Towards a global reinsurance of poor producers’ risks

Mar 22, 2012
The way out of a crisis is always easier and faster provided there is a post-crisis scenario plan. In the current global crisis, Africa has a role to play: The continent has immediate and distant future emerging countries which will help boost global economic growth. But it also has a serious challenge: it is vulnerable as most of its producers are, and faced with too many risks against which they are helpless. Vulnerability or growth? It will be one or the other. For growth to prevail, Africa needs to be reinsured.
A milestone has been achieved. While the spread of insurance has long been viewed as a future outcome of economic development, it is widely acknowledged that it could serve as a lever of development, especially with regard to primary risks that affect the capability of poor producers, at the bottom of the development process. The list of insurance "virtues" is indeed
- speed and transparency of victim compensation, mitigation of paralyzing impact of risk, protection of gains of past efforts, speedy restoration of the victim’s potential, increasing responsibility of the individual, reduction of credit risk, increased development aid efficiency. The facts are there - the spread of micro-insurance across the world proves that even on the poverty line, people are willing to voluntarily make an effort ensure themselves if over time, they find their interest.
But there is a major obstacle in the way: An insurance system remains fragile if there are no reinsurance facilities to deal with exceptional claims (cost or frequency). Besides the "technical" advantage of strengthening the capacity of local insurance companies and making coverage of huge risks affordable, reinsurance also contributes greatly to development by freeing up capital for productive use, and by lowering the required return on capital given that it is generally less exposed to risk.
But the two conditions for the emergence of reinsurance – available financial capacity, and the maturity of the local financial system - are lacking in the least developed countries. The crisis has further complicated the situation: added to the increasing needs due to the effects of the crisis is the increasingly difficult debt situation and increasingly scarce public funds for development aid.
Given that reinsurance capacity is lacking at national level, it is necessary to look at the global level: this constitutes the objective of the Planet Ré Project. Various funding possibilities are available to replenish Planet Ré reserve: booting through public endowment, reinsurance premiums, issuance of Poverty bonds (securitized risk on the model of cat-bonds and weather derivatives), temporary and paid deposit of a tiny portion of international financial transactions before return to its owners ... excluding catastrophic hazard! Like poverty bonds, this simple exchange of risk - at no additional cost to the crisis that has hit global economy - would expose investors to random losses of a scope comparable to that of financial markets.

Concretely, Planet Ré can be viewed from three main configurations, which may foreshadow a phased implementation: partial regional or thematic mechanism (food security, health, agricultural safety, climatic accidents, etc.), consortium with joint ultimate reinsurance capacity or specific institution. Whatever the configuration adopted, the specificity of Planet Ré is its founding principle (connecting local risks to the global financial system), under the protection of demanding specifications: in the genuine interest of the populations concerned, the specific context of low-income countries would be no excuse for any weakness in relation to actuarial rules, insurability criteria and, more generally, solvency standards that govern insurance activities. This is thus the only way that the challenge to put financial globalization at the service of the poor can be taken up.
For more information, please access the full note here. Emeritus Professor at the University of Lyon (IEP), former Dean of the Faculty of Economics, Lyon, associate researcher at the Thomas More Institute. Specialty: decision taking assistant, forecasting, risk analysis. He participated as an expert in the ILO/World Bank Social Re program, contributing to the Social Reinsurance collective work and several conferences (Geneva, Lyon, Washington, and San Francisco) on the limits of insurability in poor countries. He is the author of numerous books, articles and contributions among which is the Leçons d’économie politique (Economica), a reference document reprinted eight times. His Reflection titled: "Réassurer la planète (reinsuring the planet)" (Thomas More Institute, 2004-2011), advocated a global reinsurance to support development strategies. Conferences in Paris (FFSA),Rome (FAO), Quebec (ICMIF).

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