- The Washington Times - Sunday, January 23, 2005

KOBE, Japan — When the tsunami’s waters poured through Banda Aceh, some small merchants tried frantically to rescue their precious goods or save their shops, rather than flee to safety in their upstairs homes. And there they died — in their uninsured businesses.

A U.N. economist, Ricardo Zapata, cites this tragic example from the Indonesian city to illustrate a sad fact of life among the Maldives fishermen, Sri Lankan farmers and grieving families in a dozen nations swept over by the catastrophic waves spawned by the Dec. 26 underwater earthquake: Almost no one in such poor developing lands has insurance.

“We’re talking here about people who don’t have the actual means to cover insurance,” Mr. Zapata told a session of the World Conference on Disaster Reduction.

Industry experts estimate that 80 percent of the world’s people have no realistic access to life and property insurance.

Even before the tsunami devastated Indian Ocean coastlines, the industry paid $40 billion in claims for disaster damage in 2004, largely because of hurricanes in Florida and typhoons in Japan. It was its costliest year ever, but an additional $90 billion in economic losses were not insured, reports the Munich Re Group, the German reinsurance giant.

“There’s a very well-developed insurance market in some developing countries,” said Thomas Loster, a “geo risks” researcher at Munich Re. “But there [are] countries where there’s no insurance, when, of course, losses do not stop at the borderline. We have to find a way to deal with that.”

Finding a way to finance disaster risk in poor countries dominated hours of discussions at the conference, which ended Saturday after five days and dozens of workshops at which scientists, economists and others sought better approaches to protecting populations against natural disasters.

Aid agencies, governments and ordinary people in the developing world have tried various financial tools for protecting against catastrophic risk:

• In a few countries, “micro-insurance” schemes cover poor breadwinners with, typically, $1,000 life-insurance policies in exchange for relatively tiny premium payments. Cooperatives in the Philippines operate such plans, but they’re often rooted in local cultural practices, and for-profit insurance companies find the numbers too large and the revenue too small to justify the overhead.

• With financial support from the World Bank, Turkey introduced a mandatory home-insurance plan nationwide in 2001, after a series of devastating earthquakes. It’s the sole provider of coverage up to $30,000, and ends a long-standing practice of government financing for rebuilding quake-wrecked housing. Taiwan and Algeria have since developed similar plans.

• The World Bank and U.N. World Food Program (WFP) have begun a pilot program in Ethiopia using “catastrophe bonds” to insure the 2006 food crop. Investors receive high interest payments on such bonds, but if the disaster occurs during its term, all or part of the principal is converted to financing the cost of recovery — in this case, purchase of emergency food if the crop succumbs to drought.

• The WFP is also interested in “weather derivatives,” essentially a hedging tool for betting on specified temperatures or precipitation. The WFP could buy derivatives, so that if a drought and crop failure drive up prices for its food purchases, the derivative payoff helps cover the higher cost.

The U.N. conference called on governments and international organizations to work to develop “financial risk-sharing mechanisms” against catastrophes.

The approaches tried so far all have their shortcomings.

Costly “cat bonds” and derivatives don’t directly help poor individuals in the developing world. Micro-insurance requires the right socioeconomic setting. And the Turkish plan leans on a contingency credit guarantee from the World Bank.

As for the international insurance industry, “they’re not running in that direction,” Mr. Loster said.

He and others point out that traditional insurers want a context of stable laws and regulations, and customers with clear property rights — something often lacking in poor countries.

“There’s no initiative by the private sector in the uninsured world,” Mr. Loster said. “There’s a strong need for better public-private partnerships” — that is, partial underwriting by intergovernmental agencies.

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