RMS Completes Micro-Insurance Quake Project for Rural China

June 8, 2009

Risk Management Solutions has completed a new quantitative analysis, which “reveals that a micro-insurance system could be both technically and commercially viable to provide cover against catastrophic earthquake risk in rural China.”

RMS explained that “with the appropriate support, micro-insurance could, for the first time, help protect low-income households against major earthquakes through a framework of risk sharing and risk transfer involving insurers, reinsurers, and the government.
“While micro-insurance systems exist for life insurance, significant business and implementation challenges have prevented similar systems from being developed for catastrophic risk cover.”

RMS said its” pilot project – including complete risk quantification and the conceptual design for a feasible insurance product – shows that premiums of less than 10 Chinese Renminbi (approximately $1.50) could be charged for the approximately 55 million low-income households in rural China. This would generate total premium income of around 550 million RMB ($80 million), which RMS calculates is sufficiently above the total estimated risk and operational costs of around 400 million RMB ($60m) based on average annual losses of around 180 million RMB ($25m).”

Dr. Zifa Wang, head of the RMS China office noted: “China is one of the world’s most seismically active countries, with almost half of the population located in moderate to highly hazardous areas. Last year’s Wenchuan earthquake painfully demonstrates the devastation that can be caused, yet there is still very little insurance penetration. A micro-insurance system, with simple products that provide quick disbursement of funds, would provide a financial buffer against the impact of these high-severity events and facilitate recovery efforts in rural areas.”

From its analysis, RMS has come up with a “three-layer risk-sharing program to provide the protection in its pilot study. The primary insurance layer would cover losses of up to 2 billion RMB ($300m), the next reinsurance would cover up to 4 billion RMB ($600m) losses, while the top layer of 12 billion RMB ($1.8bn) for the most extreme events would involve government participation.

“The program was designed by taking into account the technical premiums for each layer, risk loading, fees to intermediaries, and fixed (operational) and loss adjustment costs.”

Dr. Pane Stojanovski, vice president of model development operations at RMS, pointed out that “micro-insurance is gaining global momentum, particularly in countries where much of the population lives around or under the poverty line and regular insurance penetration is low. The pilot project demonstrates that these disadvantaged people, whose lives are disproportionally impacted by catastrophes, can be served in a commercially sustainable way by bringing together the relevant stakeholders, simplifying the products, and minimizing operational costs.”

In the coming months, RMS will be discussing the potential to expand this pilot study initiative with the appropriate government bodies in China and industry stakeholders.

“RMS has been a catalyst for the advancement of micro-insurance since 2007, and is committed to applying its risk analysis to help bring greater financial protection to those who are most exposed to the devastating impacts of natural catastrophes,” explained Professor Haresh Shah, chairman of the Forum and co-founder of RMS. As a further sign of this commitment, RMS has recently hired Miss Suruchi Wagh as a micro-insurance research analyst in California.

Source: Risk Management Solutions – www.rms.com

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