Invest to Prevent Disaster: The Potential Benefits and Limitations of Microinsurance as a Risk Transfer Mechanism for Developing Countries

This opinion piece is a product of the collaboration between the "‘ProVention Consortium" and the ‘"International Institute of Applied Systems Analysis." It discusses efforts underway in the field of microinsurance and reflects on the opportunities and challenges of microinsurance provision for natural disasters in developing countries. The document makes the following important points:

• Insurance is especially necessary in developing countries as a risk management strategy;
• The ProVention Consortium is concerned about making affordable and viable risk transfer mechanisms accessible to the poor in developing countries;
• Governments, households and businesses in developing countries cannot afford to, or do not have access to, commercial insurance;
• Microinsurance for disasters can provide low-income households, farmers and businesses with access to affordable means to spread losses, secure their livelihoods and improve their creditworthiness;
• Disasters present a challenge to micro-insurers because of the covariant nature of risks;
• However, there are currently a number of innovative pilot schemes, such as index-based weather derivatives.

The article concludes by discussing the challenges of viability, affordability, risk prevention and sound governance that microinsurance still faces in attempting to provide affordable security to the poor in developing countries.