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Natural Disaster Microinsurance for Rural El Salvador

abstract The aim of this project is to develop a natural disaster microinsurance scheme in El Salvador based on a cooperation between Fundamicro and the University of St. Gallen. El Salvador is a country with high population density and low insurance penetration that is highly exposed to natural disasters. One recent example is the intense rainfall in October 2011 that triggered heavy floods in several rural areas of El Salvador and throughout Central America. Significant economic damages for the rural agricultural communities were the consequence including farm animals, harvest, and other productive property. Approximately 30-40% of corn and 70% of bean crops have been destroyed (see Oxfam America, 2011) representing a significant drawback for people depending on agriculture for their livelihood.

Natural disasters cause substantial economic losses in El Salvador and affect a large share of the population. The major types of risks are floods, storms, earthquakes, and droughts. Based on the experience of the last 30 years, the likelihood for a flood or a storm occurring in one year is about 40-45% whereas the probability for an earthquake or a drought is around 20%. An average flood affects about 10,000 people and causes an economic damage of US-$ 20 million, a common storm 20,000 people and US-$ 140 million in economic losses. Earthquakes and droughts affect even more people on average (400,000 and 80,000 people respectively) whereas earthquakes generate the highest economic losses amounting to US-$ 550 million per event (see Prevention Web, 2012). These figures indicate that natural disasters constitute a significant rebound in the economic development in general and in the development of the agricultural sector of El Salvador in specific.

Despite the substantial allover effect of natural disasters on the economy of El Salvador, it is the low-income population that is affected most by losses resulting from natural disasters. Besides being highly exposed to natural disaster risk, existing risk management strategies are limited. The materialization of risk not only results in immediate financial losses, but impacts the medium and long-term resources available to generate income. Income levels and exposure to risk thus are highly negatively interrelated, resulting in an escalating downward spiral (see Churchill, 2007). Low-income populations in El Salvador have a long history of utilizing informal risk-sharing schemes on community levels (e.g., extended families, villages) and self-insuring by saving and borrowing to cope with risk. Available self-insuring strategies include adaptation of consumption levels, reducing savings, raising debt, seeking help from friends and relatives, depleting productive assets, and reducing educational expenses. Self-insurance thus might reduce the future capacity to generate income especially in the agricultural sector since future income significantly depends on present investments (e.g., seeds, fertilizers). Given the recognition that exposure to risk constitutes a significant determinant for poverty and that risk management strategies for the low-income population in agricultural communities are insufficient, microinsurance emerged as a means to provide broader access to formal risk management strategies in agricultural communities.

The underlying idea of a natural disaster microinsurance scheme in El Salvador is the same as for mainstream insurance in developed insurance markets, i.e., the transfer of a risk from an individual (the insured) to a pool of individuals (the insurer) in exchange for a premium. It is the particular target population of low-income individuals – with less than US-$ 2 of income a day – that constitutes the essential difference. In El Salvador, this potential target population is about 1.1 million people in total only earning a 3.8% share of El Salvador’s’ total annual income (World Bank, 2012). A natural disaster microinsurance scheme will thus contribute to addressing social and economic objectives by preventing a large share of the low-income population to fall into poverty and induce economic growth through setting incentives for investments into more productive farming technology (e.g., seeds, fertilizers, machinery).
keywords Natural disaster, developing countries, microinsurance, agricultural
partner Fundación de Capacitación y Asesoría en Microfinanzas (Fundamicro), El Salvador
type industry project
status completed
start of project 2012
end of project 2014
additional informations
topics Natural disaster microinsurance
methods Product development, business plan, actuarial pricing, impact evaluation
contact Christian Biener