Analysis: Potential of microinsurance

to sustain water and sanitation service

Report for Water for People

Heidrun Zeug
December 2011
 Executive Summary

There are a growing number of initiatives promoting microinsurance as a risk management mechanism for
developing countries. Most experience has been gained in the area of health, life and livestock
microinsurance. This desk study assesses the potential of microinsurance to sustain water and sanitation
services in low-income populations in developing countries, including those prone to disasters.

Based on a literature review and semi-structured interviews with water and sanitation experts and (micro)
insurance experts, information and views on the applicability of microinsurance in the water and sanitation
sector in developing countries were collected and analyzed.

The results reveal that there is general awareness about microinsurance in the developing sector among
the interviewees, but not much information available about standalone products to sustain water and
sanitation services. Two programs were found that link water or sanitation to health microinsurance. One
program is currently in the initial design stage for water and sanitation microinsurance. Government
funding is mostly accessed ex post disaster to rehabilitate water supply and sanitation infrastructure. Some
funds specifically target community disaster preparedness strategies to protect water and sanitation
facilities against disasters. Community savings are most common to sustain or rehabilitate failed services in
developing countries. There are several challenges linked to microinsurance implementation. The study
found risk priority, insurance education, trust, ability and willingness to pay, targeting of microinsurance,
moral hazard and pricing key issues to consider while planning microinsurance products.

The study hardly supports a business case for a standalone microinsurance product to sustain water and
sanitation services in low-income communities. However, the study sees potential to link water and/or
sanitation components with other existing microinsurance products, such as health microinsurance or
climate change microinsurance. It further argues to strengthen local mutual safety nets in order to manage
risks better and prepare for interruption of water and sanitation service. The study reveals also that slum
microinsurance may be an innovative risk management mechanism for sustaining water and sanitation
service delivery in slums. Nevertheless, further research in the field would be required to assess its
potential. As microinsurance is a relatively new risk management mechanism in developing countries its
still a learning field. Modes of implementation are crucial for success or failure of microinsurance.

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 Table of contents

Executive Summary ....................................................................................................................................... 2

Table of contents ........................................................................................................................................... 3
List of Abbreviations ...................................................................................................................................... 4
List of Figures ................................................................................................................................................. 6
List of Tables .................................................................................................................................................. 6
Acknowledgements ....................................................................................................................................... 7
1 Introduction ............................................................................................................................................... 8
1.1 Study background & objective .......................................................................................................... 8
1.2 Research questions............................................................................................................................ 9
1.3 Structure ............................................................................................................................................ 9
2 Literature review ..................................................................................................................................... 11
2.1 Microinsurance as risk management mechanism in developing countries .................................... 11
2.2 Lessons from microinsurance in the agriculture and health sectors .............................................. 13
2.3 Experience with microinsurance in the watsan sector.................................................................... 16
2.4 Lessons from other strategies to finance and sustain water & sanitation services ........................ 18
2.5 Lessons from risk management mechanisms in the watsan sector in industrialized countries ..... 20
3 Methodology ........................................................................................................................................... 25
3.1 Research Approach .......................................................................................................................... 25
4 Results ..................................................................................................................................................... 27
4.1 Awareness of microinsurance ......................................................................................................... 27
4.2 Financial and non-financial strategies ex ante and ex post disasters ............................................. 27
4.3 Challenges of microinsurance implementation............................................................................... 28
5 Discussion ................................................................................................................................................ 32
5.1 No case for standalone product ...................................................................................................... 32
5.2 Options to link with other insurance products................................................................................ 32
5.3 Strengthening mutual safety nets ................................................................................................... 34
5.4 Microinsurance case for slums ........................................................................................................ 34
6 Conclusion ............................................................................................................................................... 36
7 Recommendations................................................................................................................................... 40
8 Bibliography ............................................................................................................................................. 42
9 Annex ....................................................................................................................................................... 45
Literature list for WFP ................................................................................................................................. 45

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This Page Intentionally Left Blank

4
 List of Abbreviations

DfID Department for International Development

FINISH Financial inclusion improves sanitation and health
GESS Global Extension of Social Security
GIS Geographic information systems
ICT Information and communication technology
IESE Instituto de Estudios Superiores de la Empresa
IFAD International Fund for Agricultural Development
IPCC Intergovernmental Panel on Climate Change
IRC International Water and Sanitation Centre
ILO International Labor Organization
MFI Microfinance institution
MI Microinsurance
MIA Microinsurance Academy
MiCRO Microinsurance Catastrophe Risk Organization
mio million
NGO Non-Governmental Organization
NWP Netherlands Water Partnership
OBA Output based aid
ODF Open defecation free
O&M Operation and maintenance
SAMRISK Societal Security and Risks research program of the Research Council of Norway
SIMAVI Dutch NGO
TATA-AIG Joint venture of Tata Group and American International Group, Inc.
TSC Total sanitation campaign
UN DESA The United Nations Department of Economic and Social Affairs
UK United Kingdom
USA United States of America
USAID United States Agency for International Development
WASH Water sanitation and hygiene
WASTE Dutch NGO
Watsan Water and sanitation
WFP World Food Program
WWF World Wildlife Fund

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 List of Figures

Figure 1, Analytical framework.......................................................................................................................... 8

Figure 2, Flow of finances for the FINISH project (Mark, 2010). ..................................................................... 17
Figure 3, Water industry risk radar, Marsh (2008). ......................................................................................... 21
Figure 4, Global premiums split by class of insurance (Marsh, 2008). ............................................................ 22
Figure 5, Hazards for water utilities ................................................................................................................ 23
Figure 6, Words in SMS messages sent to the Ushaidi risk mapper after ....................................................... 34

List of Tables

Table 1, Priority risks in selected countries (Churchill, 2006) ......................................................................... 11

Table 2, Overview of insurance instruments and risk exposures (Marsh, 2008, modified) ............................ 21
Table 3, Steps in emergency planning (Griggs, 2000) ..................................................................................... 24
Table 4, Overview of guiding aspects .............................................................................................................. 25
Table 5, Sampling criteria for study groups ..................................................................................................... 26

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 Acknowledgements

The author would like to thank all interviewees from the following organizations:

Water and Sanitation Program of the World Bank, UNICEF, Cranfield University, Water Aid,
Welthungerhilfe, MicroInsurance Academy, MunichRe Foundation, Church Development Service,
International Labor Organization (ILO) of the United Nations, Institute for Fiscal Studies, Jalakam Solutions
Pvt. Ltd., IRC International Water and Sanitation Center, and various Independent Consultants in the WASH
and MicroInsurance Sectors.

About the author:

Heidrun Zeug works as independent consultant in the water and sanitation sector. She holds a Master of
Science Degree in Applied Environmental Sciences from Germany and a Master of Science Degree in Water
Management from the UK. She supported the East Africa Rural Water and Sanitation Program of the
German NGO Welthungerhilfe and worked as a Water Specialist for the Water & Sanitation Program of the
World Bank in India managing projects for optimization of urban water service delivery. She has high
interest in sector innovations, such as the potential of ICT & GIS technology in water and sanitation
management.

7
1 Introduction

Study background & objective

The core task of water and sanitation service providers is the delivery of good quality of service to water
and sanitation users. The characteristic of well managed water and sanitation services are the delivery of
safe, sustainable and affordable services. However, service provision can be concerned through shocks
which go beyond the management of day to day problems (Fig. 1). Effective risk management strategies
need to be in place to prepare and protect against shocks which could range from slight incidents to
extreme natural disasters carrying the potential to cause severe health and economic impact on service
users and providers. Water and sanitation service can be affected by a wide range of different incidents and
disasters.

Figure 1, Analytical framework.

Floods can contaminate water resources. Pipes can break due to frost or earthquakes, sanitation facilities
can be demolished. Landslides can destruct important network equipment. Droughts can compromise on

8
bulk water supply. The scale of damage depends on the scale of event, but may be also linked to the quality
of infrastructure which was built in the first place. The response to a disaster may be linked to financial
resources at hand and the risk management and coping strategies of the institutions running water and
sanitation services and of concerned consumers. A broken hand dug well may probably not be very costly
to repair, but without skills and resources for spare parts it might not be feasible for a community to
rehabilitate the infrastructure. Severe damage of water networks in a town may be costly to repair, but
when a utility has the resources and skills to rehabilitate and has alternative supply sources at hand, the
impact on the water users may be less severe.

Focusing on this analytical framework the studys main objective is

To study the potential of microinsurance to sustain water and sanitation services in low-income
populations in developing countries, including those prone to disasters

Research questions

In order to examine the research topic the author identified the following list of research questions as
guiding questions for the scoping study:

What experience exists with microinsurance related to water and sanitation, or other sectors?

What are challenges of microinsurance implementation?

What would a potential watsan microinsurance product framework look like?

Is there scope to integrate water & sanitation in existing microinsurance products?

What appropriate risk management strategies other than microinsurance are available?

What can be learned from financial risk management mechanisms in the water sector in

industrialized countries?

Structure

Chapter 1 gives an introduction to the research topic. It provides an overview of the analytical framework
and explains the identified research questions of the study.
Chapter 2 describes a broad literature review. It explains microinsurance as risk management mechanism in
general and presents current trends about microinsurance. It further gives an overview on
health microinsurance and weather index insurance. It draws on experience with
microinsurance in the water and sanitation sector. Also lessons from other risk management
mechanisms in the water and sanitation sector are provided.
Chapter 3 explains the methodology used. It describes the research approach, the interview and sampling
strategy and concludes with a short methodology assessment.
Chapter 4 presents the results and findings based on the interviews and relevant literature.

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Chapter 5 focuses on the discussion of the results.
Chapter 6 presents the conclusion of the study.
Chapter 7 gives recommendations for further steps.
Chapter 8 provides the bibliography of literature sources.
Chapter 9 provides important literature in the area of microinsurance

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2 Literature review

Microinsurance as risk management mechanism in developing countries

Poor people are vulnerable to many threads including illness, accidental death and disability, loss of
property, yield losses, and both, manmade and natural disasters. When a shock occurs poor people have
the least resources to cope with the situation. Informal coping strategies are mostly available, but do
usually not provide sufficient protection. And what happens when the poor have to face a series of risks? A
high frequency of crises may undermine the chance of a household to fully recover (Churchill, 2006).
The Landscaping Study of the MicroInsurance Centre (2007) found that low-income groups usually do not
have access to insurance mechanisms. The report estimates only 78 million people in the 100 poorest
countries in the world have microinsurance coverage. Out of that, 60 mio microinsurance contracts alone
are signed in India and China. The Lloyds Risk Insight report (n.a.) estimates the potential market for
insurance in developing economies to be between 1.5 and 3 billion policies.

2.1.1 Priority risks & demand

People across different countries prioritize risks differently. An illness in the family or the loss of a family
member is of great concern. Other risks include business losses, livestock disease, property loss, childrens
education. Tab. 1 gives an overview of countries and their priority risks.

Table 1, Priority risks in selected countries (Churchill, 2006)

Country Priority risk

Uganda Illness, death, disability, property loss, risk of loan

Malawi Fear of death, especially in relation to HIV/AIDS,

food insecurity, illness, education

Philippines Death, old age, illness

Vietnam Illness, natural disaster, accidents, illness/death of

livestock

Indonesia Illness, childrens education, poor harvest

Lao P.D.R. Illness, livestock disease, death

Georgia Illness, business losses, theft, death of family

member, retirement income

Ukraine Illness, disability, theft

Bolivia Illness, death, property, loss including crop loss in

rural areas
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When the insurance market initially entered low-income countries it focused on downscaling insurance
products available in industrialized countries. This carried the risk to match products and consumer
preferences. Hence, products supplied were (are) not always appropriate to the market. The design of a
microinsurance product requires a detailed market research to analyze key risks faced by the poor and their
impact on peoples livelihoods. Understanding the clients needs results in better adoption rates (Churchill,
2006).

2.1.2 Types of microinsurance products

The following list provides an overview of the most common microinsurance products (The Microfinance
Gateway, 2011).

Credit life insurance is the most common microinsurance product. It protects lenders from the death of
their clients and is often offered directly by MFIs.

Term life or personal accident insurance is often offered with credit life insurance to cover the family if the
borrower dies.

Savings life insurance is often used to stimulate savings.

Health insurance is in greatest demand among poor and low-income households; however, it is also the
most complex risk to cover due to higher information asymmetries between the insurer and insured.

Property insurance is nearly always linked to a loan and may help a borrower continue repaying his or her
loan only if something happens to the property.

Agricultural insurance has been recently linked to rainfall and other weather conditions. Also livestock
insurance has been common among farmers.

2.1.3 Partners in microinsurance delivery

Microinsurance schemes are run by various actors such as mutual benefit organizations, NGOs, micro-
finance institutions, or commercial insurers. Most common are the following providers (GESS, 2011):

(a) Pre-existing civil society organizations (MFIs, NGOs, Health care providers, trade union, etc.) add to
their activities the provision of microinsurance. They implement all insurance tasks and assume the
(financial) risks. Although the design and operations of the insurance scheme is usually done in
participation with the potential policyholders, the microinsurance system remains in the ownership of the
implementing organization.

(b) Community based organizations providing only microinsurance coverage, such as mutual benefit
associations. The system is owned and managed by the insured groups themselves, and relies on active
solidarity mechanisms.

(c) Commercial insurers selling insurance products to low-income groups. This category includes
partnerships between organizations, for example partner-agent agreements and outsourcing of
management functions.

In partner-agent agreements the partner is an insurance provider (usually a regulated insurer, occasionally
a Government institution or a national agency). The agent is a civil society organization. In exchange for a
12
commission, the agent sells the insurance products of the partner to its target population and offers its
infrastructure for product servicing such as marketing of the product, premium collection, and assisting in
claims management. The insurance provider is usually responsible for the designing and pricing of the
product, the final claims management, investment of reserves, and absorbs all the insurance risks.

Third party administrators are service providers that may take over several functions: the accreditation
of health care providers and the monitoring of these agreements, claims management, etc.

2.1.4 Trends in microinsurance

Some trends can be identified in the microinsurance sector (MIA, 2011; Morduch, 2006):

General trends

The microinsurance field is young and break-through in the formal markets comparable to the
mushrooming of microcredit have not been registered yet
There exist large informal markets of insurance-type risk management mechanisms in developing
countries based on traditional safety nets

Trends in commercial insurance

Commercial insurers move increasingly into microinsurance

Focus often still on life, but health and livestock, as well as crop increasingly targeted
Focus on reduced transaction costs (mass distribution, use of technology or index insurance)

Trends in community based insurance

Professionalizing community based insurance

Introducing technology
Integration into the formal sector (e.g. linkages to commercial sector and government)

Moreover, apparently a wave of innovations and new products have started to provide risk management
mechanisms to the poor linking commercial insurers with community based organisations, aid agencies and
research institutes.

Lessons from microinsurance in the agriculture and health sectors

2.1.5 Health microinsurance

Health insurance is a risk-transfer mechanism under which the insurer assumes a certain risk on behalf of
the insured in exchange for a premium. The premiums are paid in advance in return for compensation paid
retrospectively if an insured event occurs (Radermacher et al, 2006).
Research shows that health microinsurance can increase access to health care services and can offer
financial support to poor people. Financial costs of illness can leave households in debt and poverty. About
40 mio people worldwide have some form of health microinsurance. In the developing world India is
cutting-edge.

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According to Tidikis (2004) a well-designed health microinsurance product is defined as satisfying when
three main conditions are met:
The price of the premium should not be so expensive that it requires individuals to sell off other
assets in order to acquire this one.

The coverage of the service must be comprehensive enough to address those issues that arise and
to encourage clients to seek medical care early, rather than late in the process.

Payments should be structured in a way that does not make it difficult for clients to meet
them.

How does it work?

Tidikis (2004) gives a short summary of the four main models emerged in the field of microinsurance:

Partner-agent model
Community based model
Full service model
Provider model

The partner-agent model

is a system with two actors. The insurer provides the financing and skills to create a health care system,
while taking on the risks. In exchange, the partner provides the delivery of the product and the service to
individuals and households. Thus the partners are able to reduce the costs of the insurer by using their
extensive network to generate sales and disseminate information.

The community based model

is owned and managed by the individuals who use the plan. A committee of elected managers is
responsible for negotiating the provision of products and services with external health-care providers.
These same managers continue to oversee all aspects of the interactions between the external providers
and their members. This means that they collect the premiums, review the claims, manage the accounts,
and evaluate the risks. A disadvantage of this system is that it requires an extensive level of knowledge for
what is essentially a voluntary position.

The full service model

is a system with a single entity being responsible for all aspects of the product. The insurer accepts all risks
and receives any profits. It also designs the product and provides the staff for sales, develops the marketing
plan, provides customer services and reviews claims for validity. In order to achieve all of these objectives
the insurer must have a knowledgeable staff and be able to maintain the appropriate financial controls to
avoid problems such as insolvency.

The provider model

is characterized by a health care provider that offers a range of care to individuals or groups through
insurance policies. Care is generally limited by the services that the provider is capable of offering;
however, implementation is relatively straightforward since by paying a fixed amount, clients are then able
to access services whenever they are needed during a defined period of coverage. The provider is
responsible for establishing pricing and evaluating risk, which it then assumes.

In discussion
There is no consensus in the research community which of these models will prove to be the most effective
for providing health care services to the worlds poor. The major challenge of health insurance is apparently
its financial viability. Many health microinsurance programs, particularly under the community model, still
14
require donor support and cannot meet their operational expenses and transaction costs from premiums.
Further the understanding of risk pooling is hardly available among clients. Paying before a health problem
arises is a concept which is difficult to adopt. Behavior change and client education are major hurdles.
Apparently, micro health insurance products are chosen most by socially innovative groups in a society and
not explicitly by the poorest people (Hoffmann-Kuehnel, 2011).

2.1.6 Weather index insurance

In the agricultural sector there had been attempts in crop insurance. High transaction costs, moral hazard,
and adverse selection have undermined these approaches. Innovations shift from insuring crop losses to
insuring against bad weather incidents through index-based insurance (Carter, et al., 2007; Skees, et al.,
2004). Farmers cannot influence the weather thus moral hazard and adverse selection disappears in this
insurance type.

How does that work?

Weather index insurance provides protection against the impact of weather perils to a particular crop or
livestock. By modeling the threshold values at which production losses are expected to arise are defined.
Weather index insurance is provided against the defined adverse climatic conditions in a given area rather
than assessing the farm-based actual production losses of each and every farmer. A farmer could be paid,
whenever rainfall or temperature is so high or so low that it is likely to reduce crop yields. Other weather
related risk could be droughts, frost, or high humidity.
Claim payments to policyholders are based on weather-index parameters predefined in the insurance
contract. The recorded data on actual weather from weather stations determines the payment trigger.
Farm visits to check eventual losses are not necessary and therefore administrative costs for insurers are
lowered (Rockefeller Foundation, n.a.).

Karlan (2010) describes an example of a rainfall index insurance provided to farmers in Andhra Pradesh,
India.

Key elements of the insurance contract are:

Cropping season is divided into three parts, roughly corresponding to sowing, flowering, and
harvest phases.

Farmers can purchase separate contracts for each phase.

The risk in the early phases is that rainfall will be insufficient, so, in this example, the contract pays
nothing if rainfall exceeds 70 mm.

If accumulated rainfall is less than 70 mm, the policy pays 10 rupees for each millimeter of rainfall
below the cutoff, paying out a fixed amount (1000 rupees) when the season is extremely dry.

In the harvest phase, problems emerge when rainfall is excessive, so the policy reverses itself; it
pays out when rainfall exceeds 70 mm and pays nothing below the threshold.

A policy covering all three phases is inexpensive enough to be accessible to low-income farmers
(coverage costs 200-300 rupees or US$5-6).

In discussion
A risk related to weather index insurance is the potential mismatch between the index-triggered payouts
and the actual losses suffered by the policyholder. In an index contract it is possible for policyholders to
receive a payout even when they have suffered no losses, and conversely, policyholders may not receive

15
payout when they have suffered a loss. An example: A farmer with rainfall holding insurance could lose his
crop to drought and not receive an indemnity if the drought is not recorded at the reference weather
station because the microclimate of the farm land does not reflect the climate at the weather station (IFAD,
2010).

Experience with microinsurance in the watsan sector

Insurance coverage in developing countries is still low. So far, only a limited type of microinsurance is
available. Most widely known is health microinsurance, life microinsurance, crop and livestock
microinsurance and funeral microinsurance. Based on literature review and interviews the author found
only two types of microinsurance which are linked to the water and sanitation sector, both health
microinsurance products. Furthermore, the author found a water and sanitation microinsurance project
which is in its very initial planning stages. Unfortunately the involved organisation was not able to share
detailed information yet. The author did not find any microinsurance product specifically targeting the risk
of water and infrastructure destruction due to disasters.

2.1.7 Water and sanitation microinsurance, Central African Republic

Mercy Corps works on a microinsurance initiative which apparently focuses on the same problem what
WFP made to initiate this scoping study the problem of sustainability of water and sanitation
interventions.
Mercy Corps currently carries out research to assess the potential of microinsurance as a component
around water programming in the Central African Republic. The project aims at increasing the sustainability
of water and sanitation interventions initiated by Mercy Corps in the Central African Republic. The NGO is
currently undertaking feasibility studies in this regard.

Assessment: So far, it is not possible to get more detailed information about the case and an assessment is
too early. Mercy Corps indicated to be in a better position to inform about the progress of this
microinsurance project after finalization of the feasibility studies.

2.1.8 FINISH Project, India

The Financial Inclusion Improves Sanitation and Health (FINISH) program started in 2009. TATAAIG, one of
the largest private sector insurers in India, together with the Dutch NGO WASTE identified a joint
approach to increase the sanitation coverage by the design of sanitation sensitive health microinsurance
products. The products are developed based on existing demand for health insurance. Health insurance
premiums are offered at a lower cost when clients acquire and use improved sanitations systems promoted
by microloans. The intention is to link the improvement of sanitation conditions with financial incentives,
e.g. lower premiums and microloans. At the same time health insurance offers the target groups an
additional risk management mechanism (financial inclusion). The objective of this initiative is to achieve
improved sanitation for 1,000,000 households.
The innovation of this program is to link microcredit with microinsurance. Further, micro-finance
institutions will be stimulated to develop sanitation loan products using the World Bank developed Output
Based Aid (OBA) model, whereby small subsidies will be paid to microfinance institutions on the basis of
them reaching agreed upon targets.
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 Figure 2, Flow of finances for the FINISH project (Mark, 2010).

Assessment: The FINISH program is in implementation stage. It is too early to make a solid evaluation of its
effectiveness. The United Nations University in Maastricht is in charge of the impact assessment of this
intervention. The research is based on indicators to monitor the effects and impacts of sanitation
interventions. Results will be available in 2012. Nevertheless, the author found some early-on opinion on
the way of implementation of the initiative, but cannot back the findings by additional sources of
information. The information is based on research carried out by a student for one of the local NGOs
partnering with the program (Park et al., 2010). The findings of this specific piece of research show that
FINISH is an innovative, but complex approach to sanitation. Its financial loop apparently is not understood
in the same fashion by all stakeholders involved in the project. Household borrowers seem to be not
educated enough about the product that they have signed. They are typically only informed about their
monthly payments and are not aware that they are paying an interest rate on loans which is between four
to seven times higher than the common bank rate of interest. While beneficiaries are aware of their
insurance plan, they are not aware that that TATA-AIG Life Insurance is mandatory in the program. None of
the beneficiaries have ever received financial advice about repaying their loan and remain largely financially
illiterate. Nevertheless, all beneficiaries have paid on time and there are no reports that premium holders
were unable to repay loans.
Park also suggests that beneficiaries should be informed about the Total Sanitation Campaign (TSC)
subsidies offered by the Indian Government and MFIs should seek to collaborate with the TSC authorities.
Beneficiaries should be aware of the financial composition proposed and its requirements (i.e. TATA-AIG
Life Insurance). Health education and sanitation awareness campaigns should be integrated into multiple
steps of the FINISH process. Further, clear delineation of the roles, responsibilities and expectations of all
actors involved in the FINISH project is necessary (Park et al., 2010).

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2.1.9 Cholera microinsurance, Haiti

A recent innovation in microinsurance related to waterborne disease is cholera microinsurance developed

by the Microinsurance Catastrophe Risk Organization (MiCRO). This company was co-founded by Mercy
Corps, the Haitian microfinance institution Fonkoze and global reinsurance company Swiss Re. The financial
model behind the insurance uses indicators of cholera such as rainfall to trigger insurance payout. MiCRO
will specifically target female entrepreneurs, whose families are particularly vulnerable to health and
economic shocks. Fonkoze will allow female clients who borrow from Fonkoze to get an amendment of
their loan contracts, compensating them through loan reductions and access to short-term financial
support if a member of the family is affected by cholera. This insurance aims at reducing the financial
impact on families after a shock. The development of this new product is in its initial stages.
Swiss Re has started with the design of the cholera product. In spring 2012 a pilot test will take place with
existing Fonkoze women borrowers. Mercy Corps will work with Fonkoze to develop distribution channels
and promote insurance education of the cholera policy pilot test.

Assessment: It is too premature to assess this new insurance product. However, it is evident that the
insurance aims at increasing the payback of microcredit taken from Fonkonze. It is not offered as an
independent product, but only available linked to a microloan finance product. It is not clear to the author
why it prioritizes women. It is also not clear, how to enable the policyholder to prove that a family member
suffers exactly from cholera and not from any other water related disease. Laboratories that can detect
cholera bacteria are probably not always easily accessible. Providing protection specifically against cholera
accommodates the fact that an infection with cholera bacteria is very serious and life-threatening
compared to less severe fecal-oral infections very common in developing countries.

Lessons from other strategies to finance and sustain water & sanitation services

This chapter gives an example of a community-led disaster management mechanism to protect water
systems in Bangladesh as prevention measure. Further, it explains two examples of microfinance
instruments in use to cover investments for water and sanitation services.

2.1.10 Non-financial stratgy

Disaster resilient water supply, Bangladesh

A successful example of a community-led disaster preparedness strategy is located in Bangladesh. Saline

ponds were rehabilitated after a tide and further prepared against future flooding risk by the local
community. Saline water was bailed out, the embankment was raised with a wall, a fence was installed to
limit potential contamination, the pond sand filter was renovated and a users committee and a caretaker
was elected. Further, a low-cost latrine was made nearby the water point. Ponds provide safe water even
after floods and are expertly operated and maintained. The Union Parishad (Union Council) has replicated
this good practice for 169 ponds within its jurisdiction. The strengths of the project are that was run by a
collective decision of the communities with oversight provided by the local government. The banks of the
ponds are durable and above the maximum height of salt water tidal surges. Income generation is from
user charges and the produce grown on the perimeter fence (Ellery, 2011).

18
2.1.11 Financial strategy

Microfinance

Microfinance is in use in the sector to provide seed money for the setup of water and sanitation systems.
Its not an instrument to cover operational costs. It also does not seem to be an appropriate instrument to
increase sustainability of systems generally. Nevertheless, two common examples revolving funds and
microcredit are explained shortly in this sub chapter to understand its mode of application in the water
and sanitation sector.

Revolving funds

Revolving funds are a form of community loan. Initial seed money is lent from a body. Once the loan is
repaid, the money is lent to other groups. Revolving funds are often funded by NGOs and often do not
charge interest. A community that takes a loan needs to set up a committee to manage the fund (Box, 1).
Simavi a Dutch NGO is known for promoting revolving funds (NWP, 2009).

Box, 1, Revolving fund for improved sanitation

In Tanzania UFUNDIKO a small NGO provided revolving funds to make households able to
finance improved latrines. The fund was adapted to the local needs and the clients payment
capacities. 15.000 Euro was shared by 10 villages. After two and a half years more than 790
latrines had been built and more than 1000 additional latrines were under construction.

In urban slums water and sanitation services are usually delivered by middle men who set
up water houses. In the water house slum dwellers can buy water, they can use a toilet
and can take a shower. The pay back of the investments in a water house is incredibly
Requirements:
quickly. It is estimated that within only two to three months a middle man would get full pay
The committeeback should keep
of his the money
investments forina awater
safe house.
place such as ainvestor
But the bank account with a local bank.
Borrowers need to be trained in order to be aware of the costs & benefits of the loan.
Banks should be close to the community, otherwise operational costs may rise.
The size of the loan should fit to the economic conditions of the borrowers and should be designed
flexibly to consider crop cycles and income cycles.
The sustainability of water and sanitation facilities should not only depend on the revolving fund.
Cost reflective water tariffs will be needed to recover costs for O&M (NWP, 2009).

Microcredit

Microcredit is a financial instrument that provides small loans to low-income persons. It is an instrument
for individuals. Various institutions can provide microcredit ranging from community-based organisations
to NGOs or other microfinance institutions. Microcredit is given based on the analysis of the clients income
and affordability. Interest rates vary. Microcredit has been used very little for financing water and
sanitation at scale. Communities may hesitate to get into debt to invest in water and sanitation. They often
assume such investments to be carried out by authorities. However, at the individual level microcredit may
be taken by manufacturers of products, service providers or water consumers. Entrepreneurs producing
19
water technology may require investment capital, service providers need capital for up-front investment
and consumers may buy individual water or sanitation facilities, such as latrines or pumps (NWP, 2009).

Requirements:

Combining microcredit schemes can help to build entrepreneurial skills for water and sanitation
product development.
Microcredit shall only be provided based on sound analysis of the income of the client. Debt must
be repaid. Consumer education is of high importance (NWP, 2009).

Too high interest rates of microfinance raise the price for water and sanitation improvements by the factor
of the interest. This should be taken into consideration when thinking about the option of microfinance for
water and sanitation systems. The microfinance crisis in Andhra Pradesh, 2010, exposed examples of
profiteering and of unsound practices in the microfinance market (Mader, 2011).

Lessons from risk management mechanisms in the watsan sector in industrialized

countries

2.1.12 Risk exposure

In industrialized countries risk management systems are an integral part of the operation of water utilities.
Service providers face a range of internally and externally driven risks. They are related to finance, strategy,
operation and hazards. In a survey the insurance provider Marsh compared the effectiveness of the risk
management of seventeen water utilities of five regions including Australia (7), USA (3), Colombia (2),
Europe (1) and the UK (4). The author identified a water industry risk radar (Fig. 4) (Marsh, 2008). The risk
radar diagnosed the failure of water assets and contamination of water supplies to be the top two risks
followed by water availability. Climate change linked risks such as droughts causing diminishing water
supplies and natural disasters increasingly challenge the maintaining of high quality water services. The
most common risk management activities of the analysed utilities cover crisis and emergency management,
business continuity planning, risk profiling and review of risk and compliance systems. Climate change
adaptation projects play a growing role across all regions. Some risks can be handled by a service provider
itself and need appropriate risk management. Some risks happen less frequently or have an extreme
impact on water services and can therefore not handled by a service provider itself. Often then insurance is
chosen as financial risk management mechanism.

20
 Figure 3, Water industry risk radar, Marsh (2008).

2.1.13 Insurance

Utilities manage their risks through insurance broking and risk advisory firms. The exposure of water
industry to a wide range of risks requires adequate insurance. The following table (Tab. 2) gives an
overview of various insurance instruments as response measure to certain risk exposures.

Table 2, Overview of insurance instruments and risk exposures (Marsh, 2008, modified)

Risk exposures Share among utilities in %

Underground pipelines 20
Dams 43
Water 15
Machinery breakdown 57
Accidental contamination 40
Environmental exposure 40

Figure 4, compares water utilities by their insurance coverage. The benchmarks related to major classes of
insurance were synthesized. Public & products liability insurance has with 34 percent the greatest share
among service providers, followed by 21 percent for industrial special risk insurance. Contract works
insurance and workers compensation range in middle with 13 percent and 11 percent. Motor vehicle
insurance, directors & officers liability and fidelity insurance play a minor role with 7 percent, 6 percent and
3 percent only.

21
Figure 4, Global premiums split by class
of insurance (Marsh, 2008).

2.1.14 Risk management

Risk management is part of organizational management. Its a business tool that considers hazards which
can threaten vulnerable elements of a system, assess risks and consequences, and develop risk
management actions, including mitigation, response and recovery.

Hazard identification
Typical hazards of concern to infrastructure are natural disaster, human threads and accidents or
unexpected events Fig. 5 (Grigg, 2000).

22
 Figure 5, Hazards for water utilities

Vulnerability assessment
Grigg (2000) categorizes six steps of vulnerability assessment in the following actions:

Identification of system components requires an inventory with maps, condition inspections, and
data for operations and maintenance scenarios, including emergency actions.
Quantifying the magnitude of anticipated disasters determines the scale and magnitude of each
potential disaster or contingency.
Estimating the effects of each anticipated disaster on each component of the system involves
disaggregation of the system to assess the effects of each disaster type on each component.
Estimating water demand during and after the disaster for all purposes is an extension to normal
water demand estimating procedures.
Determining the capability of the water supply system to meet demands during emergencies
requires modeling and analysis to match demands and supplies during the emergency.
Finally, identifying critical components that cause failure during emergencies is the result of the
vulnerability analysis and pinpoints the components that need strengthening.

Emergency planning
Mitigation, preparation, response, and recovery are the four stages of emergency management. The
following table (Tab. 3) by Griggs (2000) links these steps to water services.

23
Table 3, Steps in emergency planning (Griggs, 2000)

Mitigation Disasterproofing activities which eliminate or reduce the probability of a

disaster. Includes long-term activities to reduce effects of unavoidable
disasters. In the case of water supply, mitigation includes reliable and flexible
supply systems, cooperative plans for watersharing and interconnections,
preparing to conserve, alternative treatment, and removing highrisk
components.
Preparedness Necessary to extent that mitigation measures cannot prevent damages.
Governments, organizations, and individuals develop plans to save lives,
minimize damage and enhance response operations. Requires standby
equipment and arrangements for mutual assistance. Critical facilities should
have water reserves.
Response Follows an emergency or disaster. Designed to provide emergency assistance
for casualties, reduce probability of secondary damage and speed recovery
operations. Command and control during an emergency are critical. Requires
effective control through decisive actions based on accurate information, with
established chain of command, effective decision support, and trained
participants who understand chain of command and coordination
requirements.
Recovery Continues until systems return to normal or better. Short-term recovery
returns vital life-support systems to minimum operating standards. Long-
term recovery may continue for a number of years after a disaster.

2.1.15 Trends in risk management in industrialized versus low-income countries

Marshs global survey reveals that risk management and particularly risk profiling increases
maturity among utilities based in industrialized countries. Insurance is a major risk management
instrument which is used to prepare for risk exposures linked to water industry services.

There is no doubt that risk management is required for disaster management for water utilities. It is
therefore an integral part of organisational management of service providers in industrialized
countries. However, in developing countries water service providers often cannot draw on formal
emergency guidelines provided by institutions or regulators. Day to day water service provision is
often carried out under circumstances which regularly have to cope with crisis (Franceys, 2011).

From the Indian water sector the author knows that public water utilities adopt not full coverage
against all typical hazards. Common is insurance against breakdown through fire, flooding, accident
etc., but not for destruction or contamination as premiums are high as well as utilities do not
maintain proper asset registers to claim the replacement value of assets (Jalakam, 2011).

24
3 Methodology

Research Approach

The topic of the study links the microfinance instrument microinsurance to the water and sanitation
sector. The author approached this topic in two ways, by literature review and by interviews. As the topic is
rather innovative by its nature an explorative methodology was used.

3.1.1 Interview strategy

The author developed two separate guidelines for the interviews with water and sanitation experts and
(micro) insurance experts. The following table (Tab. 4) gives an overview of areas which the author
intended to cover by semi-structured telephone interviews. Beyond the developed guidelines the author
was interested to gather any additional information which was likely to contribute to the research
questions.

Table 4, Overview of guiding aspects

Water and sanitation experts (Micro)insurance experts

Awareness about microinsurance Types of microinsurance products

Ex ante disaster strategies Success factors and restraining factors of

microinsurance products

Ex post disaster strategies Barriers/incentives for insurance adoption

Financial risk management mechanisms Roadmap of microinsurance product development

Role of stakeholders in disaster management Education and empowerment of communities

Barriers/incentives for insurance adoption Policies and regulations for microinsurance

Target groups for insurance Business case for water and sanitation
microinsurance

Potential linkages of water and sanitation to other Scope to integrate water and sanitation in existing
insurance products microinsurance products

Any additional information Any additional information

25
3.1.2 Sampling & Stratification

For the interviews a judgment sampling technique was applied. The author decided to select interviewees
by purpose. This approach ensured to work with a most productive sample (Marshall, 1996). The research
topic refers to two main thematic areas, microinsurance as financial instrument for the poor and the
sustainability of water and sanitation services in developing countries. In order to ensure rich informants
providing insight in both thematic areas, two different study groups for qualitative interviews were
selected; microinsurance and insurance experts as well as water and sanitation experts.
The author aimed to fulfill certain criteria of stratification in the study groups (Tab. 5). Interviewees of both
groups should include experts at senior and mid-career level and should work for a range of different
employers in the development sector and insurance sector, such as NGOs, United Nations, bilateral aid
agencies, university institutes, insurance companies, microinsurance organizations and private
consultancies. The objective was also to identify interviewees possessing work experience in developing
countries in Latin America, Asia and Africa, regions where WFP is active.

Table 5, Sampling criteria for study groups

Sampling criteria for study groups

Thematic research areas
Study groups
Stratification by career level
Stratification by employers
Stratification by country
work experience
Microinsurance Water & sanitation management
Microinsurance and insurance Water and sanitation experts
experts
Mid- level and senior-level
NGOs, United Nations, institutes, microinsurance organizations and private
consultancies
Developing countries in Latin America, Asia and Africa

3.1.3 Methodology assessment

The study framework had certain limitations. The nature of the desk study could not analyze perceptions
about microinsurance of communities living in developing countries. The author recognizes that the input
of communities would have been highly valuable for research however fieldwork in a developing country
was not part of the scoping study.

26
4 Results
This chapter integrates findings of the literature review and findings from the interviews.

Awareness of microinsurance

The interviews with water and sanitation specialists revealed that the majority of interviewees had already
heard about microinsurance in the development context (six out of seven interviewed persons). The
interviewees have come across livestock, crop microinsurance in the agricultural sector and disaster
microinsurance and health microinsurance. No expert has ever heard about the implementation of
microinsurance in the water and sanitation sector so far. Though, the concept of microinsurance seems to
be completely new in the sector, many experts showed a general interest of its potential benefits.

Financial and non-financial strategies ex ante and ex post disasters

Current financial strategies among communities have to be differentiated between disaster funds provided
by governments and community based strategies. Interviewees quoted examples from India, Bangladesh
and Honduras.

4.1.1 Government funding

Ex post disaster

In India the district governments have access to a disaster fund. In case of a natural disaster e.g. a landslide
they can quickly mobilize labor and materials in order to respond to the event, including the repair of water
or wastewater infrastructure. At the national level there is also a funding mechanism for disaster recovery
in case of extreme events e.g. huge floods hitting states like Bihar or West Bengal on a regular basis. The
effectiveness of the local level fund seems pretty high. The effectiveness at national level is not clear as
there apparently is no coherent strategy how to use it.

Ex ante disaster

In Bangladesh the local governments provide funds for disaster preparedness measures at community
level. In the water and sanitation context the funds can be accessed to build disaster proof water and
sanitation infrastructure.

27
4.1.2 Community saving

An interviewee described his experience in Honduras in 1998 during the aftermath of hurricane Mitch. The
hurricane destroyed or damaged about one third of the rural piped water gravity schemes. In communities
that had well managed water committees modest savings had built up on the accounts for the O&M of
water supply systems. Communities could draw immediately on these resources and started undertaking
repairs. The majority of water schemes was severely damaged and could not be rehabilitated by the
financial means of the local people. Many relief agencies provided assistance to rebuild water schemes.

4.1.3 Disaster preparedness strategies

The discussions with water and sanitation experts made clear that the poorest of the poor are not able to
invest in disaster preparedness strategies. Self-preparedness is only possible with rising financial resources.
An interesting example in Bangladesh shows the replication of good practice in disaster resilience and
disaster proofing in order to sustain local water supply schemes. Bangladesh regularly faces cyclones and
tidal surges in the coastal area. Hence, local communities come together and build disaster resilient ponds,
canals and low cost rainwater harvesting systems. These initiatives are usually funded through cash for
work programs of the government (Box. 2).

Challenges of microinsurance implementation

4.1.4 Priority of risks

The development of a microinsurance product should be based on an initial needs assessment at

community level. Best practice shows that communities know themselves best what type of risks they face
and what risks go beyond their own risk management strategies. Interviewees endorsed the fact that
clients would need to see clear benefits in an insurance product that would respond to the clients risk
priorities. A major failure in microinsurance programs can be due to wrong risk mapping. Microinsurance
products that are not tailor-made to the needs of a target group or products that do not cover priority risks
are typical examples of failed approaches.

In the water and sanitation context:

In a disaster event a household may not think that the destruction of a latrine is a priority risk, but rather
the demolition of a shelter or business. Hence the reconstruction of a latrine may not be the first choice
after a disaster event.

4.1.5 Insurance education

Interviews with microinsurance specialists and literature review shows that often potential target groups
for insurance do not have any insurance education. The concept of insurance is not known to them. Hence,
people may not be willing to adopt insurance even if it seems to be appropriate. Also there exist many
28
examples that due to the lack of financial literacy and understanding of insurance policy people may sign a
policy not knowing what it provides to them. They may not be aware about its benefits or pitfalls. In India
life insurance is a very common insurance. The policyholder expects a savings amount based on the
premium paid over a certain time period. NGOs that offer products other than life insurance have realized
that communities have the perception that insurance is generally a savings product. Target groups are
often not aware of other insurance products linking payout to a certain risk event. This creates the problem
that a person may assume getting payouts even without at risk event happening in the future.

4.1.6 Trust

In the interviews the values of trust and transparency were mentioned as critical prerequisites for the
adoption of insurance. Lack of trust is a major reason for rejection of insurance products. Research on risk
management by Mosely et al. in Uganda and Zimbabwe (2003) shows that the development of trust
appeared to be favored by charismatic leadership, capable institutions providing insurance and most of all,
satisfactory performance in relation to what was expected. Demonstrated loyalty and better-than-expected
performance strengthen the development of trust. Evidence of exploitation and under-performance
undermine the development of trust. Hence, insurance requires effective customer protection against
misinformation and fraud.

In the water and sanitation context:

Billing collection for water services is often linked to a trust deficit with water users. Consumers doubt the
effective use of water fees and are not motivated to pay tariffs as long as they do not see a transparent
management of financial resources. This trust deficit may create a negative attitude towards insurance for
water and sanitation facilities.

4.1.7 Ability and willingness to pay

The economic theory of value, if something is worth having, then it is worth paying for is not easily
transferable to the context of the poor. Even if people understand the value of insurance, it does not
implicate that they are able to pay. Not many studies about the ability and willingness to pay for
microinsurance in developing countries are found in the literature. However, the interviewed water and
sanitation experts assumed affordability a major constraint for microinsurance for the poor. The
microinsurance specialists indicated that ability and willingness to pay is a major constraint in the area of
microinsurance. Apparently, community-based models involving the client in the benefit design process,
learn more about clients needs, ability and willingness to pay. The insurance product in this model is likely
to respond more directly to the clients needs and may even increase their willingness to pay (Cohen, M. &
Sebstad, J., 2006 in MI compendium).
In Brazil Carvalho (n.a.) examined the willingness to pay for life microinsurance by studying the
characteristics of households. He found out that gender and age played a role in willingness to pay. Female
householders were willing to pay more for the insurance policy than male householders and older
householders were more willing to pay for insurance. The location of the household in the city and the
presence of children under 5 years had also an impact on the willingness to pay. However, financial
background, education and occupation could not explain willingness to pay in his analysis. It is likely that

29
with increasing confidence in insurance, expanding insurance culture and premium payments adjusted to
the cash flow of low-income households willingness to pay might increase (Cohen, M. et al., 2006).

In the water and sanitation context:

A key research topic in the water and sanitation sector is sustainable financing of services. Effectively
community-managed financing mechanisms are rarely found in developing countries. Revenue collection
should be invested in rehabilitation, upgrading and O&M of water and waste water systems. However, cost
recovery is difficult to achieve, particularly in rural environments. Another key issue is ability and
willingness to pay of water consumers for the costs of water service delivery. Very poor communities
cannot afford to pay for water. In cases where water committees are able to generate revenues, these may
cover O&M costs, but capital costs for building infrastructure or indirect costs for capacity building are
hardly financed by water fees (Harvey, 2007). The interviews held revealed that when considering
insurance as a risk management mechanism to increase sustainability of water and sanitation services one
needs to be aware about the existing challenges with collection efficiency and limitations of cost recovery
of services. In the urban environment the idea of insurance for well-functioning water and sanitation
services may have become mature enough, in the rural areas affordability is seen as a major constraint.
It is rather questionable if a water user in the rural context, either not able or not willing to pay a water
tariff paid, an extra charge for insurance of the system on top.

4.1.8 Targeting of microinsurance

In the interviews the author was asked if microinsurance really targets the poor. And some interviewed
persons doubted that microinsurance could be a poor-inclusive financial mechanism. This is a difficult
question to answer. The dilemma is trying to create a financially viable product and keeping it affordable to
the poor. There are many examples of insurance that focuses on higher-income clients and excludes poor
women (Ameh et al., 2006). One way to respond to this gender issue is to offer lower premiums to poorer
clients. In the context of access to water and sanitation services the question of who pays how much? is a
similar question of equity. The concept of social water and waste water tariffs is an instrument to provide
poor-inclusive services and is widely known in the water sector. One idea is that certain households with
lower-income have to pay reduced charges. Another variant refers to increasing block tariffs. The first block
of basic water use is charged less than that of higher amount of water use (WWF-UK, 2007).
Jacquier et. al (2006) writes on the point when describing the problem: Stand-alone, self-financed
microinsurance schemes have major limitations on their ability to be sustainable and efficient social
protection mechanisms capable of reaching large segments of the excluded populations. He proposes to
include microinsurance in national social protection strategies to achieve more coherent, efficient and
equitable social protection systems.

4.1.9 Moral hazard

Moral hazard is a serious problem in the context of insurance. Mosely (2009) defines moral hazard as:

The tendency for the existence of insurance to create perverse incentives

to claim spuriously and behave carelessly, causing resource costs which
may wipe out the benefits of insurance.

30
He described the case of a series of state-financed agricultural insurance schemes that were not financially
viable in the United States, India, the Philippines, Brazil and Mexico. Mostly these schemes operated under
losses because the insurance against failed yields provoked moral hazard and deficient husbandry. As an
example a farmer could neglect the care of an insured goat because it is insured, thereby increasing the
chance it will die of disease and hence increasing the chance for an insurance payout (Microinsurance
network lexicon, 2011).
Index based drought insurance provides defense against moral hazard as payouts are directly linked to
certain rainfall levels. Once the rainfall is below a defined rainfall trigger level payout occurs.
Risks that the insured cannot influence and peer monitoring of claims can be a tool preventing moral
hazard. Apparently opportunistic consumer behavior such as fraud or moral hazard is less likely with low-
income customers. There is some evidence from the insurance market that moral hazard risk increases with
income (Mosely, 2009).

In the water and sanitation context:

Insurance may be counterproductive in the case of the earlier mentioned successful disaster preparedness
strategy used by communities in Bangladesh to build disaster resilient ponds. The interviewee gave cause
of concern and said when an insurer pays out once a flood inundates a community pond, there is no
incentive for the community to increase the embankment or to use any other protection measures against
floods. The insurance payout rather creates a negative incentive and may cause moral hazard.

4.1.10 Pricing

In the interviews pricing was often described as one of the key issues when developing an insurance
product. It needs to reflect cost acquisition and product delivery. Attracting the poor is a matter of keeping
the cost of insurance sufficiently low. Accurate costing analysis is the only way to determine policies at the
right price (Roth et al., 2005). Raising premiums is more difficult than lowering premiums. Premiums
subsidized by donors may be attractive for an insurer in the short term, but they may mask the market
viability of insurance.

In the water and sanitation context:

The author refers here to the paragraphs about trust, ability and willingness to pay

31
5 Discussion

Pros & cons of microinsurance in water and sanitation

No case for standalone product

Based on the interviews and the literature review microinsurance seems not recommendable as a
standalone product for sustaining water and sanitation services for low income population in developing
countries. Major reasons are the following:

Water and sanitation may not rank as first priority risk among communities
There is a lack of data about potential demand
Ability and willingness to pay is questionable due to general service financing constraints
It seems not financially viable

Options to link with other insurance products

Although a standalone microinsurance product may not be applicable, further studies could analyze the
potential of water and sanitation microinsurance when it is linked to health microinsurance or disaster
microinsurance.

5.1.1 Health microinsurance

Linkages between the insurance of water and sanitation and health seem to be an option to develop
further. Health microinsurance is one of the microinsurance products most widely in demand. The example
of sanitation sensitive health microinsurance was considered as an interesting idea by the majority of the
interviewed water and sanitation specialists. Some interviewees considered the incentive of lowering
health premiums as an interesting one and some can imagine that there would be a market for up scaling.
One interviewee raised concerns about the viability of the business model from the insurers and the
insured perspective. The person argues that the construction and use of a toilet in a house might be
desirable, but the source of infection would be not mainly through facilities in the own house but rather
through infection risks in the public. Assuming the neighbors excreta flowing past a policyholders house,
the insurance would be not a real health benefit. The key concern here is the use of the facility and the
dissemination in the entire community. If a beneficiary does not live in an open defecation free (ODF)
environment, a sanitation sensitive health insurance would not be a real benefit. From the insurance
companys side the business model may be questionable in a community where open defecation is
practiced even after the construction of sanitation facilities. Then investments were made to promote the
construction of sanitation facilities and also payments would need to be made in case of illness.

32
The key issue here seems to be the dissemination, awareness and toilet use factor. When an entire
community uses a sanitation sensitive health insurance and has an ODF practice, the sanitation sensitive
health insurance may be an interesting option. It would be necessary to assess the type of insurance model
if it is promoted at single household or at community level. Furthermore, sanitation sensitive health
insurance should go hand in hand with existing TSCs in developing countries. Therefore, the author
suggests two ways to think further. Firstly, to examine the impact assessments currently underway of the
Indian sanitation sensitive health insurance business case and secondly to reflect on the circumstances and
conditions under which a sanitation sensitive health insurance may be an effective financial risk
management mechanism.

5.1.2 Disaster and climate change microinsurance

Over the last years there has been a growing interest among the scientific community, private insurers, re-
insurers and aid agencies in disaster risk or climate change insurance (Hochrainer et al., 2009; Ward et al.,
2008; Mills, 2008). A range of partnerships have been created in this regard between the insurance industry
and development agencies or research institutes e.g. The Munich Climate Insurance Initiative which brings
together Munich Re, the United Nations University, climate experts and independent organisations or the
recently created cooperation agreement between USAID and Swiss Re. these new types of insurance
represent a new class of risk. They are usually delivered in composite packages which can combine
insurance of several risks together e.g. insurance of health risks with life, asset, livestock or other risks. In
this framework the integration of risk related to the loss or damage to water and sanitation services may be
possible and should be further researched. Climate change and natural disasters can pose a considerable
risk for water and sanitation infrastructure and the outbreak of water related disease in the aftermath of a
shock. This could be related to vector borne disease due to water logging or fecal oral disease due to
unhygienic defecation practices or damage of sewer networks. The question will be how to link the risk
priority of the user and creating benefits for sustainable water and sanitation services.
The next figure gives a reference of priority needs of communities after a disaster. It shows a word graphic
of mostly used words in SMS messages sent to the Ushaidi risk mapping platform after the earthquake in
Haiti within the first two weeks (Meier, 2011). The bigger the word, the more often it was used in the SMS
messages. Very clearly can be seen the word water which comes after the general word help and food.
It was not possible for the author to identify a word for sanitation such as toilet or latrine. It would be
interesting to find out, why this is the case. It shows that water is definitely a priority need of people after a
disaster.

33
 Figure 6, Words in SMS messages sent to the Ushaidi risk mapper after

the earthquake in Haiti (Meier, 2011).

Strengthening mutual safety nets

Insurance is mostly seen as a financial instrument. Interview response revealed that in the UK water utilities
sign mutual help agreements to prepare for disaster events (UK Water, 2011). The Mutual Aid Scheme
allows water service providers to request assistance from other water companies in case of a low key
event, a major event or an emergency. The assistance ranges from the provision of bottled water supplies,
tankers, equipment or specialist staff. The author considers this idea of a sectoral self-insurance as an
interesting case with scope for replication and adaptation to the developing country context. In developing
countries major shocks to water and waste water services are difficult to tackle for utilities in the urban
environment, small towns and community water supply systems in rural areas. Bigger utilities may draw
from experience made in the UK and adjust it to the specific country needs. Townsend (1994) finds that risk
sharing, while not perfect, is quite good. But data proving evidence of regional risk-sharing are inconclusive.
Communities could think about pooling risks and local mutual support arrangements. Cross learning
initiatives about contingency planning, disaster preparedness strategies and financial risk management may
help to prepare better against major shocks undermining water and sanitation services in developing
countries. This refers also to the need to increase investments for capacity building in the water and
sanitation sector in developing countries.

Microinsurance case for slums

In the interviews a water specialist contemplated an innovative idea for a business case of a water and
sanitation microinsurance product. Drawing on the experience of neglected water and sanitation services in
slums the interviewee described a problem which all slum dwellers have in common. Slum dwellers face
the constant risk of slum eviction and demolition of their house or business. Karlan et al. (2010) show how
realistic the risk of slum clearing in Bangladesh is. They describe a case of slum demolition undermining
research. Researchers studying slums had returned to their three original urban sample sites in Dhaka in

34
2005, five years after their several year-long surveys, and all three sites had been wholly or partly
destroyed.
Microinsurance on housing hence could help to manage this risk better. The interviewee explained the high
cash flows in urban slums, but little investments in slums. The slum infrastructure, be it roads, schools,
houses is of poor quality. Microinsurance in urban slums for property, a hand pump or a water house
(water kiosk) could incentivize investments. Box 2, explains the typical situation of water and sanitation
services in urban slums in Dhaka, Bangladesh.

Box, 2, Water and sanitation services situation in urban slums an example from
Dhaka, Bangladesh

In urban slums water and sanitation services are usually delivered by middle men who set
up water houses. In the water house slum dwellers can buy water, they can use a toilet
and can take a shower. The pay back of the investments in a water house is incredibly
quickly. It is estimated that within only two to three months a middle man would get full
pay back of his investments for a water house. But the investor has very limited
incentives to upgrade the system or to make the water house really safe because he
knows that the water house could be evicted. The middle men are afraid to lose their
investments. Therefore, usually the facilities are of poorest quality and unhygienic. If a
builder of a water house had an insurance against eviction, he could take the payout of
insurance in case of eviction and insurance may incentivize the builder to provide better
facilities in the first place.

The idea of microinsurance for facilities in slums is innovative. Migration from rural areas to Dhaka,
currently around 5000 slums (Ashraf, 2007) exist in the capital, shows how many people have to cope with
the risk of slum demolition and poor quality of infrastructure and services. Considering the general
expansion of megacities in developing countries and the projections of further growth the issue of slums
will carry on. A demand study among slums dwellers and service providers could bring the risk profile of
inhabitants to light. Based on the assessment of insurability of risks the potential of slum microinsurance
related to water and sanitation or other services could be examined.

35
6 Conclusion

This chapter concludes by giving answers to the research questions identified in chapter 1, paragraph 1.2.

What experience exists with microinsurance related to water and sanitation, or other sectors so
far?

The experience with microinsurance related to water and sanitation is so far very limited.
Mercy Corps apparently is in the initial planning stage to set up microinsurance to increase
sustainability of water and sanitation services in their program in the Central African Republic. It is
too early to assess the approach and product yet.

The idea to link sanitation with health microinsurance as it is currently implemented under the
FINISH project in India is an interesting approach. The project is currently under evaluation. The
evaluation results expected end of 2012 will inform about its potential for upscaling.

The design of a health insurance which specifically protects against the risk of cholera infection is in
its pilot phase in Haiti. It is questionable if this insurance is a viable product due to the difficulty to
diagnose the infection properly without accessible laboratory infrastructure. It seems only targeting
higher income people and not the very poor.

Health microinsurance is a product in a growing market. There are various types of delivery models
available combining different clients needs for different premiums and products. In the health
sector the experience with microinsurance is much bigger compared to other niche products
Achieving financial viability is the key challenge. It is questionable how small programs can meet
operational expenses and transaction costs without support by governments or donors.

Weather index insurance will become more important with the growing impact of climate change
on farmers. The exposure to droughts and floods and unexpected weather events will increase
based on current research of IPCC and others. The challenge will be how to keep the potential
mismatch between index-triggered payouts and the actual losses suffered by the policyholder low.

What are challenges of microinsurance implementation?

There are a variety of challenges when it comes to microinsurance implementation. Key messages to take
away:
Priority of risk
Is crucial to understand before any design of a microinsurance product is undertaken. Priority of risks of
potential target groups can only be understood through demand research.

Insurance education
Is important to educate customers about the concept of insurance. Target groups that are informed
and empowered can make better decisions to decide for or against insurance.
36
 Trust
Is often the key problem when it comes to insurance adoption. Paying premiums requires trust by the
policyholder in the insurance provider.

Ability and willingness to pay

Are key concerns when it comes to accessing water and sanitation services and there is always the
question how to provide pro-poor services. The same issues apply to microinsurance.

Targeting of microinsurance
Has limitations. Self-sustaining microinsurance schemes are hardly able to reach the poor who need
insurance most.

Moral hazard
Is a common problem in insurance. Smart insurance design may not create incentives to claim
unjustifiably.

Pricing
Is a challenge for water and sanitation services as well as insurance. The dilemma is how to create a
viable insurance product and how to keep it affordable for the people most in need.

How could a potential watsan microinsurance product framework look like?

The scoping study underlines that there does not seem to be a viable business case for a standalone
product for watsan microinsurance. Water and sanitation may not rank as a first priority risk in a
community and therefore the demand for watsan microinsurance may not be there. Due to the
current constraints of ability and willingness to pay for water in low-income communities it is
questionable if there is an ability and willingness to pay only for watsan microinsurance and thus its
financial viability is questionable too.

A standalone product may only be viable if a target group considers water and sanitation service
destruction as a priority risk. This could be only assessed through a detailed demand study in target
countries. Hence, the study findings cannot provide a watsan microinsurance product framework
without a detailed demand study.

The study reveals that watsan microinsurance could be part of slum microinsurance. Slum dwellers
constantly face the risk of slum eviction. There are high cash flows in urban slums, but low
investments. Infrastructure is generally of poor quality including water and sanitation facilities.
Microinsurance in urban slums for property, a hand pump or a water house (water kiosk) could
incentivize investments and therefore increase the sustainability of water and sanitation services. A
demand study among slums dwellers and service providers could bring the risk profile of
inhabitants to light and assess the potential of slum microinsurance related to water and sanitation
or other services.

37
Is there scope to integrate water & sanitation in existing microinsurance products?

Apparently there is scope to integrate water and sanitation in health microinsurance. The example
of sanitation sensitive health insurance is promising. A policyholder would pay lower health
insurance premium based on the construction of a sanitation facility in the house supported by a
microloan. This output based mechanism could create an incentive for target groups to improve
sanitation and receiving lower health insurance premium. Key concern is the way of
implementation. Health benefits will only be achieved when toilet facilities are used and
disseminated in an entire community. When a policyholder does not live in an ODF environment, a
sanitation sensitive health insurance will not be a benefit. The risk for infection with fecal oral
disease will not be lowered through a toilet in the policyholders house alone, but only when the
entire community lives hygienically. It will be important to examine the impact assessments
currently underway of the Indian sanitation sensitive health insurance business case and secondly
to reflect on the circumstances and conditions under which a sanitation sensitive health insurance
may be an effective financial risk management mechanism. Further, it needs to be examined if
good household water quality could be integrated apart from sanitation facilities to incentivize
health microinsurance.

Apparently there could be scope to integrate water and sanitation in climate change and disaster
insurance. There is no known case to the author which links water and sanitation with such a
product so far. But this new class of insurance is growing in developing countries. Disaster
insurance is usually based on composite packages combining several risks such as health risks with
life, asset or livestock. Risks related to water and sanitation could be considered as well. Apart from
the risk of mechanical damage to water and waste water infrastructure disasters can cause the
outbreak of water related disease due to water logging, unhygienic defecation practices or
contaminated drinking water sources. Hence, it may be useful to partner with organisations
working on climate change and disaster insurance. The NGO MIA in India does research on climate
change insurance and suitable combinations of insurance packages. It may be useful to contact
them (ref. Appendix).

What other appropriate risk management strategies than microinsurance are available?

Water and sanitation services may benefit from mutual safety nets in communities and thus may
increase their sustainability. Regional risk-sharing seems to be a promising approach although data
are inconclusive about its application in developing countries. In the UK water service providers
sign mutual help agreements to prepare for disaster events. Communities could think about
pooling risks and local mutual support arrangements. Cross learning initiatives about contingency
planning, disaster preparedness strategies and financial risk management may help to prepare
better against major shocks undermining water and sanitation services in developing countries.
This refers also to the need to increase investments for capacity building in the water and
sanitation sector in developing countries.

Community-led disaster preparedness strategies can increase the sustainability of water and
sanitation services. Examples from Bangladesh show that communities apply low technology to
protect their water sources against floods. This good practice of building disaster resilient ponds,

38
 canals and low cost rainwater harvesting systems has been replicated many times and may be a
model to adopt or modify in other communities or countries.

What can be learned from financial risk management mechanisms in the water sector in
industrialized countries?

Mutual aid agreements mentioned above may be applicable for water and sanitation services in
low-income regions. Utilities in the West usually have comprehensive risk management tools for
disasters. In developing countries regulators would need to provide formal emergency guidelines
and training capacities would need to be established. Lacking proper asset registers and high
insurance premiums make it difficult for utilities to benefit from insurance.

Is there potential for watsan microinsurance?

There is a need to make water and sanitation services more sustainable in developing countries.
Microinsurance is a risk management mechanism which has been in use already in some sectors
and there seems to be scope for its application in the water and sanitation sector as well. The
question will be how to define a successful business case. A standalone product does not seem to
be a viable option at large scale based on this scoping study. Water and sanitation service delivery
may benefit from slum microinsurance creating an incentive to provide better quality services in
slums. Furthermore, there may be potential to integrate watsan components in current
microinsurance types such as health microinsurance or climate change microinsurance. The critical
message of the study is that modes of implementation of microinsurance matter and thus decide
about failure or success of this risk management instrument.

39
7 Recommendations

As next steps the author suggests WFP

(1) To examine the feasibility to link water and sanitation components with other microinsurance
products.

(2) To reflect on community-led disaster preparedness strategies as measure to increase sustainability

of water and sanitation services.

(3) To reflect on local mutual support arrangements to increase sustainability of water and sanitation
services.

(1) Approaches to link watsan with microinsurance

Slum MI

When pursuing the idea of slum microinsurance the author suggests

To partner with organisations supporting slums.

To carry out a pilot demand study in slums in WFP countries to understand priority risks of slum
dwellers and examine the potential for microinsurance in slum environments protecting slum
infrastructure including water and sanitation services against eviction.

Health MI

When pursuing the idea of watsan linked to health microinsurance the author suggests

40
 To contact the FINISH project in India in order to receive findings of the impact evaluation of
sanitation sensitive health microinsurance.

Climate change MI

When pursuing the idea of watsan linked to climate change microinsurance the author suggests

To identify WFP countries/regions prone to natural disasters undermining the sustainability of

water and sanitation services.
To carry out demand studies in relevant regions for climate change microinsurance linked with a
watsan component.
To contact MicroInsurance Academy in Delhi in order to learn about climate change microinsurance
packages under research, to examine the potential to link water and sanitation and to partner.

(2) Approaches to promote community-led disaster preparedness strategies

When pursuing the idea of community-led disaster preparedness strategies the author suggests

To collect best practices in community-led disaster preparedness strategies for sustaining water
and sanitation services.

To disseminate best practices in WFP programs.

(3) Approaches to promote local mutual support arrangements

When pursuing the idea of local mutual support arrangements the author suggests

To collect best practices of mutual support schemes in industrialized and developing countries.

To disseminate best practices in WFP programs.

41
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