Guatemala’s small-scale farmers live on the edge of disaster. Without a safety net of insurance, these low-income farmers and their families face long-term ruin from natural calamities like excess rainfall, earthquakes, and drought. But microinsurance helps protect the livelihoods of farmers and small businesses from damages caused by natural catastrophes.
For 2.5 billion small-scale farmers responsible for half of global food production, extreme weather patterns put their livelihoods at risk by destroying crops, wiping out financial savings and further entrenching families in poverty.
Insurance payouts could help mitigate these last-resort survival strategies—but few Guatemalans have access to traditional insurance.
However, Microinsurance Catastrophe Risk Organization (MiCRO), a reinsurance company, is bridging the gap between insurance markets and vulnerable populations. It is the first organization of its kind to be working on solutions to natural catastrophe by providing microinsurance to those who do not have access to insurance against natural disaster.
“We all face risks, but inevitably vulnerable low-income populations are worse affected given that they lack other safety nets—such as savings,” says Josh Ling, a microinsurance actuary for MiCRO.
Microinsurance helps vulnerable and low-income families build resilience and protect themselves in the face of catastrophes and the extreme weather caused by climate change.
Microinsurance doesn’t just cover lost crops or a failed business. It can help individuals build resilience, so they won’t need as much humanitarian aid when catastrophe strikes. Microinsurance is also a bottom-up solution for long-term economic development and stability in developing countries.
MiCRO was founded in response to the 2010 Haiti earthquake by Mercy Corps and Fonkonze—the largest microfinance institution in Haiti. Between 2011 and 2013, MiCRO provided microinsurance to 65,000 Haitians. MiCRO is taking the lessons learned from providing microinsurance in Haiti and applying them as they expand their services throughout Central America.
In 2016, MiCRO launched Esfuerzo Seguro to protect low-income Guatemalans against natural catastrophes. The index-based insurance is sold through Banrural, the largest bank in Guatemala, bundled with a loan and lasts for the same duration of the loan.
Index-based insurance pays out benefits based on measurement of an index based on predefined levels that correlate with real-life losses caused by climate and catastrophic events. For example, a rainfall index could be based on millimeters of rainfall within a 72-hour period. If it rains 100 millimeters, the insurer pays 50 percent of the sum insured. If it rains 200 millimeters, the insurer pays 75 percent of the sum insured. And if it rains 250 millimeters, the insurer pays 100 percent of the sum insured. So, the more sizeable the event, and hence greater damage, the greater the payout to beneficiaries.
With continuing advances in data analysis and technology, the possibilities continue to expand. For example, satellites are able to quantify the amount of rainfall in a given area over a period of time with more granularity than was possible just five years ago.
Index-based insurance is not perfect. The index might not include a certain type or level of event. If a policy pays out for an earthquake with a magnitude of 7 or above, but the earthquake registers at 6.9 magnitude, then the insurance might not cover some of the damage. But on the flipside, the policyholder might receive payments that are greater than their losses.
While most microinsurance products cover direct losses, Esfuerzo Seguro covers business interruption. If a smallholder farmer or small business suffers loss of income as a result of extreme weather—falling within the pre-determined index levels—then the insurance payout will serve to support that loss.
MiCRO continues to work to help its client understand the benefits of insurance. After all, it is an intantigle product that does not have a guaranteed financial benefit. But communities in Guatemala are learning about the benefits of insurance through experience.
“When a drought destroys part of a harvest, MiCRO’s policyholders will experience financial relief from an event that otherwise could have forced the sale of assets or the need for a second job to repay the loan,” says Ling.
MiCRO plans to expand throughout Central America—from Guatemala to Honduras and El Salvador—over the next two years. It recently received regulatory approval to launch in El Salvador in mid-2017.