation-action-urban-resilience-and-risk-transfer-southasiadisastersnet.