Microinsurance and natural disasters: challenges and options

Providing disaster microinsurance to low income individuals is far from easy. Designing and structuring products so that they can be sold at low cost raises a set of challenges, and even then the level of voluntary purchase can be disappointingly low. Recent innovations in providing agricultural insurance could have broad implications for other disaster microinsurance products. If a market is to be viable governments will have key roles to play, including: approving insurance policy small print and product designs; supporting or leading industry-wide investments in data collection, index design, and loss adjustment capacity; financing sustained public information campaigns; nudging or compelling purchase; and committing to limits on post-disaster financial assistance to the uninsured. If disaster microinsurance prices do not accurately reflect the risks faced, the presence of disaster microinsurance can distort incentives to migrate. However, in the presence of risk-based pricing, it seems plausible that disaster microinsurance could make it easier for people to stay where they are even as their environment becomes more fragile, yet increase post-disaster migration through increasing post-disaster wealth.