by Tobias Gasser
Last autumn leading insurance groups, humanitarian organisations and government policymakers gathered at The Swiss Re Centre for Global Dialogue in Zurich for an international conference on “Solidarity and Opportunity: The Potential of Insurance for Disaster Risk Management in Developing Countries”.
The conference was organised under the aegis of the ProVention Consortium, founded by the World Bank. This is a global coalition of international reinsurance companies such as Munich Re und Swiss Re, Lloyds, the Red Cross and Red Crescent Societies, the UN World Food Programme (WFP), the World Bank, as well as foreign ministries and other NGOs. The aim of the conference was to involve the private sector in disaster reduction and reconstruction.
The world’s humanitarian organisations are facing slow growth or stagnation of available aid and consequently unable to keep up with demand for help. Major disasters tend to occur at irregular frequencies, with each event upsetting aid budgets.
The World Bank and the WFP are working together to present an “innovative solution”. In a recent article in Germany’s Tageszeitung, James T. Morris, Executive Director of the WFP, says that “high-performance fi nancial instruments such as weather derivatives and catastrophe bonds” are being used to create a risk management system to “protect populations at risk from losses incurred through weather-related damage”, in short, a form of hunger insurance for the world’s poorest.
Morris says that such fi nancial market instruments would have a fundamental impact. The risk of a disaster would no longer have to be borne by the families concerned, but by humanitarian organisations.
Richard Wilcox, special programme director at the WFP, explains that the WFP and the World Bank plan to start with a pilot project in Ethiopia. Another drought like the one seen in 1984 would require aid in excess of $2.6bn. “Even at the highest levels, funds pledged for humanitarian aid are unreliable and come too late,” says Wilcox. The WFP now plans to start talks with reinsurers, using a rainfall index as a basis for insuring Ethiopia’s harvest for 2006 with a catastrophe bond and a reinsurance policy.
Speaking to Switzerland’s Wochenzeitung, Jürg Trüb, head of Swiss Re’s weather desk, compares hunger insurance with similar solutions in energy. “When the winter turns out to be warmer than usual, and energy companies sell less power, they come to us to help make up for the shortfall.” The difference with hunger insurance is that it covers changes in precipitation levels instead of temperatures. Trüb sees a number of conditions that would have to be met before Swiss Re could move into hunger insurance.
One of these is the existence of reliable precipitation measurement data. Also, local supervisory bodies would have to approve this type of insurance. Interested parties would have to be prepared to pay commercial rates, and a certain volume of transactions would be necessary to make the market worthwhile.
Bruno Kopp is an independent insurance broker in Basel, specialising in the hard-to-insure market. His company, Risk Management Service, offers insurance products for businesses affected by war or political instability. Kopp is all in favour of the idea of hunger insurance. The major problem he sees, however, is the likelihood of a claim. “If the cat bond is drawn upon regularly, then nobody will invest in it anymore. What investors want is a bond that is never actually used,” he explains.
Ralph Läuppi, fund manager for alternative investments at Bank Leu, a private Swiss bank, finds the WFP’s idea an interesting proposition and is prepared to include a “hunger bond” in his portfolio. The fact that the WFP bond poses a higher-than-average risk among catastrophe bonds is not a problem. But he does think it must be offset with a higher risk premium. It is here that charities are sceptical. “Who’s going to pay for this?” asks Bruno Gurtner, a fi - nancial markets specialist with the Swiss Coalition of Development Organisations. “If the public sector pays for it, this is a socialisation of costs.” Such a model could only work if private sponsors see a fi nancial interest.
Gurtner sees hunger insurance as an example of a public-private partnership involving private enterprise and the state. But, much as for other similar projects, he wonders “how much sense they make and how they can really make a difference to developing countries”. However he is glad international organisations are making an effort to speed up the rate at which they use available aid funds. Another alternative to insurance, he emphasises, would be for states to release aid money more promptly to international organisations. He believes such bodies should also have greater fl exibility in the use of funds.
Tobias Gasser is an independent journalist in Bern, is an independent journalist in Bern, Switzerland and regular contributor to the weekly Wochenzeitung, which originally published this article on 21 October 2004.
Translated by Avril Wright.