LEAP* WorkshopLEAP* Workshop

Jan 21, 2008 Jan 21, 2008 Ulrich Hess, Chief of Business Risk PlanningUlrich Hess, Chief of Business Risk Planning

Poverty and Shocks: why Poverty and Shocks: why insurance/safety nets can be an answerinsurance/safety nets can be an answer

*Livelihoods + Early Assessment + Protection

AGENDAAGENDA• Poverty and Shocks• Getting out of poverty• Peoples approaches• Roles of social protection

and insurance

Poverty and ShocksPoverty and Shocks• Poverty is about lack of– means– access– opportunities

• Shocks can be – Independent: health, life– Correlated: weather, price– Recurrent yet unpredictable– Pervasive: one event puts livelihood at risk

• Persistent shocks can trap people in poverty

Getting out of Poverty means…Getting out of Poverty means…

• Generating surpluses • For capital and/or skill accumulation to

achieve sustainable income growth • How do people get there?

Two archetypical approaches:The EntrepreneurThe Security seeker

The EntrepreneurThe Entrepreneur((“Where is profit?”)“Where is profit?”)

• Foregoes consumption– Saves start-up capital– Invests in education or information

• Takes measured risks– Applies fertilizer/quality seed–Makes deals by transforming information

and/or stuff

The Security SeekerThe Security Seeker(“(“Where is pain?”)Where is pain?”)

• Foregoes consumption– saves for tomorrow – Invests in social networks

• Avoids risk– Applies the more drought resistant local

seed– Diversifies crops and income sources

Social ProtectionSocial Protection

• Protects both from destitution risk and therefore reduces peoples’ “insurance savings” = less foregone consumption

• Allows security seeker to balance his portfolio of activities• Enables entrepreneur to put more

capital at risk

InsuranceInsurance

• Protects against losses = more measured risk taking:– Allows the security seeker to take out

small weather risk free loans for seed (WI helps supplier)

– Allows the entrepreneur to invest in new technology and businesses (WI helps banker)

Conclusion: Protect people and Conclusion: Protect people and their profits against recurrent their profits against recurrent

shocks shocks • People are both entrepreneurs and

security seekers • Social Protection against pain,

insurance for profit • People need both instruments to get

out of poverty!