Can Parametric Microinsurance Improve the Financial Resilience of Low-Income Households in the United States?

Carolyn Kousky,Len Shabman,Helen Wiley

doi:10.1007/s41885-021-00088-1

Carolyn Kousky, Len Shabman + Show 1 more

Open Access

https://doi.org/10.1007/s41885-021-00088-1

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Abstract

Natural disaster risk is escalating around the globe and in the United States. A large body of research has found that lower-income households disproportionally suffer from disasters and are less likely to recover. Poorer households often lack the financial resources for rebuilding, endangering other aspects of wellbeing. Parametric microinsurance has been used in many developing countries to improve the financial resilience of low-income households. This paper presents a review of the evidence for implementing parametric microinsurance in the U.S., with spillover lessons for other highly developed countries. We discuss the benefits and the challenges of microinsurance in a US context and explore 4 possible distribution models that could help overcome difficulties, with policies being provided: (1) by an aggregator, (2) through a mobile-based technology, (3) by linking to other products or retailers, or (4) through a public sector insurer.

Highlights

Natural disaster risk is escalating around the globe and in the United States (Gall et al 2011; Hoeppe 2016; USGCRP 2018; Coronese et al 2019)
This paper investigates the potential for parametric microinsurance to support post-disaster recovery of lower-income households in the United States, where limited income and assets, limited ability to borrow, and limited programs of disaster aid targeted to lower income households have to-date impeded recovery for this population
The third section documented the beneficial uses of parametric microinsurance and the likely roles it could play in the U.S We turn to the challenges this type of approach faces, discussing four hurdles identified in the literature review and interviews: (1) finding a profitable model or public sector support, (2) meeting regulatory requirements, (3) managing basis risk for the insured, and (4) overcoming a lack of demand

Summary

Introduction

Natural disaster risk is escalating around the globe and in the United States (Gall et al 2011; Hoeppe 2016; USGCRP 2018; Coronese et al 2019). The Puerto Rican enabling regulation for microinsurance (discussed further below), notes that “it is intended to provide a financial protection tool for persons who otherwise could not purchase traditional insurance.” In addition, parametric microinsurance for disasters could provide substantial value in a number of other situations: for perils that will not fully destroy a home, for renters who are less concerned about property damages but will struggle with other post-disaster expenses, for mobile-home owners whose total needed payout would be lower,8 and to cover non-property disaster costs, including evacuation costs.

Results

Conclusion