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Insurance Solutions

Formerly Moody’s RMS

Just over a year ago, I was in Manila for a workshop on the design of PCDIP – the Philippines City Disaster Insurance Pool. Recognizing the Philippines as a country prone to earthquakes, typhoons and frequent flooding, as well as having a rapidly increasing economy, population and building stock, the design of PCDIP was funded by the Asian Development Bank and implemented by a consortium of consultants, led by RMS. The aim: to manage the risk that Philippine cities face from natural catastrophes through the use of parametric risk transfer, to give the cities a rapid source of funding when disaster strikes.

In March, I returned to Manila, alongside a team of both RMS colleagues and our clients on the annual RMS Impact Trek with Build Change – a longstanding RMS partner. RMS works closely with Build Change in promoting, and, crucially, implementing risk-reducing retrofit measures in low-income communities around the globe. This time, the focus of the trip was arguably less on risk transfer (as during my last visit to Manila), and more on risk reduction, because effective risk management must always be a combination of both – reduction and transfer.

Transferring risk from the first to the last dollar (or Philippine Peso…) is never efficient from a financial perspective; not to mention the non-financial benefits risk reduction measures can have on the lives and livelihoods of communities. At the same time, risk also cannot be fully “reduced away” – even after the most ambitious risk reduction measures some residual risk will always remain. And this is where risk transfer can provide vital protection, to ensure (or insure?) that adequate financial means are available in response to the most extreme catastrophe events.

During the Impact Trek, we spent a lot of time with the local Build Change team and some of their key partners – microfinance organizations, local and national government, and, most importantly, homeowners.

Impact Trek
The Impact Trek team on a field visit with Build Change and ASHI, a Philippine microfinance partner of Build Change, in a neighborhood in Laguna province, southeast of Manila

I was struck by the level of disaster risk awareness among homeowners, and their understanding of the importance and value of retrofitting. Despite the challenging financial situations these homeowners often face, they are willing to invest as much as twenty percent of their weekly income in the risk-reducing retrofit programs developed by Build Change – certainly a great testimony to the technical and educational quality of Build Change’s work.

What also struck me, however, was the scale of the problem which remains unaddressed. Today, there are 15.6 million substandard homes in the Philippines, housing an estimated seventy million people. By 2030, this number is projected to increase to over twenty-five million homes in the Philippines alone, and a staggering three billion people globally will be living in substandard housing.

For the Philippines, insurance penetration remains at less than one percent, meaning that homeowners stand to lose their hard-earned investment in resilience when an event exceeding the retrofit design criteria occurs without any financial “backup”. Offering loans and insurance coverage – or, ideally, a combination of both, to vulnerable homeowners can be more than just a “nice CSR idea”. It can be a profitable investment – for lenders, insurers and governments.

Quantifying the size of this opportunity was a key challenge we set ourselves during our time in the Philippines. Leveraging a detailed housing study commissioned by Build Change, with input by local microfinance institutions and using the RMS Southeast Asia Earthquake and Philippines Typhoon and Inland Flood Models, we estimate that retrofitting loans in the Philippines could yield returns of over US$12 billion, and would make an initial level of insurance coverage at an annual premium of US$15 both commercially attractive for insurers and affordable for homeowners.

During our time in the Philippines, we had the opportunity to discuss these opportunities – and potential implementation routes, with local stakeholders such as the Asian Development Bank (ADB) and the Philippines National Disaster Risk Reduction and Management Council (NDRRMC).

Impact Trek
Impact Trekkers discussing the challenges and opportunities of resilient housing with the local ADB and NCRRMC offices in Manila

On returning from the Philippines, the Impact Trek team presented the analysis at Exceedance 2019 and the UN Global Platform for Disaster Risk Reduction earlier this month. Because even though the Trek itself officially ended after a fascinating week of new perspectives, insights and ideas, the challenge of vulnerable housing remains. Equally, it continues to present an immense opportunity for both local and global financing and insurance solutions – and hopefully the team’s work during the 2019 Impact Trek has helped to shine some fresh light on these.

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Theresa Lederer
Theresa Lederer

Theresa is a consultant in the RMS Capital and Resilience Solutions group, leading a range of projects in the team’s advisory function. Her work focuses on working with a range of private and public sector clients across the globe, to help them quantify, communicate and effectively manage catastrophe risk through a variety of innovative risk mitigation and transfer measures.

Her responsibilities include leading bespoke probabilistic hazard and loss assessments as well as the design, evaluation and optimization of custom risk transfer products. In addition, Theresa oversees the execution of catastrophe bond risk analyses, re-modeling and market commentary.

Theresa holds a master's degree in Mathematics from Cambridge University.

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