Microinsurance Could Transform the Face of Disaster Recovery

I absolutely love being in awe of friends. Recently, my friend Areiel Wolanow did a presentation before British Parliament, so you can imagine how proud I am to know this man. Actually, no you probably can’t, because my pride is off the charts.

Areiel is the Managing Director of Finserv Experts, a consulting firm that applies its expertise in technology to help transform businesses. One such area of expertise is in blockchain services. This is where things start getting completely over my head.

It seems that blockchain can take out the intermediators between producers and consumers, thus saving both of them time, effort, and money. (This makes me think of travel agents. Who uses them anymore? Now we can search for our plane tickets over the phone. I’ll let Areiel explain if I’m getting the gist of it below.)

But Areiel has put an even more humanitarian spin on the blockchain idea, by working toward using it to make insurance available to those who couldn’t otherwise access or afford it. Imagine, having your whole life wiped out by a tsunami, for example, and because you got some microinsurance from a phone app, you can now use another phone to get a payout that will help support you for a year while you get back on your feet. I don’t know about you, but I think the world could use fewer FEMA trailers! This could make that happen.

But I’ll let Areiel explain it in more detail.

The View from a Drawbridge: Please explain in layman’s terms, what microinsurance is.

Areiel Wolonow: In the most simple terms, microinsurance is simply insurance for small amounts.  But beneath this simple idea are some very powerful effects.  For instance, less than 9% of people in the world have health insurance, and unplanned health spending is one of the leading causes of people going into poverty.

Historically, it has not been possible to provide insurance to people in most parts of the world.  There are two main reasons for this:

  • The cost of administering an insurance policy isn’t that much different regardless of whether the policy covers two hundred dollars or two million dollars. As a result, insurance companies cannot afford to provide policies for smaller amounts without charging premiums that would be exorbitantly high.

  • When it comes time to pay a claim, the costs of paying the claim can often exceed the claim itself. For instance, when a tsunami Indonesia or flooding in Bangladesh occurs, the only way insurance companies could pay claims was to literally send someone out in a helicopter with a briefcase full of cash.  This is a very slow, unsafe, and expensive way of doing business, and adds even more cost to the premium.  Even the most socially responsible insurers could not avoid a pricing policy that was deeply regressive, charging the highest percentage premium to the people who could afford it the least.

What’s happening now, however, is that technology has ways of addressing both of these problems.  A combination of blockchain and mobile technology makes it possible to originate and service insurance with a minimum of human intervention.  Machine learning and integration to weather satellites makes it possible to pay claims immediately when a tsunami, flooding, or other natural disaster happens without the time and expense of having humans investigate the claim.  In the insurance industry, this is called parametric insurance, and it’s a game changer because everyone wins – the company saves huge amounts of cost investigating claims and the customer gets paid right away rather than going through the long and sometimes confusing claims adjustment process.

Technology also helps when it comes to paying the claims.  Most parts of the world now have reliable mobile wallets  (in fact the penetration of mobile payments in Indonesia and Bangladesh, even amongst the poor, far outpaces the US; this is one of many areas in technology where we are falling further behind).  This makes it possible to pay claims directly into people’s mobile wallets.  No more helicopters and suitcases of cash.

Can you tell me more about how your company, Finserv Experts, is working with blockchain to provide microinsurance solutions for natural disasters in Indonesia?

Finserv Experts is a small consultancy that I founded about 2.5 years ago, after being with IBM for nearly 12 years.  We provide both advisory and solution delivery services for transformational financial services.  For almost that entire time we have been supporting one of our clients, a regional insurer,  on a project to provide microinsurance in Indonesia.  The pilot for this program has been successfully running for two years now, and as a result our client and we have been asked to consider building a platform for scaling our solution nationally.

How will this transform the way that communities recover from natural disasters?

It is actually quite difficult to comprehend the enormity of impact that availability of insurance can have on a community.  The first impact is the effect of the insurance itself.  In our pilot program, the insurance policy is bundled with small business loans.  If a natural disaster occurs, the policy pays off the loan as well as providing the policy holder an equivalent of one year’s income to help them get back on their feet.  This is a meaningful change all by itself, but the follow-on impacts are even greater

  • The existence of the policy makes these small businesses much more creditworthy. Tsunamis, flooding, and the like are common enough that investors will often demand huge price premiums in exchange for providing loan capital; in many cases they won’t be willing at all.  The existence of this policy makes others more willing to lend money, and at more reasonable rates

  • In the same way, the existence of these policies makes it much easier for people to start new businesses. A study in Tanzania showed that of all one-person businesses in the country, only 2% would ever grow to the point that they had ten employees, but that 2% was the source of over 25% of all new jobs created.  Imagine what a difference we could make if, by making it possible for more people to start businesses, we could move that to 3%.   A small change in the success rate would have a huge impact

  • The biggest change of all, however, is land reform. A surprising fact is that even in some of the poorer regions of the world, there are many people who could afford to buy a home, but are unable to obtain a mortgage because banks will not provide one without insurance.  Access to locally insured mortgages could quite literally be a path out of serfdom for millions of people.

As the threat of global warming increases, the world will experience even more natural disasters. Are you planning to branch out to other countries?

Absolutely.  We are already working on plans to scale our solution beyond Indonesia, but we still have to focus on making Indonesia successful first.  Also, our plan calls for working with local partners in each country.  Enabling local success is the right way to go for both social and commercial reasons.  The whole reason I got into financial inclusion in the first place was the realization was that all the monetary aid in the world, however well intentioned, wasn’t even making a dent in world poverty – there is too much corruption, and aid isn’t sustainable – even the most charitable people in the world can’t keep giving and giving and giving.  Sustainable eradication of poverty only comes through local success.

Have you considered making it possible for people to microinvest in providing microinsurance to people in third world countries? Perhaps something along the lines of the microloans people like me can provide to participants in Kiva.org, only with some sort of minimal return on the investment? I know a lot of people who would like to be investors but don’t have the huge sums of money that investing usually requires. Do you think blockchain could also be used in that way?

I think about this a lot actually, but have been leery of doing anything because of how hard it is to provide a level of transparency that I would find satisfactory if I were an investor myself.  A good number of the world’s microfinance are simply scams, while others charge their lenders rates that are regressive if not outright extortionate.  Blockchain may indeed be very useful in providing the necessary transparency, as well as enabling a business model that allowed for much lower rates, both for loans and insurance premiums.  The initial results look very promising, but I want to see them proven a bit more before making any grandiose claims about what might be possible.

Is there anyplace where people can read and/or hear your presentation to Parliament?

These sessions are filmed, but it normally takes 6-8 weeks before they are published.  I will let you know as soon as the video is up on the site.

Thank you, Areiel! I’ll post the link here when it comes available. And I have to say, I’m even more in awe of you after this interview than I was before it. Keep up the good work!

1200px-US_Navy_050102-N-9593M-040_A_village_near_the_coast_of_Sumatra_lays_in_ruin_after_the_Tsunami_that_struck_South_East_Asia
A village near the coast of Sumatra lays in ruin after the Tsunami that struck South East Asia

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One thought on “Microinsurance Could Transform the Face of Disaster Recovery

  1. This reminds me of my own attempts to buy insurance. I need fire and waterdamage insurance. I was told it would be $25 a month. I was offered policies that included stuff I don’t need like $2million liability for anything or $30000 to cover my own personal property for $50 a month. I asked how they would know the value of my possessions; would they just pay what I claimed? Each time I asked about this or that the premium went up. The insurance industry needs a huge shakeup

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