Insurance for People against Disasters?
Yasuyuki SAWADA, The University of Tokyo

1. Introduction
The March 11 earthquake and tsunami in Japan resulted in the loss of more than 18,000 lives, and the complete destruction of over one hundred thousand buildings. Also, a variety of disasters hit different parts of the world. Yet, only a limited proportion of damages caused by natural disasters were covered by formal insurance mechanisms. Can we really protect our livelihoods from catastrophes? What is the role of market and non-market insurance mechanisms? What are the lessons we can learn in the aftermath of disasters? In order to answer these questions, I would like to present conceptual framework of risk management & coping as well as consumption insurance; findings from our studies on two earthquakes in Japan (Sawada and Shimizutani, 2008; Ichimura, Sawada, and Shimizutani, 2008, and Sawada, forthcoming); and new innovative ideas.

2. Conceptual frameworks
In response to the wide variety of shocks caused by natural disasters, including earthquakes, households have developed formal and informal mechanisms to deal with the potential negative consequences. There are three conceptual frameworks adopted in the presentation. The first two frameworks are: ex-ante risk management and ex-post risk-coping behaviors. Risk management strategies can be defined as household actions for mitigating risk and shock before the resolution of uncertainties, including accumulation of precautionary savings, participation in formal earthquake insurance, and investments in earthquake-proof housing structures. Even if households adopt a variety of risk management strategies, a disaster can happen unexpectedly, causing serious negative impacts on household welfare. Therefore, ex-post risk-coping strategies—those used to mitigate downside impacts of shocks to livelihood—will be needed. In general, risk coping strategies include market insurance mechanisms; self-insurance mechanisms; and non-market or informal insurance mechanisms. The third framework is the full consumption insurance hypothesis under which idiosyncratic shocks to a household should be absorbed by all other members in the same insurance network and these shocks should not affect changes in livelihood. Our intention in applying the third framework as a benchmark is to test the overall effectiveness of market and non-market insurance mechanisms in protecting people’s livelihoods.

3. Lessons from the two earthquakes in Japan and other disasters
We compare two contrasting cases of the Great Hanshin-Awaji (Kobe) and Chuetsu earthquakes. In both earthquakes, we observe that the means for coping are specific to the nature of shocks caused by the earthquake. Notably, borrowing was extensively used to recover losses resulting from housing damage in Kobe. We also found similar empirical results from a variety of natural and manmade disasters in the world. The feature that distinguishes most sharply the Kobe and Chuetsu earthquakes is in the effectiveness of consumption insurance or overall market and non-market insurance mechanisms. While the consumption insurance hypothesis was strongly rejected in the case of Kobe, the hypothesis seems to hold in Yamakoshi village. Indeed, the earthquake insurance participation rate was very high in Yamakoshi mainly because of the Japan Agriculture’s sales efforts in housing insurance products before the earthquake, compared to a participation rate of only 4.8 percent in Hyogo prefecture, where Kobe is located, in 1994.

4. Concluding remarks
There are three policy implications of our study. First, our results imply that reconstruction loan and loan guarantee programs are important means of ex post coping. For the elderly, new programs such as reverse mortgage will be needed, and loans are important even in low income countries such as Bangladesh where microfinance institutions started providing disaster loans for affected families to reconstruct their livelihoods. Second, effectiveness of formal insurance programs in Yamakoshi indicates the importance of expanding formal insurance coverage. It would be necessary to design new innovative insurance products which are accessible to the people. An example of such innovation include micro-level parametric insurance, or index insurance, written against specific aggregate events such as low rainfall, low temperature, droughts, high wind speed, and an earthquake. Finally, to support these micro-level mechanisms, macro-level insurance facilities to pool disaster risks will also be indispensable. Such facilities include: re-insurance markets; regional parametric insurance funds such as Caribbean Catastrophe Risk Insurance Facility (CCRIF) and Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI); and emergency loan programs by international financial institutions such as Cat DDO of the World Bank.

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