Summary_Study on Demand of Insurance for Natural Catastrophes Final

Study on Demand of Insurance for Natural Catastrophes

Study Report │March 2010 │Philippines

Microinsurance Innovations Program for Social Security (MIPSS)

March 31, 2010 Study on Demand of Insurance for Natural Catastrophes

GTZ Microinsurance Innovations Program for Social Security (MIPSS), Philippines 2

Responsible Antonis Malagardis [email protected] Program Manager GTZ MIPSS Author Christian Proebsting [email protected] Editor Dante Portula [email protected] Senior Finance Adviser GTZ MIPSS Publisher Microinsurance Innovations Programs for Social Security (MIPSS) microinsurance.ph GTZ MIPSS Head Office Insurance Commission Complex 1071 UN Avenue, Ermita, Manila PHILIPPINES Antonis Malagardis PhD Program Manager [email protected] March 2010

mailto:[email protected]



http://www.microinsurance.ph/




Study on Demand of Insurance for Natural Catastrophes

Study Report │March 2010│Philippines



Contents

Tables 5

Figures 5

Acronyms 6

Executive Summary 7

I Background 14

II Objectives of the Study 15

III Methodologies 15

IV Analytical Framework and Structure of Report Presentation 16

V Part 1 – Profile of Pre-selected Provinces 18

5.1 Availability of geo/weather-data 18

5.2 Presence of potential distribution channels 19

5.3 Exposure to and relevance of natural catastrophe risk 19

VI Part 2 – Findings and Analysis: Household Interviews and FGDs 25

6.1 Natcat Risk Exposure and General Vulnerability 25

6.2 Risks and Specific Vulnerability 34

6.3 Risk Preparedness and Coping Mechanism 43

6.4 Financial Literacy & Insurance Design 46

VII Recommendations and Next Steps 53

7.1 Recommendations 53

7.2 Next steps 56

References 58



Tables

1 Profile of Respondents 15

2 Weather Stations in pre-selected provinces 19

3 Vulnerability to Environmental Disasters 20

4 Social Indicators (NSCB, 2006) 20

5 Rice and Corn Production Value 21

6 Rice and Corn Yield and Income Per Hectare 22

7 Relative Vulnerability 23

8 Rice and Corn Damage (BAS 2008 Damage Report) 24

9 Damage to Rice and Corn Per Hectare (BAS, 2008) 25

10 Asset Values 27

11 Family Income and Expenditure per Province (Monthly) 28

12 RURAL Household Income and Expenditures 29

13 URBAN Household Income and Expenditures 29

14 Household Income Patterns, ILOILO 31

15 Frequent Hazards and Cost 35

16 Frequency of Natcat Occurrence 37

17 Risk Proneness for Farming and Non-farming Households 37

18 Natcat Costs to Households 38

19 Demand for Insurance by Understanding and by Membership 49

Figures

1 Analytical Framework 17

2 Financial Pressures of Households 36

3 Perception on Natcat Impact to Households – Pre selected provinces 39

4 Perception on natcat impact to households - ILOILO Province 40

5 Perception on natcat impact to households - CAGAYAN 41

6 Perception on natcat impact to households - LEYTE province 42

7 Perception on natcat impact to households - AGUSAN del Sur Province 43

8 Natcat Coping Mechanisms 45

9 Reasons to buy insurance 47

10 Perceived benefits from natcat insurance 48

11 Monthly insurance premium affordability 51

12 Challenges to PCIC crop insurance 52



Acronyms

BAS Bureau of Agricultural Statistics

BMZ German Ministry for Economic Cooperation

FGD Focus Group Discussion

GTZ German Technical Cooperation

HH Households

MBA Mutual Benefit Association

MFI Microfinance Institutions

MIPSS Microinsurance Innovations Program for Social Security

Natcat Natural Catastrophes

NGO Non Government Organizations

NSCB National Statistics and Coordination Board

PAGASA Philippine Atmospheric, Geophysical and Astronomical Services Administration

PCIC Philippine Crop Insurance Corporation

PPP Public Private Partnership



Executive Summary Within the frame of MIPSS, the BMZ (German Ministry for Economic Cooperation) has approved in mid-2009 the commission of 3-year public private partnership (PPP) between the German Technical Cooperation (GTZ) and Munich Re to develop natural catastrophes (natcat) insurance products targeted at the poor by using a parametric trigger. Based on the criteria of data availability, risk exposure, distribution channels and socio-economic profile, four provinces (i.e. Iloilo and Leyte in Visayas, Cagayan in Luzon and Agusan del Sur in Mindanao) have been pre-selected as pilot areas of the natcat micro insurance products. Profiling of the four provinces based on intensive review of secondary data had been conducted following the selection criteria. Then household interviews and focus group discussions were conducted in 14 sampled municipalities in the four provinces to generate more detailed information and analysis of demand for micro insurance products against natural catastrophes. The target populations were members of cooperatives, farmers, micro-entrepreneurs and other residents in the areas visited belonging to the low-income sector (class C, D and E) and are prone to the effects of natural calamities. The presentation of the study findings comes in two parts. First part describes the profile of the pre-selected provinces. The second part presents the results of the household interviews and FGDs which supplements the information and analysis provided in provincial profiles. Recommendations are in the last section of the report.

Profile of Pre-selected provinces 1. Availability of geo/weather data. Iloilo, Cagayan and Leyte display a relative dense system of

weather stations. In contrast, Agusan del Sur is not equipped at all. Recent efforts have modernized the equipment of weather stations. In 2009, the Korean International Cooperation Agency (KOICA) installed a modern set of rainfall and water level stations in Iloilo after the last flood in order to improve the early warning system. A similar project covered the Magat River in Isabela province, one of the main confluents of Cagayan River. According to PAGASA, plans to extend the early flood warning system to Cagayan are currently developed. In Leyte, GTZ has equipped several municipalities with digital rainfall stations within a project on disaster risk management.

2. Presence of potential insurance distribution channels. The Microinsurance Regulatory Framework now allows MFIs to become channels of microinsurance. There are more than 2,000 MFIs in the country with combined outreach of about 7 million people. Large MFIs (NGOs and banks) that cover the whole country also operate in the 4 pre-selected provinces. Many cooperatives are also operating in these provinces.

3. Socio-economic situation. There are around 2 million people (roughly 400’000 households) in the

four provinces that live under the poverty threshold and therefore, represent potential buyers for an insurance product. They can essentially be found in Iloilo and Leyte. The incidence of poverty and the incidence of food are strongly increasing from Cagayan to Iloilo to Leyte and to Agusan del Sur.

4. Exposure to and relevance of natural catastrophe risk. The provinces display a very diverse hazard

profile.



a. Cagayan is extremely hazard-prone to droughts and floods / typhoons. Agusan del Sur and

Iloilo are more prone to dry spells, but also to floods. Leyte is less prone to natural disasters.

b. In terms of asset exposure, Cagayan and Iloilo have a high production value in rice and corn, but the greatest fraction of farming households can be found in Agusan del Sur. Exposure per hectare can rise up to P50’000 to P60’000, depending on the crop.

c. Stronger natcat impacts in recent years, high exposure and missing capacities make the rice and corn sector highly vulnerable in Cagayan. Iloilo’s rice farmers suffer big damages stemming from drought, whereas in Agusan del Sur and Leyte the most important damages arose in the rice production due to floods. Demand for insurance should arise according to these lines.

d. Affected farmers incur losses from P2’000 to P15’000 per hectare, depending on the natcat,

the crop and the province. This should determine the expected payout of an insurance scheme.

Results of Household interviews and FGDs

1. Natcats are a #1 risk for poor households. They are very frequent events and entail large costs, especially for the agricultural sector. Many of households declare that they suffer at least once a year from a specific natcat. This is especially true for marginalized and very poor households living in areas where appropriate risk preparedness measures by government units are inexistent. More severe events happen every ten to 15 years.

2. The major hazards are typhoons, floods and drought with droughts generally causing the highest damage. For all these three hazards, farmers feel more at risk and incur generally three times higher losses than non-farming households. In particular, non-farming households feel barely risk-prone to droughts. This differentiation is explained by the fact that direct damage to households is very rare, but that farmers may lose large parts of their crops. Non-farming households suffer more from secondary effects through higher food prices and lower demand for their products (if they are not employed and receive a fixed salary).

a. Iloilo is prone to typhoons, floods and drought, but the impact is more moderate than in

other provinces. Drought plays an important role for farmers and fisher folks, whereas the residents in Iloilo City suffer from annual floods. A flood control project, however, shall solve this problem for the provincial capital this year.

b. In Cagayan, especially typhoons, but also floods and drought affect large part of the population, with damages higher than in other provinces. The yield of farmers’ first harvest is generally threatened by long dry spell, whereas typhoons destroy big amounts of the second harvest. At the same time, the province is also focus point of risk mitigation and relief measures of the government and donor organizations.

c. Leyte is prone to floods caused by continuous rainfall and/or typhoons, as well as landslides. People feel extremely at risk of these hazards, comparable to the situation in Cagayan.



d. In Agusan del Sur, low-lying areas near the Agusan River are frequently flooded, damaging

especially farmers’ crops. These floods are triggered by moderate, but steady rainfall.

3. Natcat expose the households to risk in terms of assets and income. The typical respondent has a permanent asset exposure of about P175,000, where 75% accounts for the house and other assets are generally business assets (such as vehicles and livestock). Compared to richer people, however, the respondents have somewhat higher exposure in income than in (household) assets This might be deducted from the fact that the respondents possess less valuables (except for TVs) and investments are done either in business assets or in non-permanent goods (such as food, transportation and tuition fees).

a. Farming households have a high reinvestment rate and have a relatively longer income turn over period. Therefore, there are high exposures after seeding up to harvest season. The income of one harvest is supposed to bring the family through the next cropping season. Therefore, a loss in crops might lead to extreme consequences for farming households.

b. Non-farming households engaged in microenteprises and vending activities have a more

stable income, a higher turnover and shorter income turn over periods, reducing thereby their exposure to possible impacts of natural catastrophes.

4. Risk preparedness is insufficient in most areas. As a result of the lack of appropriate infrastructure or

risk mitigation plans offered by local government units, natcats affect families and their communities very frequently. State players have barely developed any capacities to mitigate risks in the provinces in such a way that people feel unprepared and abandoned. Whereas, seasonal climate forecasts and irrigation system help some people to a certain extent to cope with droughts. Floods and typhoons hit most communities with little warning and preparation.

5. Risk coping mechanisms. Most people manage the impact of natcats by borrowing money from friends, relatives or neighbours and to a lesser extent via savings. Formalized systems, such as insurance schemes or organized relief programs are rarely in place and are mostly considered as less effective. At the same time, the impact of natcats exceeds the capacities of these informal risk-sharing mechanisms, leaving people with major problems in repaying their loans.

6. High demand for natcat insurance. The interest in natcat insurance is high in all four provinces with

Cagayan and Agusan del Sur displaying particularly high figures. In general, there is barely any difference in interest between farming and non-farming households, but the former are more likely to be interested in a multi-peril insurance and have higher demand in typhoon and drought insurance products.

a. In Cagayan, 80% of all households would be interested in an insurance product for

typhoons. Typhoons were also the primary concern during FGDs. However, one fifth of the farmers being interested in an insurance product would also like to have a protection against drought.

b. In Iloilo, the picture looks less clear, as both typhoon and flood protection are nearly equally high in demand. At the same time less people than in other provinces would be interested in a natcat insurance product there and when offering a specific product (e.g. for the



protection against floods) only at most one half of the survey sample would show any interest. The FGDs revealed a somewhat different picture. Nearly all people were interested in a drought-insurance, especially farmers and fishermen.

c. In Leyte, people had an interest in typhoon-related insurance products, but even protection

schemes against flooding would be appealing to nearly one half of the respondents.

d. Agusan del Sur displays a clear preference for flood-insurance products, especially among farmers.

e. People having an idea of what insurance is and those who avail of insurance products have a

bigger demand for a natcat insurance product. But even among those who are not aware of what insurance is there are still more than 80% interest in such a product. Taking the whole sample, 86% of the HH respondents are interested in buying an insurance product to protect them from the impact of natcats and 66% would like to insure their loans.

f. Quiet surprisingly, even households reporting that they are not risk of a certain calamity are

preponderantly interested in buying a natcat insurance product. About 70% of those saying not to be at risk of typhoons are interested in such a product. This finding supports the hypothesis that secondary impact effects play an important role in determining the demand.

7. Product preference. Pricing is the most important issues for most of the groups interviewed. Most

are interested to have a natcat insurance product and that holds true across all four provinces, even though corresponding to their specific risk profile. The affordability, however, is the most important single factor that will determine whether a family will decide to purchase natcat insurance. Low premiums payable in accordance with the household’s income schedule and high-frequent payouts make the product appealing to most of the households.

a. In general, the premium amount should be between P80 and P500 per month with slightly

higher willingness to pay in the province of Leyte (probably due to higher income in this subsample). Surprisingly, farming households would not be ready to pay significantly higher premiums, though being more affected by natcats. Those not interested in natcat products often argued that they were not able to pay the premiums, therefore emphasizing the relevance of low premiums for this market.

b. Benefits are also a primary consideration. Participants in the FGD equate that the amount contributed should more or less be proportionate to the amount of benefit that they will receive. About 57% of the HH respondents prefer to receive payouts for calamities that occur frequently to payouts for severe calamities that seldom occur. ‘Frequent’ as understood by most FGD participants means more or less every year. Farmers would like to have benefits around P20’000; others would expect an amount of about P5’000. When confronted with the challenge of setting up a financially sustainable product, people usually lowered the amount of benefits instead of increasing the premiums.

c. System of distribution should not only be easily accessible with putting the client in the

focus, but the insurance provider shall be trustworthy. It is important to note that NGOs, MFIs and cooperatives are not per se perceived as trustworthy entities. Respondents of the HH survey endow them with more trust than private companies, such as banks, private



insurers, and PCIC, but have more faith in barangay related institutions. The Philippine meteorological agency PAGASA is also considered as a relatively trustworthy organization.

d. Information is also critical in successfully distributing natcat insurance. Most of the

participants do have some basic understanding about the concept of insurance. But what seems to prevent them from availing insurance products (other than the price factor) is information where to get it and information on how it actually works. Only one quarter of the people interviewed availed of insurance products, especially for health and funeral pre-need plans. This subsample tends more than others to be interested by natcat insurance products.

e. Modality of transactions shall be easy. Having an agent collecting the money was the most

preferred option among HH respondents, but others were also ready to go to the nearest insurance office if there is one near the market place. The results suggest that known concerns of trust, but also other obstacles, especially ignorance of how it works shall be addressed first before introducing such an insurance scheme.

8. Financial Literacy. Insurance protection is commonly understood by the FGD groups as a means of

security against unforeseen events. Policyholders are receiving some form of benefit that will help their family to recover from incurred losses. Especially those being MFI clients or cooperative members were familiar with the basic concept. In the HH sample around 60% declared understanding the concept of insurance. Still, when probing deeper and asking about possible reasons why people buy insurance or how the payout process works answers were quite varied.

Recommendations

Designing a flexible, scalable, well timed, linked and simple product that is accompanied by inclusive

education programs shall help to reduce the premium – benefit gap. On the one hand, successful

products from private insurance companies, such as St. Peter’s Life plan, show that the poor are

interested in well-designed products. On the other hand, even highly subsidized crop insurance products

do not sell because they fail the poor’s needs.

On Product Design:

1. Products should be scalable. People look first on the premium before considering benefits. Premiums are affordable if they match other non-basic expenses and the survey shows that even those living under the food-threshold are willing to pay for insurance under certain conditions.

2. Payment schedules should be flexible. Target customers are more likely to purchase natcat insurance if premium payments are well within their natural or usual cash flow cycles.

3. Products shall have a good timing. Hazards have different probabilities to occur across the year. Exposures are unequally distributed in time as well. People are more attracted to products that cover high-exposure- and high-probability-of-hazards-periods. Marketing shall consider this timing as well. For instance, typhoon protection plans shall be marketed not earlier as shortly before the beginning of the typhoon season.



4. Payouts should be frequent. Target customers are interested in knowing whether the product works or not. Therefore, frequent payouts–that is to say, at least every three harvest seasons, but at best in the first harvest season–shall help to build up credibility and to attract customers. People have a high discount rate and expect fast ‘returns’. It is more important for them to have more, but small than little, but high payouts.

5. Products should be linked, for example to production loans, to group structures like coops/MFIs and to savings products (bundle).

6. Consider smart subsidies. People expect ‘returns’ when investing money. Even though insurance is considered as a tool to reduce risk, for most people it is also an investment that should guarantee good benefits. Subsidized products in the market (such as PhilHealth) have increased such expectations. The gap between the willingness to pay and the expected payout might be bridged via smart subsidies. In some sense, these subsidies are expected from the target population and might well be justified. It is important to clarify and make transparent the costs and benefits of subsidies before introducing them. A smart way of dealing with subsidies is by using risk-layering systems: the state might cover a certain risk-layer such as low-frequent and high-impact events, thereby reducing the risk for the insurer and ultimately the premium for the end client.

7. Lessen requirements. Natcat insurance should be available for everybody, but especially promoted for the poor by using corresponding distribution channels. Documentary requirements, if any, should be made simple and easy to understand and easy to accomplish and should be designed to match the literacy level of the poorest farmers.

8. Promote financial literacy first. Low-income groups need to be further educated on insurance and its importance. There should be a general insurance education program aimed at both the end client and the distribution channel.

9. Target the right pool of clients. Microinsurance products are not right for everyone, at least not at every time. When people fail to meet their basic needs because they lack sufficient infrastructure or when no risk mitigation projects have been developed to protect their community from frequent natcats, micro insurance might not be an appropriate solution. As a matter of fact, targeting communities with strong and active Disaster Coordinating Council or Planning and Development Officer might be a way of making sure that the insurance initiative is flanked by similar projects helping to protect the community. For instance, developing early warning system facilities and designing index-based insurance products might go hand in hand.

On Product Distribution:

Microinsurance is commonly provided by MFIs/cooperatives as a means of mitigating risks in case the

borrower is unable to pay the loans because of unforeseen events. Accidents, illness in the family, death

of family members or loss of livelihood due to fire or natural catastrophes often causes burdens on the

family’s finances. Credit life insurance products and/or micro-insurance are offered to provide the client

a means for recovery in times of such unforeseen events.

Insurance products have also become a source of competitive advantage for MFIs. Clients now choose

their MFIs based on the services and benefits they provide and the insurance products offered by an

MFI. MFIs have been known to compete on this basis.



1. The natcat insurance itself should be attractive, not only to the target clients but also for the insurance distribution channel. MFIs will most likely adopt or distribute such insurance product if there are also clear benefits that will be received at the level of the MFI. Offering such products will also entail costs in its distribution and therefore such distribution costs should be recoverable from the sale of the insurance product.

2. A certain degree of flexibility should be allowed at the MFI level to customize the delivery of the insurance product. At the distribution level MFIs are in the better position to determine the most appropriate timing or mode of payment to be made for the insurance premiums.

3. MFI networks may also play a role in the distribution for micro insurance products to achieve

economies of scale. The MFI network can provide marketing and promotion support to its member institutions with regards to micro insurance. The MFI network can also provide meso level monitoring of product performance and provide the sector with research and information support not normally available at the MFI level. Capacity development support can also be another role MFI networks can play.



I. Background Due to its location along the western rim of the Pacific Ring of Fire and the Pacific typhoon belt, the Philippines is one of the world’s most natural disaster-prone countries. In particular, it is vulnerable to typhoons, floods, landslides, droughts, volcanoes and earthquakes. When the tropical storms “Ondoy” and “Pepeng” struck in October 2009, the Office of Civil Defence estimated the damage to agriculture and infrastructure at close to P30 billion, that is roughly 0.25% of annual GNP (2008: P14’784 billion, IMF). Besides, there is an average of 25 typhoons hitting the Philippines every year. Finally, climate change is likely to increase the country’s vulnerability to natural hazards because extreme weather conditions are predicted to hit formerly unaffected areas. The poor do not have access to natural catastrophes (natcat) insurance. In 2006, there were around 28 million poor people in the Philippines including 13 million women, 2 million farmers and some 0.5 million fisherfolks1. There is no data on how many of the poor are covered by insurance schemes. However, it is known that roughly 5% of the Philippine adults (2.5 million) avail of micro insurance products, but these are generally confined to life, credit life and health insurance2. Pure natural catastrophe insurance schemes are non-existent for the poor. Primary insurers are reluctant to go into the natcat business. The Philippines can count a few years of experience in providing micro insurance through mutual benefit associations (MBAs) and a number of cooperative insurers, as well as commercial insurance companies. Microfinance institutions (MFIs), rural banks and farmers’ organizations complement the range of common distribution channels. Financial institutions for the poor do not have sufficient access to portfolio insurance. The poor are very vulnerable to the impact of natcats and might unable to fulfill their obligations to their lending institution in case of an extreme event that affects their livelihood. This puts the MFIs’ and cooperatives’ loan portfolio at risk, especially if the natural catastrophe hits a large part of their clients. Credit defaults and withdrawing of saving deposits might undermine their financial performance. Stakeholders have joined hands to lay the groundwork for micro insurance. In response to these deficits on the supply side, stakeholders in the government and the financial sectors took up their work in early 2009 to lay the groundwork for a more comprehensive micro insurance provision. On January 29 this year, the government launched the National Strategy for Micro Insurance that defines the objective, the roles of the various stakeholders and the key strategies to be pursued in enhancing access to insurance by the poor. Concretely, it allows registered cooperatives and MBAs in addition to commercial insurers to engage into the provision of non-life insurance schemes, including products for the protection against natcats. The GTZ project “Micro Insurance Innovations Programme for Social Security” (MIPSS) has contributed to the groundwork development for Microinsurance. MIPSS is a 4-year BMZ funded with project components i. frame conditions for micro insurance; ii. micro insurance innovations; and iii. social protection in case of illness.

Against this background, and within the frame of MIPSS, the BMZ (German Ministry for Economic Cooperation) has approved in mid-2009 the commission of 3-year public private partnership (PPP) between the German Technical Cooperation (GTZ) and Munich Re to develop natcat insurance products

1 National Statistical Coordination Board, Philippine Poverty Statistics, 2006 estimates

2 Department of Finance, Philippines



targeted at the poor. By using a parametric trigger these products should overcome obstacles of traditional insurance schemes. Based on the criteria of data availability, risk exposure, distribution channels and socio-economic profile four provinces have been pre-selected to pilot the micro insurance products. The presentation of the findings comes in two parts. First is a description profile of the pre-selected provinces following analysis of secondary data. The second part presents the results of the household interviews and FGDs. The second part supplements the information and analysis provided provincial profiles.

II. Objectives of the Study First, it shall complement the pre-selection process. Second, it shall generate information and analysis of demand for micro insurance products against natural catastrophes in the pre-selected provinces that will serve as an input to the detailed in-depth assessment.

III. Methodologies of the Study

The Study employed the methodologies of household (HH) surveys with structured questionnaires and

focus group discussions (FGDs) with potential microinsurance clients. Intensive reviews of secondary

data that are describing the 4 pre-selected provinces were conducted prior to the field work.

The survey was conducted in three to four municipalities in the pre-selected provinces of Agusan del Sur

(Mindanao), Cagayan (Luzon), Iloilo and Leyte (Visayas). The target populations were members of

cooperatives, farmers, micro-entrepreneurs and other residents in the areas visited belonging to the

low-income sector (class C, D and E) and are prone to the effects of natural calamities.

The HH questionnaire is structured into four main parts about i. HH information and economic activities, ii. access to credits, iii. risks, iv. access and interest in insurance. The first parts aim at obtaining data on the HH’s exposure in terms of assets and income, and her vulnerability. The second part is dedicated to the HH’s (obstacles to) access to credits. How different hazards affect the HH’s budget and how HHs cope with these risks shall be clarified in the third part. Finally, questions of familiarity with insurance, interest in natcat insurance products and issues of product design are addressed in the last part. Table 1 provides the profile of survey respondents.

Table 1 Profile of Respondents

Province/# Municipalities # of HH Respondents

# of FGDs (Ave Pax per FGD = 10)

Sector of Participants

Leyte / 4 Municipalities 94 7 Clients of banks, coops; students

Iloilo / 3 182 5 Clients of NGO-MFI; local residents

Cagayan / 4 103 7 Clients of banks and coops

Agusan del Sur / 3 108 3 Local residents, farmers

Total = 4 Provinces = 14 Municipalities

487 22



IV. Analytical Framework The UNDP report on reducing disaster risk constitutes the main reference of this report, as it cuts down

the notion of risk into the concepts of ‘hazards’, ‘exposure’ and ‘vulnerability’. This objective framework

is adapted to allow for integrating the subjective perception of risk. Risk perception constitutes the

driving force for demand, but several constraints might shape this demand as well, such as financial

literacy and product design.

Risk = Hazard x Exposure x Vulnerability. UNDP’s report “A Global Report – Reducing Disaster Risk: A

Challenge for Development”, published in 2004, presents a conceptual model to grasp the notion of risk.

Accordingly, disaster risk is not caused by hazardous events per se, but rather is historically constructed

through human activities and processes. For an extreme physical event to be hazardous, by definition

there has to be a subject to experience the hazard. But pure physical exposure is insufficient to explain

different risk patterns across countries. For a given exposure the impact of a hazard can vary and

depends largely on the underlying vulnerability. Some individuals and/or assets are more vulnerable

than others and may therefore be more or less at risk. As a matter of fact, coping capacities and

adaptive capacities, which shape vulnerability, are unequally distributed across societies and individuals

and may explain large parts of differences in death tolls and damage reports resulting from disasters. In

mathematical terms, the concept can be stated as follows:

Risk = Hazard x Exposure x Vulnerability

Different indicators are used to measure the three factors. Theoretically, the proposed formula can be used for different contexts, such as risks stemming from illness and man-made catastrophes. For our purpose, we define ‘hazards’ as natural disasters, such as earthquakes, typhoons/tropical storms, droughts, volcanic eruptions, landslides and floods. The distinction between typhoons and floods is difficult in the Philippine context, as most floods are caused by continuous rainfall that usually goes together with strong wind. The ‘physical exposure’ is generally measured by calculating the population living in a given exposed area. This notion is helpful when focusing on the risk of death, but it neglects the social and economic impacts of natural hazards, such as injuries and damage to assets (infrastructure, crops). In this report, we refer to the notion of ‘exposure’ as expressed in terms of assets and number of the poor.

The concept of vulnerability is more difficult to grasp. Quantitatively, the relative vulnerability can be calculated by dividing the damage/people killed by the value/number exposed. More interesting, however, might be to identify (absolute) vulnerability indicators. Vulnerability depends on the socio-political-economic context of the exposed population as well as on the hazard in question. For instance, national indicators can include GDP, the Human Poverty Index, the Human Development Index, literacy rate and the relative number of radios (to assess early warning capacity). In our study, we try to approach the notion of vulnerability by the income per household, occupation, access to financial services and the efficiency of coping mechanisms. Exposure to and relevance of risk are related, but two different concepts. While the concept of exposure to risk per se is a more objective notion that can partly be captured by quantitative methods, the relevance of risks is a more subjective idea and relies on the perception of the individual. Some risks may have a large impact in terms of socio-economic losses, but may not be perceived as ‘relevant’. The



perception is influenced by the individual’s environment and cognitive capacities. The former is crucial in evaluating the disaster’s impact and the latter shape to what extent people are able to recall memories of disasters. In the end, demand for micro insurance products depends largely on the relevance of risks and only directly on the exposure to risks. For instance, demand for insurance products is supposed to be higher immediately after the impact of catastrophes when memories are still fresh, even though the exposure to risk might have not increased. It should be noted that this concept correlates with the exposure to risk as it is about the people’s experience on the nature, extent, frequency and impact of unpredictable risks. And it also takes into account the existence of coping and adaptation strategies, but the concept adds a further layer in form of subjective perception. While some statistics will be presented on the exposure to risk, this survey focuses on the question of risk perception, therefore adapting the UNDP approach.

Several constraints might shape the demand for natcat micro insurance, such as financial literacy and product design. Risk perception constitutes the driving force for demand. Still, whether people will eventually be interested in purchasing a product depends on several side-constraints. Having access to information and understanding these products is an essential aspect. Even though credit and saving services are popular among the poor in certain areas–especially where MFIs have a high penetration rate–insurance products are still terra incognito for most low-income households. And finally, the product design itself should match the needs and expectations and correspond to the payment capacities of the potential buyers and thereby stimulate their demand. This study tries to acknowledge these two conditions by analyzing them in a separate chapter.

Figure 1 Analytical Framework

Perception of

Risk

Exposure to

Risk

Financial

Literacy

Product

Design

Demand for Insurance



V. Part 1 – Profile of the pre-selected provinces

The provinces of Cagayan, Iloilo, Leyte and Agusan del Sur were pre-selected on the following criteria:

1. Availability of geo/weather-data 2. Presence of potential distribution channels 3. Exposure to and relevance of natural catastrophe risk

Intensive review of secondary data might draw the following general observations:

There are around 2 million people (roughly 400’000 households) in the four provinces that live under the poverty threshold and therefore, represent potential buyers for an insurance product. They can essentially be found in Iloilo and Leyte.

The incidence of poverty and the incidence of food are strongly increasing from Cagayan to Iloilo to Leyte and to Agusan del Sur.

Cagayan is extremely hazard-prone to both droughts and floods / typhoons. Agusan del Sur and Iloilo are more prone to dry spells, but also to floods. Leyte is less prone to natural disasters.

In terms of asset exposure, Cagayan and Iloilo have a high production value in rice and corn, but the greatest fraction of farming households can be found in Agusan del Sur. Exposure per hectare can rise up to P50’000 to P60’000, depending on the crop.

Stronger natcat impacts in recent years, high exposure and missing capacities make the rice and corn sector highly vulnerable in Cagayan. Iloilo’s rice farmers suffer big damages stemming from drought, whereas in Agusan del Sur and Leyte the most important damages arose in the rice production due to floods. Demand for insurance should arise according to these lines.

Affected farmers incur losses from P2’000 to P15’000 per hectare, depending on the natcat, the

crop and the province. This should determine the expected payout of an insurance scheme.

5.1 Availability of geo/weather-data Since the project’s idea is to design an index-based insurance scheme sufficient data on climate phenomena was a pre-condition in selecting the provinces. This data is used to design an index that captures very well the correlation between the calamity and the damage caused to the insured population. With such a parametric insurance product claims are settled based on the index and not on individual damage assessments. For instance, information on rainfall and wind speed might help in assessing the strength and impact of typhoons. Despite new technologies and remote sensing via satellites, ground-based device is still indispensable to obtain reliable data. In the Philippines, the main reference for weather stations is PAGASA, the Philippine Atmospheric, Geophysical and Astronomical Services Administration. The following table displays the number of weather stations in the pre-selected provinces.



Table 2 Weather Stations in pre-selected provinces

Weather stations Synoptic station/Agromet station/Automatic station*

Rainfall Water level Radar

Iloilo Province 3 6 2 0

Cagayan Province 3 4 1 1

Leyte Province 4 6 0 0

Agusan del Sur 0 0 0 0

Iloilo, Cagayan and Leyte display a relative dense system of weather stations. In contrast, Agusan del Sur is not equipped at all. Recent efforts have modernized the equipment of weather stations. In 2009, the Korean International Cooperation Agency (KOICA) installed a modern set of rainfall and water level stations in Iloilo after the last flood in order to improve the early warning system. A similar project covered the Magat River in Isabel province, one of the main confluents of Cagayan River. According to PAGASA plans to extend the early flood warning system to Cagayan itself are currently developed. In Leyte, GTZ has equipped several municipalities with digital rainfall stations within a project on disaster risk management.

5.2 Presence of potential distribution channels

According to the new regulatory framework on micro insurance, institutions engaged in microfinance activities, primary cooperatives and rural / thrift / cooperative banks can be licensed to sell micro insurance products. Even though they might not act as risk carrier, they can market products to their clients.

MFIs have a strong penetration rate in some municipalities. One should consider the fact that most MFIs

only serve one, at most two individuals per household. In the Philippines, a typical household comprises

approximately 5 individuals. Therefore, one might multiply the number of clients by 5 to obtain the

number of households reached by MFIs. Finally, the PCFC database only includes lending institutions

that borrow capital from PCFC. Even though this is mostly the case for bigger MFIs, some locally

operating MFIs are not listed and the actual number of covered households is probably higher.

5.3 Exposure to and relevance of natural catastrophe risk

HAZARD

This study focuses on the impact of natural hazards, in particular typhoons/floods and drought. In a first

step, these hazards should be identified in their sole dimension of climate and geological events; that

means without considering their impact. The following table displays information published in the 2005

study Mapping Philippine Vulnerability to Environmental Disasters by Manila Observatory.



Table 3 Vulnerability to Environmental Disasters

Hazards Cagayan Iloilo Leyte Agusan del Sur

Typhoon Incidence Very high Low Medium Very low

Historical Rainfall Increase 200-300 mm 0 mm 0 mm 0 mm

Historical Temperature Increase > 0.5 C > 0.2 C 0.2 C < 0.5 C > 0.2 C

Decrease in Rainfall Due to El Niño

Very low Low to Medium

Medium High

Earthquake: Magnitude Very low Low Low High

Earthquake: Hits Very low Very low Very low Medium

The provinces display a very diverse hazard profile. Cagayan’s fate combines several hazards: It is frequently hit by typhoons and in recent years an increase in rainfall and temperature suggests that it faces periods of severe flooding and long dry spells. Agusan del Sur, on the other hand, is not hazard-prone to typhoons, but more to water shortage due to decreases in rainfall. In addition, strong earthquakes frequently hit the province. Iloilo and Leyte, finally, display a more moderate picture, with low and medium, respectively, incidence of typhoons and decreases in rainfall. As a consequence, the areas are supposed to suffer less from natural hazards than the other two provinces. According to the report, climate change in the Philippines is supposed to have two strong effects: First, the path of typhoons shall move more to Northern provinces, that is away from the Visayas and more to Luzon. Second, Mindanao is going to experience more dry years. Unfortunately, the study does not contain any information on the strength of the typhoons. Another pitfall of the analysis is that it does not capture local disasters, such as flash floods, that only occur in river-near areas.

EXPOSURE

The exposure to natural disasters can be measured in different ways, depending on the subject of

interest. In general, one might distinguish between the number of people and the assets in a specific

area. The following table presents information on social indicators.

Table 4 Social Indicators (NSCB, 2006)

Pre-selected Provinces

Poverty Threshold

Poverty Incidence

Magnitude of Poor Population

Food threshold

Subsistence Incidence

Magnitude of Subsistence Poor

Magnitude of poor that are not subsistent poor

Overall population

Iloilo 14,810 30% 641,619 9,861 11.80% 249,049 392,569 2,110,588

Cagayan 12,928 23% 247,764 9,018 8.30% 89,023 158,741 1,072,571

Leyte 13,919 47% 814,523 9,501 22.90% 394,346 420,177 1,722,036

Agusan del Sur

14,544 56% 342,509 10,080 33.90% 206,603 135,907 609,447



Since the project focuses on the poor population the number of people living under the poverty threshold3 is the critical figure. The four provinces display a very diverse picture. From North to South the incidence of poverty increases, reaching more than half of the population in Agusan del Sur. In addition, the fraction of poor people living under the food threshold4 is also twice as high in Agusan del Sur as in Cagayan and Iloilo. Around 2 million people in the visited four provinces live under the poverty threshold. On the other hand, nearly 1 million poor have less income than necessary to meet the basic food requirements. Whether these people have enough income to buy insurance products for the protection against natural catastrophes is questionable, but this survey is going to shed some light on this question. It is supposed that rural areas have a higher poverty incidence than in urban municipalities. Even though the data is suggestive in this respect, it must be noted that the poverty threshold used in this table is a provincial indicator, that is potential heterogeneity in expenditure requirements across municipalities is not considered. Therefore, it probably underestimates (overestimates) the poverty magnitude in urban (rural) areas.

There are several indicators to determine the exposure of assets to natural catastrophes. There is no

reliable statistical information on the value of infrastructure in the Philippines (the second part of the

survey tries to estimate some of these numbers). However, one might try to approximate the value in

different ways. Catastrophes can hit private assets, such as homes, but also assets for business purpose,

such as stores, tricycles and crops. The authors were unable to obtain data on costs for business assets

in urban areas. For rural areas there exist some estimates that are presented in the succeeding tables.

Most households in rural areas depend at least partly on farming. In Agusan del Sur, nearly three out of

four households engage in agricultural activities. And a similar pattern can be observed in Cagayan, even

though relatively more households receive income from fishing and the fraction of non-farming

households is greater. Even though agricultural activities constitute generally only one source of income

among others, it is often the most important one. In the Philippines, there are nearly 5 million farms5.

The number of subsistence farmers is not known, but most of them plant rice (palay) and in some

provinces corn. For this reason, the statistics concentrate on these commodities. The value of annual

production and damage of these two crops might approximate the exposure per province.

Table 5 Rice and Corn Production Value

Production value in Million Pesos (BAS, 2008)

Cagayan Iloilo Leyte Agusan del Sur

Rice 10,330 17,250 7,779 2,230

Corn 4,588 3,572 869 786

Cagayan and Iloilo are one of the major rice baskets in the Philippines. As a matter of fact, Iloilo’s

current production capacity in rice and corn is more than P20 billion per year (that is around P10’000

per capita). The production of rice and especially corn plays a minor role in Leyte and Agusan del Sur.

3 The poverty threshold is defined as „the minimum income/expenditure required for a family/individual to meet

the basic food AND non-food requirements.“ National Statistical Coordination Board (2003) 4 The food threshold is defined as „the minimum income/expenditure required for a family/individual to meet the

basic food requirements.“ http://www.nscb.gov.ph/poverty/FAQs/default.asp) 5 Agricultural and Fishery census 2000



Breaking down the data to individuals is helpful in identifying the exposure per capita. In the end, it is

individuals who are hit by catastrophes and therefore understanding their exposure is an important

step. In the Philippines, smallholder farmers are typically defined as those having less than seven

hectares. Most poor farmers have even less, typically around one and two hectares. Generally, there are

two harvests per year. Given this, one can calculate the gross income per hectare for the four provinces:

Table 6 Rice and Corn Yield and Income Per Hectare

Yield per hectare (2008, metric ton per hectare)


Rice 3.53 3.30 4.44 3.40

Corn 3.62 3.56 1.51 2.18

Income per hectare (pesos, 2008 prices)

Rice 45,987 59,360 56,877 38,389

Corn 39,998 41,248 17,180 23,914

This rough average shows that income per hectare varies strongly between provinces. In Agusan del Sur,

low prices lead to incomes of less than P40’000/ha for rice and roughly P24’000/ha for corn, whereas

high prices and good yields lead to nearly P60’000/ha and P41’000/ha, respectively, in Iloilo. In general,

rice farmers have a higher gross income than corn farmers for a given size. These numbers show what is

at stake when there are natural catastrophes like typhoons or droughts destroying part of sometimes

even the whole crop6.

As mentioned above, there are no numbers to assess the exposure in urban areas. The household survey

was conducted in both urban and rural areas to address this shortcoming.

VULNERABILITY:

The concept of vulnerability tries to explain differences in death tolls and damage across regions, even

when taking into account variations in exposure and hazard. Since we have poor data on the strength of

the hazards, we have to restrict ourselves to the concept of relative vulnerability, which is the damage

divided by the exposure. When we see differences in relative vulnerability this can be due to either

different strengths of hazards or different capacities in coping with the hazards. It is beyond the scope of

this study to distinguish between these two effects. Nevertheless, the relative vulnerability might act as

a proxy indication to how vulnerable the different provinces are with respect to various hazards.

Besides, it relates the damage to the production potential and therefore describes the financial impact

in relative terms. Once more, we refer to the vulnerability of the agricultural sector due to data

constraints.

6 The amount of the disaster-induced loss depends strongly on the growth stage.



Table 7 Relative Vulnerability

Relative Vulnerability (average, 1994-2008)


Corn

Overall 22.65% 0.00% 0.19% 5.15%

Flash floods & Typhoons 13.29% 0.00% 0.15% 4.43%

Drought 9.33% 0.00% 0.03% 0.64%

Rice

Overall 9.60% 1.87% 0.36% 3.21%

Flash floods & Typhoons 7.21% 0.56% 0.31% 1.50%

Drought 2.21% 1.28% 0.00% 0.67%

The provinces of Cagayan, Leyte and Agusan del Sur are generally more vulnerable to flash floods and

typhoons than to droughts. Iloilo, on the other hand, looses a higher percentage of its rice production to

drought than to typhoons. Even though Iloilo is a big corn producer, its cornfields are barely vulnerable

to the impact of neither typhoons nor droughts. This is in contrast with the situation in Cagayan, where

annually more than one fifth of the potential corn production is completely lost. And even for rice this

number is relative high. Given this extreme vulnerability the question whether corn (and rice)

production is still a financially sustainable activity arises. Leyte is clearly less vulnerable than the other

provinces and losses typically accrue to less than 1% of annual production. In Agusan del Sur, corn is

more vulnerable than rice, but it must be noted that the corn production is very low. All in all, the four

selected provinces display a very diverse picture in terms of vulnerability.

RISKS:

The realization of risks can be measured in death tolls and damage. Missing comprehensive and reliable

data on death tolls and damage to non-agricultural assets, we only refer to the crop damage reports

released by the Bureau of Agricultural Statistics (BAS). They show clearly that droughts and flash

floods/typhoons are the most devastating hazards for farming. By restricting ourselves to the rural

sector we neglect risks in urban areas, such as landslides and earthquakes. The household survey in the

second part of this study shall try to shed some light on this issue. The following table displays the loss

for the total of rice and corn production from 1991 to 2008 organized by province and natcat category.



Table 8 Rice and Corn Damage (BAS 2008 Damage Report)

Damage in Million Pesos (Rice & Corn, 2008 Prices)

Flash floods Typhoons


Year 1991 552.1 0.0 56.3 1.5

1992 0.0 0.0 0.0 0.0

1993 148.3 0.0 48.3 14.5

1994 401.2 148.3 41.3 444.5

1995 24.3 546.5 17.9 0.2

1996 509.1 19.4 18.2 85.9

1997 0.0 0.0 0.0 94.9

1998 1,218.6 0.0 0.0 0.0

1999 1,176.2 0.0 0.0 47.1

2000 413.2 0.0 0.2 0.0

2001 1,210.9 36.1 0.0 15.1

2002 63.5 0.0 0.0 0.0

2003 1,701.9 0.7 0.0 0.0

2004 2,257.9 0.0 0.0 0.0

2005 1,688.0 16.2 0.2 0.0

2006 1,985.9 11.9 102.4 56.3

2007 249.9 0.7 0.0 48.4

2008 1,701.1 253.1 24.2 1.4

Cagayan Province suffers big losses every year

especially due to typhoons and drought. Noteworthy

is the trend in recent years that losses usually exceed

P1.7 billion. Droughts and typhoons play both a role

in this increase. Even though data for 2009 is not yet

available, one can suppose that damages have

reached another record because three big typhoons

(‘Pepeng’, ‘Ondoy’ and ‘Ramil’) hit Northern Luzon

last year. Typhoons hit Cagayan on an annual basis,

but droughts are somewhat less frequent. Severe

years are typically El Niño years (1998 and 2005). For

the considered period the average amount per year

rises up to P1.3 billion (or more or less $25 million).

To sum up, Cagayan is hit by strong and very frequent

disasters and they cause a high amount of damage.

Somewhat surprisingly, the province failed in a

certain sense to adapt to these extreme events. The

high vulnerability patterns show clearly that the

agricultural sector has not developed sufficient capacities to cope with natcats. On the other hand, the

fact that Cagayan is one of the richest provinces in the Philippines might show that farming generates

sufficient benefits in spite of high natcat damages.


Drought Cagayan Iloilo Leyte Agusan del Sur

Year 1991 0.0 181.9 0.0 0.0

1992 0.0 612.7 0.0 0.0

1993 0.0 0.0 0.0 0.0

1994 0.0 0.0 0.0 92.1

1995 31.0 494.8 0.0 0.0

1996 457.0 0.0 0.0 0.0

1997 191.6 0.0 0.0 0.0

1998 1,030.8 831.5 1.2 124.5

1999 0.0 0.0 0.0 0.0

2000 0.0 0.0 0.0 0.0

2001 0.0 0.0 0.0 0.0

2002 791.0 4.2 0.0 0.0

2003 536.4 376.3 0.0 0.0

2004 0.0 0.0 0.0 0.0

2005 1,729.3 0.0 0.0 0.0

2006 459.4 0.0 0.0 0.0

2007 1,512.7 1.4 0.0 0.0

2008 137.9 0.0 0.0 0.0


All Causes Cagayan Iloilo Leyte Agusan del Sur

Year 1991 552.1 181.9 56.3 1.5

1992 0.0 612.7 0.0 0.0

1993 148.3 0.0 48.3 16.9

1994 401.2 148.3 41.3 580.6

1995 55.3 1,041.3 17.9 0.2

1996 966.1 19.4 18.2 85.9

1997 191.6 0.0 0.0 117.3

1998 2,249.4 831.5 1.2 271.6

1999 1,176.2 0.0 0.0 47.1

2000 460.8 0.0 22.6 0.0

2001 1,210.9 36.1 0.0 15.1

2002 854.5 4.2 0.0 0.0

2003 2,366.7 377.0 0.0 0.0

2004 2,257.9 0.0 0.0 0.0

2005 3,417.2 29.3 0.2 0.0

2006 2,461.7 18.4 102.4 56.3

2007 1,771.4 2.1 0.0 48.4

2008 1,839.0 295.9 24.2 1.4



In comparison with Cagayan, other provinces are relatively less affected by typhoons and droughts.

Leyte is safe from droughts and Agusan del Sur suffered only twice losses due to long dry spells. This is

remarkable given the fact that droughts are supposed to be very severe in Mindanao. Iloilo, on the other

hand, is heavier affected by droughts than by typhoons. In dry years, damages typically rise above P150

million, whereas typhoons cause usually not that much damage. One exception is typhoon ‘Frank’ in

2008. Floods (and typhoons) hit Agusan del Sur and Leyte especially in the 90s, but also in recent years.

However, the damage was clearly smaller than what could be observed in other provinces.

A final table might illustrate the damage on an individual basis, at least for rice and corn farmers. It is

not possible to obtain damage data at farm level, but the crop damage reports include information on

area affected. Conditioned on being an affected area, the following numbers reveal information on the

average damage per hectare.

Table 9 Damage to Rice and Corn Per Hectare (BAS, 2008)

Damage per hectare (in Pesos, conditioned on being affected)

Corn


Overall 10,367 2,827 2,475 6,084

Flash floods & Typhoons 9,614 3,182 2,475 7,282

Drought 13,261 1,939 - 3,181

Rice

Overall 11,205 6,810 6,955 7,572

Flash floods & Typhoons 10,736 4,145 7,721 7,206

Drought 15,148 11,160 - 8,375

The average damage is generally 10% to 25% of the overall production, depending on the province and the crop. It is interesting to see that drought has generally a more severe impact than floods and typhoons. These statistics shall help to clarify the expectations of a possible insurance coverage. For instance, a rice farmer cultivating two hectares in Cagayan and who are affected by drought might ask for a payout of about P30’000 to cover his losses.

VI. Part 2 – Findings and Analysis of Household Interviews and FGDs 6.1 Natcat Risk Exposure and General Vulnerability The household respondents and FGD participants have an important natcat risk exposure in terms of assets and income. The typical respondent has a permanent asset exposure of about P175’000, where 75% accounts for the house and other assets are generally business assets (such as vehicles and livestock). Compared to richer people, however, the respondents have somewhat higher exposure in income than in (household) assets This might be deducted from the fact that the respondents possess less valuables (except for TVs) and investments are done either in business assets or in non-permanent goods (such as food, transportation and tuition fees). Farming households have a high reinvestment rate and have a relatively longer income turn over period. Therefore, there are high exposures after seeding up to harvest season. The income of one harvest is



supposed to bring the family through the next cropping season. Therefore, a loss in crops might lead to extreme consequences for farming households. Non-farming households engaged in microenteprises and vending activities have a more stable income, a higher turnover and shorter income turn over periods, reducing thereby their exposure to possible impacts of natural catastrophes. For natural catastrophes to have impact on people’s livelihood, there must be physical exposure, either in terms of people (usually measured in number of people living in a certain area) or in terms of economic losses (usually measured in money value). Since the insurance product shall not be a life insurance, our approach focuses on the second concept of exposure in terms of economic losses. To be more precise, we concentrate on natcat exposures to:

Household assets (for instance, damage to houses) Business assets (for instance, crop losses) Business income (for instance, losses brought about by lack of demand from the people/public

affected by natcat who are short of money to spend).

Theoretically, two different proxies could be used to measure the three exposures. The value of

household assets shall determine the first exposure. The value of (business) assets and income (not

added up, but in comparison) shall help to shed light on the size of direct business losses. And finally,

the value of income might approximate the extent of possible losses through lack of demand.

The challenge of attaching a value to these different proxies might be solved in the following way. First,

the emphasis is given to the estimate of the household itself because we are interested in their own

perception and how they evaluate their own assets. Second, we refer to more objective numbers based

on market values to correct for possible strong biases in the household’s estimates.

The value of assets and especially income are not static, but undergo strong fluctuations throughout the

year. This concern shall be addressed by analyzing low- and high-income months, as well as high-

expenditure months. Changing exposures (for the same household, but also across households) have a

direct effect on the risk of natural catastrophes. In months with low exposure, natcats shall have a lower

impact than in high-exposure months.

Based on this analysis, we refer directly to the question of general vulnerability. The extent of vulnerability, defined as the inverse of coping capacity, might be determined by the household’s endowment, but also on how she cope up with seasonal income fluctuations. Natcats are supposed to result in strong volatilities in income and expenses. Therefore, understanding how households deal with ‘normal’ fluctuations and whether these mechanisms are sustainable or fragile shall help to identify the impact of natcats.



Risk Exposure to Household Assets

The first table displays the distribution of assets and the typical median value.

Table 10 Asset Values

Asset Values

% Average Value

Median Value

Mean Asset Value per HH

House 93% 553,857 150,000 134,178

Heavy Livestock 25% 21,140 16,000 3,862

Small Livestock 58% 4,353 1,000 562

Farm machineries 7% 64,224 40,000 2,759

Vehicle 23% 63,479 45,000 9,949

Other 2% 13,486 14,000 284

Fridge 37% 9,771 8,000 2,888

Bathroom 83% 3,403 2,500 1,998

TV 73% 6,986 5,000 3,529

Radio 38% 2,792 1,500 551

Phone 7% 1,063 500 32

Cell 78% 3,753 2,000 1,513

PC 5% 24,765 25,000 1,166

A majority of the respondents own their house or occupy a free house without paying any rent. Typical

household assets include TVs and cell phones, less common are fridges or radios. The high numbers on

heavy and small livestock suggest that many respondents depend on agricultural activities and some

possess even farm machines (tractors, fishing boats). A little bit more than 20% own vehicles, especially

bicycles, tricycles and motorcycles.

The median value of the different assets gives some hints about the exposure. For the respondents, the

house itself was clearly the most valuable asset, even though the amount of P150’000 (ca. $3000) might

be somewhat too high. The two most common and valuable household assets are TVs and cell phones

that cost around P110’000.

Risk Exposure to Livelihood or Business Assets

For farm activities, livestock (and to a lesser extent farm machineries) are important assets. Heavy

livestock (carabaos and horses) is especially used for plowing the field, whereas small livestock is mostly

possessed on a more temporary basis to generate income through selling. The cost of inputs for

cropping is also a crucial asset that is not reflected in this table. Rice farmers participating in the FGDs

confirm that seeds and fertilizer might cost between P15’000 and P25’000 per hectare, depending on

the variety (footnote: In a recent crop damage report the Bureau of Agricultural Statistics estimates the

value of seedlings to P12’000 per hectare). A typical field size for farmers we talked with ranged

between one and two/three hectares. Therefore, the cost of inputs represents a big investment for

farmers.



Especially in urban areas business assets include vehicles to take passengers from A to B. Tricycles

(motorcycles) are very common in the Philippines and many people earn their living as tricycle driver.

Such a motorcycle with a sidecar might cost between P30’000 and P100’000. However, it must be noted

that not all tricycle drivers own their bike. A cheaper version is pedicabs (pedal cabs) that cost up to

P10’000.

Women are generally involved in trading activities, either of agricultural products on markets, or in sari-

sari stores (variety stores). Such sari-sari stores are very common in the Philippines and are either built

within the house or as a small pavilion. Such stores can cost around P50’000 and merchandise capital

might go up to P20’000. When compared to discussions with market vendors these numbers display the

upper bound. For instance, traders in Abuyog, Leyte, confirmed that they only possess a little pushcart

and buy fruits and vegetables with daily loans, therefore reducing the exposure.

Besides the large part being involved in the agricultural sector (especially rice farming), many male

respondents earn their livelihood as labourer (e.g. construction worker) or do other work (e.g. tricycle

driver). As described above, women generally stay at home or run small shops. Other activities women

practice includes clothes washing, small manufacturing and housekeeping.

Splitting down the sample into the four provinces reveals that especially farming households were

interviewed in Leyte, whereas Iloilo has the highest fraction of non-farming households7. This is because

one of the three covered areas was the capital, Iloilo City (fn: Cagayan’s capital Tuguegarao was also

included in the sample, but it is a smaller town and does also give home to many farmers.). All in all, the

number of farming households is too low and does only correspond in Cagayan to the actual percentage.

Risk Exposure to Household Income

Table 11 Family Income and Expenditure per Province (Monthly)

Monthly Income & Expenditure per province (Peso)

Income Expenses

Iloilo 6,457 5,417

Cagayan 14,544 7,477

Leyte 19,477 15,944

Agusan del Sur 8,631 6,504

Income and expenditure patterns in our sample vary across provinces, but this might be more due to the

selection of households than to the provinces itself. Especially the figures for Leyte appear quite high.

7 Farming households are defined as households where at least one member declares being involved in an

agricultural activity or where at least one income source is from agricultural production/livestock breeding. Households that are not farming households are non-farming households.



Table 12 RURAL Household Income and Expenditures

Household Income – Rural Household Expenditure – Rural

Sources # Median Mean HH/Mo. Sources # Median Mean HH/month

Permanent Job 56 6,000 1,349 Education 196 1,500 1,148

Temporal Job 86 4,500 1,554 Business 149 5,000 2,910

Trade Activities 59 6,000 1,422 House rental 125 75 37

Service Provision 16 2,000 129 Medical 179 500 350

Production Activities 20 5,000 402 Food 246 3,000 2,883

Agriculture Production 161 10,000 6,466 Utilities 227 400 355

Livestock Breeding 83 5,000 1,667 Transport 205 500 400

Pension 6 5,800 140 Leisure 137 750 401

Social Benefits 24 1,300 125 Loan 132 1,300 670

Money from abroad 30 5,000 602 Miscellaneous 125 450 220

Money from PH 33 3,000 398

Others 4 800 13

Table 13 URBAN Household Income and Expenditures

Household Income – URBAN Household Expenditure – URBAN

Sources # Median Mean HH/Mo Sources # Median Mean HH/Mo.

Permanent Job 68 7,000 2,300 Education 188 1,000 817

Temporal Job 93 4,000 1,797 Business 124 2,500 1,348

Trade Activities 34 4,500 739 House rental 114 450 223

Service Provision 26 4,750 597 Medical 151 500 328

Production Activities 10 7,250 350 Food 224 2,350 2,289

Agriculture Production 0 0 0 Utilities 206 300 269

Livestock Breeding 0 0 0 Transport 160 500 348

Pension 11 4,750 252 Leisure 113 200 98

Social Benefits 15 1,000 72 Loan 114 1,000 496

Money from abroad 27 5,000 652 Miscellaneous 114 100 50

Money from PH 29 2,000 280

Others 1 2,000 10

More revealing for understanding the different exposures is to distinguish between (typical) farming and

(typical) non-farming households. Overall, the former display a higher income and higher expenditures

than the latter. When comparing the different categories it becomes clear that the main part of income

is generated through farming, that is around P10’000 per month, or P50’000 per main harvest.

The numbers from the survey are in line with those reported during the FGDs and in the database of the

BAS. At the same time, farmers have higher business expenditures because they have to invest several

thousand pesos twice a year to buy inputs. In general, farming households have more family members,

which justify higher expenses for food, education, utilities and transport. Throughout the provinces, the

data for farming households displays a stable gap between monthly income and monthly expenditures.



Given the fact that leftovers at the end of the month were smaller than the gap (below P1’000) and

similar for farmers and non-farmers, we could think of two alternative explanations: First, income for

farmers varies significantly throughout the year and this makes it difficult for the respondent to report

an average value per month; second, respondents tend to report “normal”, or expected incomes. In

reality, however, harvest income might be lower due to the impact of natural catastrophes.

Looking at the distribution of income throughout the year, one realizes that the interactions between

different income groups are more complex. The communities / areas visited are largely agriculture

based communities and the local economy is greatly dependent on the agriculture sector’s

performance. Good harvest results to more economic activities in the area benefiting not only the

farmers and traders, but also local entrepreneurs and residents who profit from the increased spending

and consumption of various goods and services.

Cash flow is high during and in the month following harvest season and low during the planting season.

Planting seasons vary slightly from each province visited depending on the weather patterns. Farmers

do land preparation and planting during the rainy season, commonly during the months of December,

January to February and June to August.

Cash flow patterns of farming communities are the same across all the provinces visited. There is

increased spending during harvest months when cash flow is high and lesser spending as farmers wait

for harvest season. During harvest season, farmers are able to spend more for basic goods such as food.

For example, the type of dietary intake is different as they tend to spend more for meat products during

high-income months compared with low-income periods.

Micro-entrepreneurs in town centers or market areas had more stable income during the year. These

types of participants had high incomes during non-harvest season as farmers buy items to trade in their

community such as vegetables, basic goods, and even rice. But income is higher when farming

communities start to spend for more non-essential goods during harvest season.



These general findings might be illustrated by income patterns of the province of Iloilo.

Table 14 Household Income Patterns, ILOILO

Household Income Patters – ILOILO Province

Farming Households (including Livestock) Non-Farming Households Livestock

Most income

Less Income

Highest Expenditure

Most income

Less Income

Highest Expenditure

Most income

Less Income

Highest Expenditure

Jan 10% 5% 5% 8% 4% 7% 4% 6% 5%

Feb 3% 6% 4% 5% 3% 3% 6% 2% 9%

March 5% 13% 6% 5% 5% 6% 2% 2% 5%

April 1% 10% 7% 8% 8% 2% 4% 12% 2%

May 2% 9% 7% 5% 6% 11% 18% 10% 9%

June 3% 10% 14% 3% 12% 19% 2% 18% 20%

July 4% 10% 8% 2% 16% 9% 0% 16% 16%

Aug 3% 25% 6% 3% 27% 4% 2% 20% 9%

Sept 15% 6% 4% 5% 9% 1% 14% 6% 0%

Oct 13% 1% 4% 10% 3% 3% 6% 2% 0%

Nov 12% 1% 3% 10% 0% 5% 10% 0% 2%

Dec 24% 0% 29% 31% 2% 28% 24% 0% 20%

None 5% 5% 4% 6% 4% 4% 6% 6% 2%

Iloilo displays two pronounced climate seasons, reflected in the income patterns. During the wet season

from September to January/February farmers can plant and harvest simultaneously with potentially up

to three harvests. The rest of the year, the weather is very dry and only a few vegetables can be

cultivated. The income of farmers is correspondingly distributed with high incomes during harvest

season and low incomes during hot season. Non-farming households, however, display a more stable

income pattern. Only three months are clearly identified as high-income months from October to

December. These households generate income through second-round effects via higher demand from

farming households. This might explain the time lag of one month with respect to farming households.

In addition, the month of December is quoted by one third of the non-farming population as a high

income-month. Discussions revealed that this is partly due to higher demand during Christmas season

and partly cause by end of the year bonuses for employees.

Vulnerability to natcat

People in rural areas undergo strong seasonal income fluctuations. This asks for smoothening measures.

Most of them were only able to cope with seasonal fluctuations by relying on external financing.

Informal moneylenders are still a very popular income source and their tight payment schedules make

their clients very vulnerable to unforeseen events. Their money is particularly used for consumption

smoothening and businesses with daily turnovers. Those having access to formal sources felt somewhat

less vulnerable to seasonal income fluctuations because of longer repayment schedules.



Farmers belong clearly to the most vulnerable group, as they need high amounts of capital to invest in

their business and they are expose very volatile income patterns. This makes them less attractive clients

for MFIs and they have troubles to access formal loans. It is usual for them to approach their traders for

input loans. During the FGDs, most farmers affirmed that they have entered a debt cycle, where they

use the harvest returns to pay for the inputs of the same or earlier harvests. Therefore, they are highly

vulnerable to failed harvests.

People with income sources that are not directly linked to agricultural production experience a more stable income throughout the year (e.g. traders, vendors, and fisher folks in some areas). They manage to smooth out their remaining fluctuations stemming from secondary market effects on a more sustainable way by using savings, especially those with access to saving accounts.

To measure the vulnerability of the respondents, one might refer first to their endowments. The tables

above show that the food expenditures are around P2’800 per month per household. Given an average

household size of slightly less than 4 members, this number corresponds approximately to the food

threshold in the Philippines (between P9’000 and P10’000 per capita per year). Similarly, the amount of

expenditures (excluding business investments) is about P16’500 per capita per year. These numbers are

more or less the same across all four provincial subsamples, even though in Leyte the number reaches

P26’000. As a result, one can conclude that most of the interviewed households and the participants of

the FGDs belong to the low-income sector (class C, D and E). Their lack of financial means might result in

a lack of flexibility (e.g. above one third of the people’s gross income is spent on food and is therefore

not available for other expenses) and capacities to deal with strong impacts on their lives. Some of the

visited communities were clearly marginalized being deprived of stable electricity and water supply.

Our dynamic exposure analysis revealed that households face important fluctuations in their income

throughout the year. At the same time, nearly all households report variations in their expenditures as

well. These are more or less the same across different household types and provinces. The new school

year starting around June results in high expenses for tuition fees, new uniforms and schoolbooks.

Christmas entails high costs as well. The vulnerability of the households towards these events can be

determined from possible mismatches of high-income and high-expenditure months. In Iloilo, the start

of the new school year falls in the middle of the low-income season, therefore having a big impact on

the household’s financial stability. The question arises how the households are able to cope with these

seasonal fluctuations and whether these mechanisms are sustainable or fragile.

Risks Coping Mechanisms

Coping mechanisms among the FGD participants are the

same across all provinces, but were somewhat dependent

on whether a household member was an active

member/client of MFIs/cooperatives. In all visited areas it

is common practice to seek for alternative income sources

or livelihood. Women usually engage in small variety

stores, in trading activities or food peddling. Men look for employments as construction worker,

Risks coping mechanisms include: Borrowings from MFIs, loan sharks

and relatives/friends; Reduce spending including on food

and education; and Engage in alternative source of

livelihood and temporary jobs.



carpenter or tricycle/pedicab driver. Other coping mechanisms noted were to plant vegetables and root

crops with faster gestation periods and to sell these crops to the market or to other locals in the area.

Finally, some migrate to Manila during low-income months to work there and send money back home.

These affirmations correspond to the figures from the household survey, saying that roughly one

quarter of overall income is generated through temporary jobs.

Most of the discussants reported that they finance these alternative income sources through borrowing

money; only few could rely on savings. Those having no access to formal sources approach loan sharks

to finance their business. For instance, vendors in Abuyog, Leyte, reported that they took small loans to

buy vegetables early in the morning, sell these throughout the day and pay back their loan in the

evening. They have troubles to fulfil the requirements of MFIs and cooperatives and declare that

informal moneylenders are the best source to get quick money. On the other hand, those being

members of cooperatives or clients of MFIs usually prefer this formal source because loan sharks usually

ask for daily payments. The members affirm that their business investments take time to generate

benefits and therefore, such repayment schedules appear impossible for them.

Farmers have generally more troubles to obtain loans from formal sources. For them, an alternative

credit source is the rice trader who extends loans to the farmers through farm inputs and that are to be

paid back during the harvest season in the form of farm outputs. All participants reported to take loans

from neighbours or friends in order to finance their alternative income sources. This constitutes a very

important source for them.

Credits are not only taken for business investments, but also for direct consumption. However, most

MFIs do not offer consumption loans. These loans for consumption smoothing are generally taken from

informal money sources.

Another way to cope with income volatilities is by reducing expenditures. This includes lowering food

spending by lessen food intake or changing the dietary quality during seasons of low income. For

instance, during hot seasons, the people reduce their consumption of rice and eat other vegetables

instead. This behaviour could be observed in nearly all groups, independent of their income class.

Savings is seldom mentioned in the groups as a means to cope with the decrease in income. When

asked why they do not include savings as a means to prepare for low-income periods, a common answer

from all groups interviewed was that money is not enough even for food. Those who manage to save

will also use up cash immediately either to pay debt amortizations or to be used to purchase basic

necessities.

Cooperative leaders reported that they had difficulties to enforce mandatory savings because members

always sought for ways to get access to their money. This has also a significant impact on the

cooperative’s capital. At least leaders of two of the visited cooperatives declared having troubles to

accumulate enough capital during low-income months in order to issue loans. Those who have access to

formal sources and do not undergo big income fluctuations use more frequently savings and refrain

from taking pure consumption loans.



Savings practices come in other forms for those living in rural areas. Excess income is invested in

livestock (hog, poultry, and goat) which the people sell usually during the start of the school year or

when money is needed. This can also be observed in our income table for Iloilo (and other provinces as

well). Households that engage in livestock breeding manage to have their animals ready for selling

before / during high-expenditure months.

6.2 Risks and Specific Vulnerability

The exposure estimates help us to understand what is at stake if a natcat occurs. The general

vulnerability assessment gives us an idea on how good different groups presumably are in absorbing

shocks. Now, we address the question of hazards and their impact structure through the following

analytical process:

1. We compare the impact of natural hazards to life-cycle events and average income to understand the relative importance of the former. For instance, even though the reported damage might be low it gains in importance when expressing it in number of income months.

2. We analyze the three major natural hazards – typhoons, floods and drought – across the two major different economic sectors and across the four provinces. This helps us to understand whether some jobs are more vulnerable to specific risks than others. We try to figure out whether the expectations from our prior data analysis, that hazards are unequally distributed across the Philippines, match with the household’s perception.

3. We address the topic of risk management systems that people developed (or not) to protect themselves against the impact of specific natural calamities.

Natcats are a #1 risk for poor households. They are very frequent events and entail large costs,

especially for the agricultural sector. Comparable to illness in affecting a large part of the population,

they are generally considered as having a bigger impact on the household’s budget. Many of those being

affect declare that they suffer at least once a year from a specific natcat. This is especially true for

marginalized and very poor households living in areas where appropriate risk preparedness measures by

government units are inexistent. More severe events happen every ten to 15 years.

The major hazards are typhoons, floods and drought with droughts generally causing the highest

damage. For all these three hazards, farmers feel more at risk and incur generally three times higher

losses than non-farming households. In particular, non-farming households feel barely risk-prone to

droughts. This differentiation is explained by the fact that direct damage to households is very rare, but

that farmers may lose large parts of their crops. Non-farming households suffer more from secondary

effects through higher food prices and lower demand for their products (if they are not employed and

receive a fixed salary).

Iloilo is prone to typhoons, floods and drought, but the impact is more moderate than in other

provinces. Drought plays an important role for farmers and fisher folks, whereas the residents in Iloilo

City suffer from annual floods. A flood control project, however, shall solve this problem for the

provincial capital this year.



In Cagayan, especially typhoons, but also floods and drought affect large part of the population, with

damages higher than in other provinces. The yield of farmers’ first harvest is generally threatened by

long dry spell, whereas typhoons destroy big amounts of the second harvest. At the same time, the

province is also focus point of risk mitigation and relief measures of the government and donor

organizations. Leyte is prone to floods caused by continuous rainfall and/or typhoons, as well as

landslides. People feel extremely at risk of these hazards, comparable to the situation in Cagayan.

In Agusan del Sur, low-lying areas near the Agusan River are frequently flooded, damaging especially

farmers’ crops. These floods are triggered by moderate, but steady rainfall.

State players have barely developed any capacities to mitigate risks in the provinces in such a way that people feel unprepared and abandoned. Whereas, seasonal climate forecasts and irrigation system help some people to a certain extent to cope with droughts. Floods and typhoons hit most communities with little warning and preparation. Most people manage the impact of natcats by borrowing money from friends, relatives or neighbours and to a lesser extent via savings. Formalized systems, such as insurance schemes or organized relief programs are rarely in place and are mostly considered as less effective. At the same time, the impact of natcats exceeds the capacities of these informal risk-sharing mechanisms, leaving people with major problems in repaying their loans. Table 15 Frequent Hazards and Cost

Frequent Hazards and Corresponding Cost

What are the events that affect your household in the last 3 years?

Type of Hazards % Average Occurrence Per Year

Average Cost Median Cost

Childbirth 33% 1.3 5,618 2,000

Baptism 25% 1.2 3,546 2,000

Schooling 52% 3RD

2.8 11,074 2,500

Wedding 12% 1.1 20,726 2ND

10,000

Fiesta 51% 2.6 6,197 3,000

Illness 40% 2ND 2.9 9,629 3,000

Accident 7% 1.3 39,931 5,000

Funeral 7% 1.2 16,253 1ST

15,000

Typhoon 59% 1ST 3.1 17,496 5,000 Floods 49% 2.3 11,566 5,000

Drought 20% 2.7 17,891 2ND 10,000

The HH survey shows that natural catastrophes are part of the respondents’ life. Typhoons are the most

frequent event for the four provinces taken together. They affected 60% of the households in the last

three years and happen on average once a year. Floods (except typhoons) are also a very common

disaster affecting half of the sample. There are only two life-cycle events affecting more or less the same

number of households: More than 50% of the households report fiestas and schooling as events that

have affected their households recently. Illnesses and childbirth are a little bit less common. Droughts

only affected 20% of the sample.



The data on the strength of the impact, expressed in Pesos, shows that funerals, weddings and drought

entail the largest costs, but they are also clearly less frequent than other events. Schooling and

especially fiestas have a more moderate impact on the people’s budget than typhoons, floods or

drought. The typical respondent household looses P5’000 every year either to the impact of floods or

typhoons. Given that the average costs are clearly above the median one can conclude that the cost

distribution is highly skewed with some experiencing losses plainly above P20’000. These numbers

compare to typically one to two income months, showing the strength of the impact.

Figure 2 Financial Pressures of Households

When asked for the financial pressure on the household, one obtains some deviations from the impact

expressed in Pesos. Events associated with life or happiness (such as childbirth, wedding, fiesta) have a

lower impact than ‘sad’ calamities (especially funerals, but also illness and all natural calamities).

These figures correspond to the answers during the FGDs, even though participants did not mention

‘happy’ events as big risks. Illness in the family, natural disasters, education spending, and accidents are

the common events or occasions that affect family income across all the groups interviewed. Family

cash flow is heavily affected whenever these events happen.

Poor and marginalized communities identified as their major concern the supply of water and food

during wet season when storms and floods make it difficult to reach them. When asked for the

frequency and impact structure one could notice a slight distinct picture. Illness and education were

mentioned as having the most frequent and for some even biggest impact on the people’s livelihood.

Other agriculture-related events were also mentioned, such as pest and death of livestock. In many

discussions, natcats were declared as having the biggest impact.

1.0 2.0 3.0 4.0 5.0

Funeral

Floods

Drought

Typhoon

Illness

Accident

Schooling

Childbirth

Fiesta

Wedding

Baptism

Financial Pressures of Households

Scale 1-very small, 2-small, 3-neither, 4-big, 5-very big



Table 16 Frequency of Natcat Occurrence

Frequency of Natcat (Number of responses)

Frequency of Occurrence

never lifetime ten yrs 2-5 yrs annually several times

Typhoon 126 133 8 25 125 48

Floods 182 113 13 40 69 37

Drought 273 38 8 21 59 15

The frequency patterns of the three major natcats - typhoons, floods and droughts - reveal that the

typical recurrence period is one year. Those affected by natcats experience them typically very often

and only a few respondents declared being affected regularly, but less than once a year. According to

10% of the respondents especially typhoons might even affect their household several times a year.

These high frequency numbers might be at odds with the general perception of natural calamities as

being a somewhat unexpected event that is not part of the regular, seasonal weather fluctuations. For

instance, the distinction between normal dry season and droughts was not that clear to some of the

FGD participants. In Zarraga, Iloilo, the respondents affirmed that droughts affect them every year, and

the impact has increased in recent years.

When asked about natural calamities that have had high impact on the family over the past ten years,

most groups could only remember the most recent calamities. However, when asked about when such

event with a similar or higher magnitude of destruction occurred, they could recall events dating way

back over twenty years or so.

As emphasized above, farming and non-farming households have different exposures and different

general vulnerability towards exogenous events. This was justified by the fact that farmers need high

investments and have long income turn over periods thereby creating strong fluctuations that might

easily be exacerbated by the impact of natcats. The next table helps in figuring out whether farmers

also have different risk perception regarding different natcats.

Table 17 Risk Proneness for Farming and Non-farming Households

Farming HH not little more or less Strongly extremely

Typhoon 23% 13% 20% 24% 16%

Floods 34% 12% 14% 25% 10%

Drought 48% 15% 11% 13% 3%

Non-farming HH not little more or less strongly Extremely

Typhoon 40% 16% 19% 15% 9%

Floods 43% 17% 14% 16% 7%

Drought 72% 7% 3% 2% 1%

The table reveals two important findings: First, farmers are more affected by natural catastrophes than

non-farming households. Second, non-farming households feel barely risk-prone to droughts. This



pattern holds across all provinces. In other word, typhoons and floods affect everybody, but particularly

farmers; droughts affect essentially only farming households.

For each of the three hazards, the gap in risk perception between farming and non-farming households

is around 15 percentage points, when considering those reporting to be strongly or extremely at risk.

This first result is in line with our former findings, emphasizing the high exposure and high general

vulnerability of farmers. They have simply more at stake and in addition, crops are especially vulnerable

to extreme weather events, particularly during the reproductive stage. Floods and typhoons affect

farmers in two ways. Besides the destruction of their harvest, they suffer considerable losses from

floods because the remaining crop is of lower quality and they obtain lower price when selling it.

Another common concern for farmers among all provinces includes pest & infestation.

At the same time, around 25% of the non-farming households feel at high risk of typhoons or floods.

This number is in line with observations gathered during FGD. Depending on the income source and the

location of the homes the discussants claimed to be more or less affected by these hazards. When asked

for the impact of typhoons and floods FGD participants living in risk-prone areas (near the riverside)

generally answer that everything is submerged and flooded for several days. But few report substantial

damages to their houses, such as roofs blown away. Natural calamities that would affect their homes

directly are not very frequent. Except for floods, the participants have rarely experienced extreme

natural calamities that have destroyed completely their homes or have resulted to losses of life in the

family. The impact of typhoons, floods and particularly drought is more indirect. Those running stores or

engage in trading suffer more from less demand for their products and higher expenditures for food as

prices increase. But those with fix salaries (e.g. Barangay officials) experience only the latter effect. This

difference in risk perception is also represented in the median cost that people attach to the three

calamities:

Table 18 Natcat Costs to Households

Cost of Major Natcat Events

Farming HHs Average Median #

Typhoon 24,055 8,000 84

Flood 15,647 5,000 66

Drought 20,789 10,000 38

Non-farming HHs Average Median #

Typhoon 7,998 2,000 58

Flood 5,954 2,000 48

Drought 4,125 3'500 8

In case of natural disasters farmers incur three times higher losses than non-farming households.

Droughts are very severe and costly events for farmers. These numbers are in line with those gathered

during the FGD. When asked how much loss do farmers incur in the event of flooding, the common

estimate provided is around P15’000 per hectare of land. However, severe droughts can destroy up to

70%-80% of the crop that is around P35’000 per hectare. Consequently, the whole community suffers

from losses. Household asset damage estimate their losses up to P20’000 for fixing damaged roofs, for

instance.



Drought is of less importance for the visited areas. Even in El Niño years there is still rainfall that can be

observed in selected areas of the province. Two thirds of those feeling at risk of droughts state that this

is because of the strong impact and not because of the short recurrence period.

Even though respondents in all provinces shared the common concern that natcats have a big and

frequent impact on their family’s lives, comparable or even greater than those caused by lifecycle-

events, the four areas display different risk ‘maps’.

Figure 3 Perception on Natcat Impact to Households – Pre selected provinces

The perception of the respondents to the impact of the 3 major natcat events was measured in a scale

of 1 to 5. 1 as no risk, 2 little risk, 3 medium, 4 high and 5 as extreme risk. Figure 2 capture the

responses in the medium-high-extreme risks of the scale. Leyte and Cagayan are more risk-prone to

typhoons and floods. Agusan del Sur and Iloilo are affected mostly by flood. Drought has the least

impact across all areas because its occurrence is less frequent than the other natcat. Drought however

provides the biggest cost to farming HHs in a single event.

Iloilo:

According to the crop damage report from BAS, Iloilo is more frequently and severely affected by

droughts and typhoons. However, most of the survey respondents declare that their household is more

affected by typhoons and floods than by drought. This can partly be explained by the fact that the

number of non-farming households is disproportionally high in this subsample. But even among the

farming households barely 10% feel at risk of droughts.

0% 10% 20% 30% 40% 50% 60% 70%

1

2

3

Perception on Natcat Impact to Households - 'High/Extreme' category

Agusan DS

Leyte

Cagayan

IloiloTyphoon

Flood

Drought

Question 5.1.7: How risk-prone is your household to the following natural calamities? Categories of responses: 1 – at no risk at all; 2 – at little risk; 3 – at medium risk; 4 – at high risk; 5 – at extremely high risk.



This number challenges both the statistics from BAS and the results from the FGDs. Four discussions

were conducted in Dumangas and one in Zarraga, a neighboring community on the way to Iloilo City.

Most participants relied, at least partly, on farming activities, but had generally a second activity, such as

microenterprises or barangay official. When asked for the risks with the strongest impact the common

answer was drought as this affects the entire community and makes other income earning opportunities

scarce as well.

Typhoon ‘Frank’ hit Iloilo in 2008, causing a lot of damage and even casualties. Therefore, the question

how the group was affected by this big event rose quickly. Most discussants could remember the big

impact of this typhoon, but did not forget to mention the drought in the consecutive year as being at

least similarly severe.

Figure 4 Perception on natcat impact to households - ILOILO Province

The survey results indicate that about every fifth respondent feels highly or extremely at risk of

typhoons and floods. Compared to other provinces the impact is more moderate and damage estimates

are lower. In addition, 75% of all respondents declare that they are hit less than once in a lifetime.

People living in Iloilo City usually say that they encounter flooding and typhoons more frequently, but

the impact is also lower than in the more rural municipalities of Dumangas and Zarraga. As a matter of

fact, Iloilo City (and its outlying areas), is vulnerable to large-scale flooding disasters frequently during

the rainy season. According to the survey respondents these calamities take place nearly every year.

Discussions with the municipal planning officer revealed that reasons for this are the city’s location at

the mouth of several rivers and the fact that unfavourable city planning structures, such as illegal

settlement, construction and encroachments, reinforce the devastating effects of the natural hazards.

Cagayan:

According to our first data screening at the beginning of this study Cagayan is one of the most risk-prone

areas in the Philippines and clearly more at risk than the other three provinces. These results are

confirmed by the household survey and the FGDs.

0% 20% 40% 60% 80% 100%

no/little risk

medium

high/extreme

Perception on Natcat Impact to HH - ILOILO Province

Drought

Floods

Typhoon



Figure 5 Perception on natcat impact to households - CAGAYAN

Especially typhoons are identified as very risky, affecting nearly the whole sample (more than 95%).

More than 60% of our sample feels at high or extremely risk of typhoons, whereas this number is around

25% for floods and drought. Compared to other provinces the cost estimates are also slightly higher,

especially for typhoons and drought, and even for non-farming households being around a median value

of P3’000 to P4’000.

In line with BAS statistics the survey respondents confirm that typhoons and drought affect them

annually. Typhoons (droughts) hit nearly 90% (50%) of the sample at least once a year. An FGD

participant sketched a typical ‘Cagayan’ (agro-)year as follows: The first (dry season) harvest in February

to April has low yields due to droughts and the second (wet season) harvest in September to October is

even worse due to several typhoons devastating the crop. Some of the farmers in the community of

Solana, one of the municipalities with the highest crop yields in Cagayan, even report that the second

harvest months are low-income months because part of their harvests are destroyed by typhoons.

The four visited municipalities have slightly different hazard profiles. The Cagayan River is the largest

and longest river in the Philippines and is subjective to extensive flooding during the wet season from

May to October. This is caused by rainfall in the southern mountains where the river’s headwaters lie

(mainly in the province of Isabela). As a consequence, cities located at the riverbanks of the Cagayan

River, such as all visited areas (Tuguegarao, Solana, Alcala and Aparri), are highly susceptible to flooding.

For instance, the urban part of the municipality of Tuguegarao is surrounded big farming areas that are

highly susceptible to flooding, as is a small fraction in the south of the city itself as well.

All four municipalities are also prone to typhoons. FGD participants could all remember the devastating

effects of typhoons Pepeng, Ondoy and Ramil that hit the province in 2009. When asked as to when a

similar event occurred, the group in Solana mentioned that something similar happened in the 1970s.

Over the past ten years, it was in 2005 and 2006 that th experienced a very strong typhoon, but it was

not as destructive as that of 2009. The municipality of Aparri, lying at the mouth of Cagayan River, is

divided in two, with this broad river in-between. Whereas the town center on the eastern shore is well

developed, the western part is mostly populated by fisherfolk, roads are inexistent and electricity supply

is only temporary. When asked these fishermen how natural hazards affect them they answered that

0% 10% 20% 30% 40% 50% 60% 70%

no/little risk

medium

high/extreme

Perception on Natcat Impact to HH - CAGAYAN Province

Drought

Floods

Typhoon



strong winds make it impossible for them to go out fishing and during typhoon seasons they are

completely cut from the town center, resulting in interruptions of food and water supply. In addition,

their wood huts are easily blown away.

Leyte:

The province of Leyte is threatened by yearly occurring floods following heavy rains, often associated

with typhoons. The main period for typhoons and floods is September to January, that is before, during

and after harvest time. Droughts rarely occur and are seldom recognized as risky events.

Figure 6 Perception on natcat impact to households - LEYTE province

People in Leyte perceive risks as being stronger than as the crop damage report data suggests. Impact

scores are comparable to those of Cagayan and they are even higher for floods. This holds true even

when considering the high fraction of farmers in the subsample. In addition, nearly 20% of the

respondents feel at high risk of landslides, making this hazard more risky than droughts in this province.

One third of the respondents declare to be affected at least every year by a typhoon. At the same time,

most of the FGD discussants stated that typhoons are probably going more north due to climate change,

thereby letting Leyte unaffected in coming years. Strong floods occur less frequently than typhoons and

are smaller in its spatial outreach. In accordance with the higher income rates and more valuable assets

that the respondents in Leyte reported the usual damage of the natural calamities is also higher than in

other provinces.

Extreme events that make losses even to those that are not directly dependent on the agricultural

production are quite rare in Leyte. The vendors in Ormoc City remembered well the flash flood of 1991,

which left nearly everybody affected, and a smaller one in 1995. Those living in protected homes on the

hills suffered from damages to their businesses because they are generally located in the center of

Ormoc City, near the water. Another major event hitting the province was a seven months drought in

the 1980s. Leyte is also known for being prone to landslides, happening especially in the southern part

of the island.

Floods occur annually in Leyte, but they do not affect everybody and are not always associated with

typhoons. When visiting a marginalized barangay of Baybay, located more to the hinterlands, the FGD

participants emphasized that they suffer harvest losses every year because of heavy rainfall in the

0% 20% 40% 60% 80% 100%

no/little risk

medium

high/extreme

Perception on Natcat Impact to HH - LEYTE Province

Drought

Floods

Typhoon



mountains. Even though it barely rains in the barangay itself the water coming from the mountain is so

strong that it destroys part of the harvest. This type of floods is not expected to change in the coming

years

Agusan del Sur:

In accordance with our prior data analysis, Agusan del Sur is generally less risk-prone than other areas.

The most critical hazard is flooding with about 25% of the respondents being at high or extremely high

risk. Droughts are also a concern for only about 30% of the farmers in the sample, but even though

these say that they are of less importance to them than floods, the estimated damage for droughts is

nearly twice as high as that for floods. Typhoons do practically not occur. Even though many people

expressed the concern of floods, those having no farms had difficulties to design a value to their

incurred losses because those are more of an indirect character. In the visited municipalities of Bayugan,

Trento and San Francisco damage to houses is very rare because they are located in higher areas,

whereas the farms are built up near the riverbanks.

Figure 7 Perception of natcat impact to households - AGUSAN del Sur Province

Floods are usually caused by moderate, but continuous rainfall, leading to overflowing of the province’s main river, the Agusan River. Even though these floods happen every year they differ in intensity. People usually refer to the years 1984, 2006 and recently January 2010 when asked about severe floods in the area. But the worst was in 1984 where houses and farms were destroyed, livestock were lost, and several people died.

6.3 Risk Preparedness

Risk preparedness is insufficient in most areas. As a result of the lack of appropriate infrastructure or risk

mitigation plans offered by local government units natcats affect families and their communities very

frequently.

Natural hazards are unequally distributed across the four visited provinces with people in Cagayan and

Leyte feeling more at risk than in Agusan del Sur and Iloilo. Besides, natcats occur very often, most of

0% 20% 40% 60% 80% 100%

no/little risk

medium

high/extreme

Perception of Natcat Impact to HH - AGUSAN DS Province

Drought

Floods

Typhoon



them annually. When asked whether they know of any action taken by the government or institutions to

protect them from the impact of natcats, the general answer across all four provinces is ‘a little’. Most of

the people feel vulnerable, as they have not developed sufficient capacities to adapt disasters.

In Cagayan, the FGD participants mentioned that they felt better prepared for droughts than for

typhoons. When PAGASA forecasts a long dry spell, the government and private operators try to store

water in their water reservoirs. Especially those areas where irrigation systems are in place farmers feel

less prone to drought. However, most of the places that have been visited lack accessible water sources

in a sense that those provided by the National Irrigation Association (NIA) are often not affordable for all

farmers. Only some communities have developed local irrigation systems that are shared among

community members. In other areas individual efforts prevail, that is to say farmers make use of water

pumps and deep wheels to get water from the ground. Anticipating a lack of water, farmers change their

cropping. They cultivate vegetables that are more drought resistant. That helps them to dampen the

impact of severe droughts. However, not all groups were aware of seasonal weather forecasts and had

troubles to prepare in time.

Given their sudden character typhoons and floods are perceived as events that let the people

unprepared. Especially the marginalized and poor people feel not at all prepared and left abandoned by

the government. Preparation is rarely organized and is more of an individual, spontaneous character.

Typhoon warnings reach those people who have a TV generally one week before the impact and

barangay officials try to disseminate the warnings via mouth-to-mouth propaganda. Preparation of

floods usually begins when steady rainfall is observed. On the one hand this gives the inhabitants

enough time to prepare their houses, store some food and evacuate livestock. People in Cagayan even

declared that local governments typically organize surveys in this week to check whether households

engage in necessary preparation measures. On the other hand, crops, that is to say the most valuable

assets for farmers, cannot be saved.

The groups affected by floods and typhoons were asked if they knew of any actions being taken to help

reduce the risk, but the common response to this query is that they are unaware of any actions being

undertaken by both the local community leaders and the local government units. The group in Baybay,

Leyte for example, explained that a simple dike could already help reduce the flooding in their area, but

they sadly noted that their local government has taken no action over these years. On the other hand,

some major cities have developed projects to dampen the impact of floods. For instance, Ormoc City has

developed a disaster plan for flood-prone areas after the flashflood in 1991, including risk mitigation

mechanisms. The construction of dikes and the widening of the river basin shall help to make the city

less vulnerable to floods. Similarly, in Iloilo City the Flood Control Project shall offer a long-term solution

to the perennial flooding in the city and outlying areas. The project, that includes construction of flood

ways and bridges, as well as education campaigns and resettlement of affected areas, shall be

completed in 2010.



Figure 8 Natcat Coping Mechanisms

Coping mechanisms after the impact of a hazard are essentially the same as those used to smoothen seasonal fluctuations. Borrowing money especially from friends and relatives is the most prominent coping mechanism as indicated by over 60% of the responses – around 13% of which gets credit from lenders/MFIs. Savings is the 2nd coping mechanism (25%) followed by reducing consumption (5%) and selling household assets (2%). Four (4) of the 264 responses said insurance claim is one of his typhoon coping mechanism. The same picture of coping mechanisms is also true for other risk events like accident, illness and funeral. Even though most of the respondents have access to formal finance sources, borrowing from friends and relatives is still more prominent. This can be explained by the fact that many MFIs are reluctant to disburse emergency loans because they are usually not invested in businesses. Alternatively, friends and relatives ask generally for lower interest rates (these zero-interest loans go along with the expectation that credits with similar conditions are given to the lender when she is in need). The FGD participants declared that most of them have relatives working at least temporarily in Manila. Still, it should be mentioned that FGDs with members of cooperatives or clients of MFIs revealed that the institutions usually disburse credits, but that they are sometimes not sufficient in serving the costs.

Saving is more commonly used for foreseeable events (fiesta, wedding, baptism and childbirth), but not

so much for unforeseeable events (illness, typhoons, floods and drought; exception: schooling). In

addition, people rely generally more on savings for those events that induce lower costs. This

corresponds to FGD results. The discussants emphasized that they try to save for emergencies and that

some are successful in accumulating a small amount, but in most cases the hazard-induced costs exceed

this sum. In a way that respondents evaluate saving as a less important mechanism, borrowing from

informal moneylenders increases in importance.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

Friend

Savings

Lender/MFI

Reduce Coonsumption

Sold Assets

Claims

Goverment

Ris

k C

op

ing

Mec

han

ism

sHousehold Risk Coping Mechanisms

Natcats

Foreseeable risk events

Unforeseeable risk events

Natcat risk events include: typhoons, floods and drought. Foreseeable risk events include: childbirth, baptism, schooling, wedding, fiesta. Unforeseeable risk events include: illness, accident, funeral.



Some people also tend more to reduce expenditures on consumption, motivated by the increase in

prices that people usually face after natcats. Besides, in case of natcats some FGD discussants remember

the distribution of money and food via the LGU calamity fund. The national food authority sells rice at

lower prices and in some places, especially in Cagayan, the farmers benefit directly from government aid

in form of free seed distribution. This takes place in proportion to the damage that each household

reports to the DA during the survey taking place one to two weeks after the impact. Some also

mentioned the good job of donor organizations that were very effective in distributing money, food,

clothes and other assets on time. All this shows that the government and donor agencies have taken

measures to help those affected by calamities, but only a small fraction of the affected is reached and

measures seem to be more sporadic than on a regular basis.

When asking how they evaluate the different coping mechanisms the survey respondents stress that

only a few mechanisms are really effective, emphasizing their vulnerability and helplessness. The

mechanisms obtaining the best scores tend to be those that are easily accessible. For instance, across all

provinces these are ‘Borrowing from a friend, a neighbour or a relative’ and ‘Savings’. Most people

evaluate claims from insurance membership as a very ineffective way to cope with calamities.

Government and donor aid obtain very good results in Cagayan. This might show that measures from

these institutions have so far concentrated inter alia on this province due to its hazard-proneness. In

general, people judge the help from MFIs and cooperatives as a rather effective way in overcoming

natcat shocks, especially in Leyte.

Having troubles to repay loans after the impact of a hazard indicates how well people are able to

overcome the shock. As mentioned above, a case of illness in the family is a major hazard affecting the

household’s budget. Still, whereas such a shock leads for most people to some problems in repaying

their loans, the impact of typhoons and floods is clearly more severe and people have more problems to

manage this impact. This result for around 40% of those affected to major problems in repaying the

loan, and for 30% to have some problems. The respondents have fewer problems, however, in coping

with the consequences of droughts. When dividing the pool of respondents in different subsamples one

can observe that especially farmers and those living in Cagayan and Leyte encounter problems in

repaying their loans.

6.4 Financial Literacy & Insurance Design

Pricing is the most important issues for most of the groups interviewed. Most are interested to have a

natcat insurance product and that holds true across all four provinces, even though corresponding to

their specific risk profile. The affordability, however, is the most important single factor that will

determine whether a family will decide to purchase natcat insurance. Low premiums payable in

accordance with the household’s income schedule and high-frequent payouts make the product

appealing to most of the households.

Since there are no other offers of such kind except for crop insurance offered by PCIC, participants of

the FGDs are not very particular about the quality and features of the product. For as long as individuals

perceive the product to be affordable and that benefit is commensurate to the amount paid in

premiums, then the insurance product would be an attractive investment for them.



Information is also critical in successfully distributing natcat insurance. Most of the participants do have

some basic understanding about the concept of insurance. But what seems to prevent them from

availing insurance products (other than the price factor) is information where to get it and information

on how it actually works. Only one quarter of the people interviewed availed of insurance products,

especially for health and funeral pre-need plans. This subsample tends more than others to be

interested by natcat insurance products.

When not being active members of any cooperative or client of any MFI, most are indifferent concerning

distribution channels as long as those are easily accessible and somewhat part of the people’s life.

Strong outreach and a high number of clients make it attractive for others to buy the product as well.

Insurance protection is commonly understood by the FGD groups as a means of security against

unforeseen events. Policyholders are receiving some form of benefit that will help their family to

recover from incurred losses. Especially those being MFI clients or cooperative members were familiar

with the basic concept. In the HH sample around 60% declared understanding the concept of insurance.

Still, when probing deeper and asking about possible reasons why people buy insurance or how the

payout process works answers were quite varied.

Figure 9 Reasons to buy insurance



Figure 10 Perceived benefits from natcat insurance

Only roughly 28% of the survey respondents hold that the reason to buy insurance is to protect the

policyholder from catastrophic losses, whereas 8% more believe that it is for the protection of recently

incurred losses. Similarly, when asked for the benefits of an insurance coverage the same number of

people chose the right answer, that is to say that policyholders only receive any payouts in case of a

qualifying event.

More than half of the respondents believed in a combination of saving and insurance product; in other

words, payouts are expected for the event of a natcat and after the end of the contract period in form

of a contribution payback plus interests. This corresponds to incidences in FGD where people frequently

asked whether they got any payout if there was no qualifying event. Surprisingly, neither those saying

that they understand the concept of insurance, nor those actually availing of insurance display a higher

probability in giving the right answer to the two questions.

Although it seems that the groups interviewed understood the concept of insurance, some still consider

insurance as an additional expenditure for the family and premium payments are a form of expense,

which is not necessary or not a priority, especially in times when incomes are low. As a matter of fact,

insurance is seldom mentioned as a means of protection against unforeseen events. Individuals will not

subscribe to insurance unless it is part of the loan availed by the individual or if someone has been able

to explain to them the benefits it would provide them. Some avail of PhilHealth cards distributed

through local government units while there are a few who avail of burial plans offered by private pre-

need companies, such as St. Peters.

In the HH survey sample only one out of four avails of insurance (25%), mostly health (PhilHealth) and

life (St. Peter’s Life Plan). Some of these products offer very rewarding leverages. For instance, some

availing of Philihealth insurance mentioned that they paid an annual contribution of P180 and benefits

include free consultation and hospitalization. The Red Cross accident insurance is also popular and is

19%

28%53%

What benefits from natcat insurance?a) When contract ends, I will get my contributions

b) When contract ends I will get nothing. But in case of calamity, I will get money from insurance company.

c) In case of calamity, I will get money from insurance company + when contract ends, I will get my contributions & interest



available for an annual premium of P100. Payouts in case of accidents can go up to P20’000. Still, private

companies, such as St. Peter, are also successful in marketing their products. Premiums are obviously

higher and ask for a payment of P550 per month during five years. Even apparently poorer people were

willing to pay that sum, arguing that they do not want to let their children worry about funeral

expenses.

The participants tend to avail of these products because they have knowledge of it or have been

referred to it by neighbours or friends or it has been thoroughly explained to them by insurance agents.

Without this information, they would not intentionally seek for or purchase insurance on their own. In

addition to little awareness, many people are also reluctant to buy an insurance cover for moral reasons.

A common argument heard was that preparing for a disaster implied to a certain extent to look forward

to the event to happen in order to collect the benefits. According to one FGD participant, that is “against

God’s will”.

However, the fact of being insured seems to alter the policyholder’s perception of risks, evaluating

covered risks as resulting in less financial pressure. For instance, those availing of health insurance

consider health problems still as a major risk, but cases of illness tend to result in less financial pressure

for the insured than for the non-insured. In discussions those benefiting of insurance coverage are

generally satisfied with the policies and stress the advantages, though adding to have difficulties in

paying regularly.

All in all, there seem to be still important gaps in questions of financial literacy. These might restrict the

demand for insurance products. It is true that understanding insurance is not a pre-requisite to have a

policy. In fact, 28% of those availing of insurance products admit that they do not have any idea about

what insurance really means. Subsidized and/or compulsory insurance products might explain this high

figure. But definitely rising people’s awareness on issues of financial risk protection should increase the

demand for insurance products. As a matter of fact, those who say that they understand insurance are

more interested in buying natcat insurance. And this is even more the case for actual policyholders.

Table 19 Demand for Insurance by Understanding and by Membership

Interest in Natcat Insurance

Those understanding what insurance is Those NOT understanding what insurance is

yes 88% Yes 82%

no 12% No 18%

those availing of an insurance product those NOT availing of an insurance product

yes 91% Yes 83%

no 9% No 17%

Financial literacy plays an important role in determining the demand for insurance products. People

having an idea of what insurance is and those who avail of insurance products have a bigger demand for

a natcat insurance product. But even among those who are not aware of what insurance is there are still

more than 80% interest in such a product. Taking the whole sample, 86% of the HH respondents are

interested in buying an insurance product to protect them from the impact of natcats and still 66%

would like to insure their loans.



The interest in natcat insurance is high in all four provinces with Cagayan and Agusan del Sur displaying

particularly high figures. The specific hazard of coverage corresponds to the identified perception of

risks as analyzed above.

In Cagayan, 80% of all households would be interested in an insurance product for typhoons. During all

FGDs in the province typhoons was the primary concern, too. The impact of drought and floods is more

specific to either certain occupations (such as farmers) or certain locations (communities without good

irrigation system; near the river) and are therefore of less demand. However, one fifth of the farmers

being interested in an insurance product in Cagayan would like to have a protection against drought.

In Iloilo, the picture looks less clear, as both typhoon and flood protection are nearly equally high in

demand. At the same time less people than in other provinces would be interested in a natcat insurance

product there and when offering a specific product (e.g. for the protection against floods) only at most

one half of the survey sample would show any interest. The FGDs revealed a somewhat different

picture. Nearly all people were interested in a drought-insurance, especially farmers and fishermen.

In Leyte, people had an interest in typhoon-related insurance products, but even protection schemes

against flooding would be appealing to nearly one half of the respondents.

Finally, Agusan del Sur displays a clear preference for flood-insurance products, especially among

farmers.

In general, there is barely any difference in interest between farming and non-farming households, but

the former are likelier to be interested in a multiple-peril insurance and have higher demand in typhoon-

and drought-insurance products.

Quiet surprisingly at first sight is the fact that even households reporting that they are at no risk of a

certain calamity are preponderantly interested in buying a natcat insurance product. This might be

illustrated by the demand for typhoon insurance products. About 70% of those saying not to be at risk of

typhoons are interested in such a product. This finding supports the hypothesis that secondary impact

effects play an important role in determining the demand. Still, being at risk is another important factor

(besides understanding & membership of insurance) in explaining demand.

Having a general interest in a natcat product makes people more likely to buy the product in the end,

but product features will certainly play their part in forming the demand. Insurance is still not common

practice among the respondents. It is important to realize that nearly no group identified insurance as

possible answer to mitigate the risks from calamities.

Selected groups were asked about the features or product attributes which they think are more

important. The groups identified the top three insurance product attributes:

1. amount of premium payments, 2. benefit or amount of payout received, and 3. requirements and ease of application

Not as important are ease in payout claims, frequency of payments and credibility of the provider.



Table 20 Monthly insurance premium affordability

Participants shared that insurance premiums should be matched with the family’s ability to pay such

amount of premium. Since insurance is commonly viewed as an additional expense, the amount should

be low – not more than what they are willing to spend on non-basic necessities. The timing of the

payment should also be considered and should coincide at times when they have excess cash inflow,

usually during harvest season or peak business seasons. For instance, one group of farmers asked

whether it would be possible to pay high monthly amounts during harvest season and lower amounts

during the rest of the year. But other factors, such as existing collection channels play also a role. For

example, SECDEP members in Iloilo preferred paying on a weekly basis, as they collect already insurance

premiums every Monday. In general, the premium amount should be between P80 and P500 per month

with slightly higher willingness to pay in the province of Leyte (probably due to higher income in this

subsample). Surprisingly, farming households would not be ready to pay significantly higher premiums,

though being more affected by natcats. Those not interested in natcat products often argued that they

were not able to pay the premiums, therefore emphasizing the relevance of low premiums for this

market.

Benefits are also a primary consideration. Participants in the FGD equate that the amount contributed

should more or less be proportionate to the amount of benefit that they will receive. The common

attitude of participants regarding benefits is that if a certain amount is paid, an equal or greater amount

should be received in case the insurance is paid-out (much like savings being availed only at time when it

is needed). The participants also prefer to receive payouts for calamities that occur frequently to

payouts for severe calamities that seldom occur. For them, the need is when the calamity occurs,

irrespective whether it is severe or not, since they are affected anyway in one way or the other and that

they will be needing cash to help them recover from losses. ‘Frequent’ as understood by most FGD

participants means more or less every year; in some provinces like Cagayan people were declined to ask

for several payouts a year, e.g. corresponding to the number of typhoons. In the HH survey sample, 57%

of the respondents preferred frequent and low payouts to less frequent and higher payouts. Desired

payouts depend on the occupation, but should fit the damage. Farmers would like to have benefits

around P20’000; others would expect an amount of about P5’000.

0% 5% 10% 15% 20% 25% 30%

Less than 10

11-20

21-40

41-80

81-100

101-150

151-200

200-500

Over than 500A

mo

un

t in

Ph

ilip

pin

e P

eso

Monthly Insurance Premium Affordability



Box: Challenges to PCIC crop insurance Only a handful of the FGD participants and nearly none in the HH survey sample subscribed to crop insurance. Only in Cagayan farmers were more inclined to have a PCIC policy. That is surprising because the current crop insurance program by PCIC may seem to be sufficient to provide protection against the effects of natcats. But the FGD discussants gave various reasons why they did not avail of any crop insurance.

The majority of the groups criticized that they have not been informed properly or have not been visited by any organization offering crop insurance. Not all farmers interviewed have heard of PCIC and those who have do not have any knowledge of where to avail and what benefits it has to offer them.

For those that have availed of crop insurance, they shared varied experiences, often unfavourable which include: Features of the insurance product are too complicated or too technical to be understood by farmers. Documentary requirements are too tedious. Benefits and claim procedures are not understood very well (example: on eligible rice varieties) Payment schedule is not flexible. Many farmers prefer paying after harvest rather than 15 days after planting as required. Difficult requirement that they had to take loans from Landbank in order to get an insurance coverage. Since Landbank does not

disburse any loans to them (as they have no collaterals) they could not avail of crop insurance. Issue of eligibility for crop insurance. Eligibility is restricted to those that do not live in risk-prone area. As a consequence, people

who benefited from payouts in one year could not apply in the subsequent year because they were considered as high-risk clients for subsequent years.

The PCIC “changes the rules” on risks categorization. PCIC is currently reclassifying land areas to adapt the risk categorization to climate change.

The perceived mismatch between premiums and benefits. FGD participants were not really sure how much they had to pay, but the most common answer was around P1’000 per hectare or P663 deductibles per P10’000 loan.

Typical payouts in case of natcat range between P3’000 and P5’000. Farmers complained that this would not cover the expenses for the inputs going up to P20’000. This can be explained by the fact that the adjusters take into account the stage of the crop when calculating the payout. Consequently, calamities hitting the crop early in the cropping calendar lead to a significantly lower payout. The whole payout can only be reached if the calamity occurs during harvest.

Delayed payment of claims. Some mentioned that they would only obtain the payout after two months. Others pointed out that the claiming process involves a tremendous administrative work and asks the insured to go several times to the PCIC office. These high cost-barriers discourage the people to buy this insurance.

The people’s discontentment with the current crop insurance scheme can also be derived from the following example: a cooperative operating in Leyte with around 25’000 members, tried to oblige its farmer members to ensure production loans via PCIC because they struggled with low payments in times of natural catastrophes. However, the assembly did not accept the proposal because the premiums would have eaten up a large part of the loans and PCIC does not enjoy sufficient public confidence.

When confronted with the challenge of setting up a financially sustainable product, people usually

lowered the amount of benefits instead of increasing the premiums. For instance, when asked for

different premiums, benefits and probabilities of payouts a typical answer was a P100 premium and a

sum of P1’000 to be paid out on average every year. Then, however, the enthusiasm for such a product

was somewhat lower.

Participants also emphasized the need for simplified and understandable procedures and requirements.

Often, they do not completely understand the insurance policies, as they often tend to be too technical

for them. Groups usually referred to PCIC crop insurance products as counterexample (see box).

Figure 11 Challenges to PCIC crop insurance

Whereas officially the requirements for services offered by PCIC are not that restrictive (see a policy

example in the appendix) most farmers complained about high barriers, high transaction costs and

difficulties to apply for insurance covers. Therefore, for FGD participants it was important that

everybody could avail of the insurance product.



Finally, the system of distribution should not only be easily accessible with putting the client in the focus, but the insurance provider shall be trustworthy. The credibility of the insurance company is very important especially for those having had bad experiences with former insurance schemes. The “College Assurance Plan”, a pre-need company intended to cover tuition fees, provoked a scandal starting in 2004 when it failed to pay its obligations to plan holders whose policies have matured (see box). Most of those affected were unable to recover their whole amount of premiums resulting in a significant loss of trust. This incidence helps to explain the importance of frequent payouts for the clients, at least in the beginning, in order to build up the necessary credibility. Most people were indifferent when asking who should distribute the product. Somewhat paradoxically some of those complaining about PCIC even suggested the same company to distribute the new product. Generally, as long as the people see that others buy the product they do not care who it sells. Still, groups of MFI clients or cooperative members usually referred to their organization to distribute the product.

It is important to note that NGOs, MFIs and cooperatives are not per se perceived as trustworthy

entities. Respondents of the HH survey endow them with more trust than private companies, such as

banks, private insurers, and PCIC, but have more faith in barangay related institutions. The Philippine

meteorological agency PAGASA is also considered as a relatively trustworthy organization.

The modality of transactions shall be easy. Having an agent collecting the money was the most

preferred option among HH respondents, but others were also ready to go to the nearest insurance

office if there is one near the market place. Roughly 10% were familiar with conducting money

transactions with cell phones and nearly two third were interested in receiving insurance payouts per

SMS8.

Still, the results suggest that known concerns of trust, but also other obstacles, especially ignorance of

how it works shall be addressed first before introducing such an insurance scheme.

VII. Recommendations and Next Steps

7.1 Recommendations

Based on the results of the FGDs and the HH survey the following recommendations might be

considered for the design of the insurance product for natural calamities.

On Product Design:

1. Products should be scalable. People look first on the premium before considering benefits when deciding on whether to buy an insurance product. Premiums are affordable if they match other non-basic expenses and the survey shows that even those living under the food-threshold are willing to pay for insurance under certain conditions. Since household’s endowments might strongly differ it is important to offer products with a wide range of possible premium amounts. A good shot would be to offer multiples of P50/month. If people gain trust in the product they are likely to purchase policies with higher face value in following (!) years in order to match their risk exposure. People

8 This might overestimate the real figure because it became clear to the authors that some respondents had

difficulties in differentiating using money transaction services from sending text messages for loan requests.



display very different perception of risks and have very different exposures. Farming households typically feel more vulnerable to natcats than others and thus, experience higher losses in case of a natural disaster.

2. Payment schedules should be flexible. Target customers are more likely to purchase natcat insurance if premium payments are well within their natural or usual cash flow cycles. Natcat insurance premiums may be paid alongside with their regular loan repayment/(health, life,…) insurance payment schedules if they are members of microfinance institutions or cooperatives. For those having regular formal income premium payments shall be every two weeks when salaries are disbursed; for those depending on agricultural activities payments shall coincide with the harvest season when cash inflow is high or should allow for different weekly/monthly premiums throughout the year.

3. Products shall have a good timing. Hazards have different probabilities to occur across the year. Exposures are unequally distributed in time as well. People are more attracted to products that cover high-exposure- and high-probability-of-hazards-periods. Marketing shall consider this timing as well. For instance, typhoon protection plans shall be marketed not earlier as shortly before the beginning of the typhoon season. At the same time, people are unlikely to pay a whole coverage at once, but prefer paying premiums step by step. Therefore, premium collection should occur throughout the year.

4. Payouts should be frequent. Target customers are interested in knowing whether the product works or not. Therefore, frequent payouts–that is to say, at least every three harvest seasons, but at best in the first harvest season–shall help to build up credibility and to attract customers. People have a high discount rate and expect fast ‘returns’. It is more important for them to have more, but small than little, but high payouts.

5. Products should be linked.

5.1 Farmers are more likely to buy insurance if the product is directly linked to production loans. This is because most farmers are in a debt circle and are driven by the resulting ‘backwardness of reasoning’. Many farmers’ income is not used as investment capital for the next season, but is used to pay back loans dating back up to several seasons before the current harvest. Therefore, farmers are unlikely to pay for an insurance product that covers the following (!) harvest period. Linking the insurance to a loan would result in collecting the premiums after the harvest. That corresponds to the usual farmer’s cash flow and way of financing his activities. Loan linking might be interesting for other target groups as well.

5.2 Linking insurance to existing group structures might help to reduce basis risk and transaction costs. Many MFIs take advantage of group lending or similar group-related lending mechanisms when disbursing their credits. Index-based insurance products can easily be linked to these structures by taking the group as the insured entity. In case of a qualifying event the MFI balances the account of the whole group and reduces the amount the group has to pay back. This lowers basis risk for the individual, as basis risk and basis chance might cancel out within the group.

5.3 A combination of saving and insurance products might also attract some target clients, especially

those having a regular and good income. Getting a payout when a calamity hits the community as well as obtaining part of the premiums back at the end of the coverage period might help to reward loyal members. For instance, such a product can feature a five years period where premium



payment takes place and a ten years coverage period. If the member decides to drop out after ten years he will get a certain percentage of her premiums back, independent on whether she will have availed of the insurance product or not.

6 Consider smart subsidies. People expect high ‘returns’ when investing money. Even though insurance is considered as a tool to reduce risk, for most people it is also an investment that should guarantee good benefits. Subsidized products in the market (such as PhilHealth) have increased such expectations. The gap between the willingness to pay and the expected payout might be bridged via smart subsidies. In some sense, these subsidies are expected from the target population and might well be justified. Most people in the HH survey see primly the state in the role of helping those being affected by natcats and not the individual itself. An insurance product is a way of dampening the impact of natcats and therefore reduces ceteris paribus the costs of public relief measures. It is important to clarify and make transparent the costs and benefits of subsidies before introducing them. A smart way of dealing with subsidies is by using risk-layering systems: the state might cover a certain risk-layer such as low-frequent and high-impact events, thereby reducing the risk for the insurer and ultimately the premium for the end client.

7 Lessen requirements. Natcat insurance should be available for everybody, but especially promoted for the poor by using corresponding distribution channels. Documentary requirements, if any, should be made simple and easy to understand and easy to accomplish and should be designed to match the literacy level of the poorest farmers. Products should be made simple and easy to understand for both the customer and for the agents that will promote the use of natcat index-based insurance products.

8 Promote financial literacy first. Low-income groups need to be further educated on insurance and its importance. There should be a general insurance education program aimed at both the end client and the distribution channel that will complement the insurance product offer. This training or education component shall explain to the farmers the features and procedures of the insurance product. The insurance education program should be simple and easy to understand incorporating adult learning methods and financial literacy games9. Lecture and orientation on insurance products may tend to be too technical and complicated for ordinary farmers to understand. Such programs tend to increase the demand from both the end clients and the distribution channels in promoting the product.

9 Target the right pool of clients. Micro insurance products are not right for everyone, at least not at every time. When people fail to meet their basic needs because they lack sufficient infrastructure or when no risk mitigation projects have been developed to protect their community from frequent natcats, micro insurance might not be an appropriate solution. As a matter of fact, targeting communities with strong and active Disaster Coordinating Council or Planning and Development Officer might be a way of making sure that the insurance initiative is flanked by similar projects helping to protect the community. For instance, developing early warning system facilities and designing index-based insurance products might go hand in hand.

Designing a flexible, scalable, well timed, linked and simple product that is accompanied by inclusive

education programs shall help to reduce the premium – benefit gap. On the one hand, successful

products from private insurance companies, such as St. Peter’s Life plan, show that the poor are

9 For instance, Carter et al. (2008) explain the role of educational games in promoting index-based insurance

schemes.



interested in well-designed products. On the other hand, even highly subsidized crop insurance products

do not sell because they fail the poor’s needs.

On Product Distribution:

Microinsurance is commonly provided by MFIs/cooperatives as a means of mitigating risks in case the

borrower is unable to pay the loans because of unforeseen events. Accidents, illness in the family, death

of family members or loss of livelihood due to fire or natural catastrophes often causes burdens on the

family’s finances. Credit life insurance products and/or micro-insurance are offered to provide the client

a means for recovery in times of such unforeseen events.

Insurance products have also become a source of competitive advantage for MFIs. Clients now choose

their MFIs based on the services and benefits they provide and the insurance products offered by an

MFI. MFIs have been known to compete on this basis.

10 If MFIs are considered as the primary distribution channels of natcat insurance, the natcat insurance itself should be attractive, not only to the target clients but also for the insurance distribution channel. MFIs will most likely adopt or distribute such insurance product if there are also clear benefits that will be received at the level of the MFI. Offering such products will also entail costs in its distribution and therefore such distribution costs should be recoverable from the sale of the insurance product.

11 A certain degree of flexibility should be allowed at the MFI level to customize the delivery of the insurance product. At the distribution level MFIs are in the better position to determine the most appropriate timing or mode of payment to be made for the insurance premiums.

12 MFI networks may also play a role in the distribution for micro insurance products to achieve

economies of scale. The MFI network can provide marketing and promotion support to its member institutions with regards to micro insurance. The MFI network can also provide meso level monitoring of product performance and provide the sector with research and information support not normally available at the MFI level. Capacity development support can also be another role MFI networks can play.

7.2 Next steps

Micro insurance for the protection against natcats is a promising tool to alleviate poverty. This study has

shown that the majority of poor people are interested in such a product, and that across all four

provinces. Perception of risks plays a crucial role in determining demand, but an insufficient exposure to

risk is unlikely to be a bottleneck in the covered municipalities. Most people are exposed to different

hazards, especially typhoons, floods and drought and secondary effects are strong enough to rise

demand for a natcat insurance even among those who are not directly affected. As a matter of fact,

financial literacy and product design reveal to be very important factors in shaping demand. Distribution

channels should be the primary contact for both concerns. Finally, index-based insurance products are

not the only way in protecting the poor from the effects of natcats. First, alternative products, such as

crop insurance, exist and might be the better solution for clients because they offer individual payouts



according to the incurred damage and present attractive premium-benefit leverages due to subsidies.

They are, however, neither well promoted nor widely used. Introducing an inclusive index-based

insurance product might have the beneficial effect of stimulating the market and encourage existing

players to strengthen their efforts in seeking clients. Similarly, introducing a portfolio-insurance for MFIs

and cooperatives shall create competition to existing meso-level insurance mechanisms such as

Agriculture Guarantee Financing Program (AGFP). This shall create direct benefits for the clients.

Coming efforts should concentrate on the following aspects:

1. Map distribution channels. For this, an extensive overview on MFIs and cooperatives working in the pre-selected provinces should be prepared. Efforts should not be restricted to one player per province, but should aim at an inclusive sample of distribution channels in order to increase the number of potential clients and increase competition.

2. Define qualifying events and calculate realistic premium-benefit leverages. This demand study should help to identify relevant hazards that have an impact on the poor’s lives. A potential trigger should be roughly designed and calibrated to different qualifying events (e.g. one-year typhoon event, three-years typhoon event etc.). This should include a respective calculation of realistic premium-benefit leverages. Triggers should not be restricted to weather data indexes. They might be complemented or substituted by area-based yield/damage indicators and/or satellite technology. Offering several triggers per province should address the issue of risk heterogeneity within the visited provinces.

3. Prepare a flexible, but concrete product matrix. Distribution channels should be the key players in designing the final product and adapt it to the needs of its clients. Results from this demand study should help to give some ideas and to guide efforts. Still, it is not extensive enough to fit each target groups’ needs. Designing a product is costly and asks distribution channels for an investment. Therefore, it should be made as easy as possible for them to bring in their ideas. As a result, it is necessary to prepare a flexible product matrix with a range of different features among which people might choose. It should be concrete enough and provide realistic premium-benefit leverages as well as definitions of qualifying events.

4. Prepare a financial literacy game. Designing a product is difficult when it is not fully understood. Therefore, it is necessary to explain thoroughly the way how insurance products work to the target population. Before going back to potential clients a short financial education game should be developed to prepare the question of product design.

5. Contact distribution channels and refine the product design. The product should be attractive for both the end client and the distribution channel. Therefore, both the MFI/cooperative and its clients/members should be involved in the process of designing the product. Financial education games and the product matrix should be provided as input to guide the discussion.



References:

M. Pelling, A. Maskrey, P. Ruiz and L. Hall: A global report – Reducing Disaster Risk: A challenge for

development; UNDP, 2004

C. G. Hina, C. G. Lomboy, E. C. Torrente: Demand Study of Microinsurance in the Philippines; Planet

Finance & gtz, 2009

G. M. Llanto, M. P. Geron and J. Almario: Making insurance markets work for the poor: microinsurance

policy, regulation and supervision – Philippines case study; CGAP, 2009

Authors unknown: Mapping Philippine Vulnerability to Environmental Disasters, Manila Observatory,

2005

S. Baas: The role of local institutions in reducing vulnerability to recurrent natural disasters and in

sustainable livelihoods development – Philippines; Asian Disaster Preparedness Center, 2006

E. Engel, N. Piepenbrink, J. Scheele, C. Dorer, J. Ferguon, W. Leujak: Being prepared: Disaster Risk

Management in the Eastern Visayas, Philippines; Humboldt University & GTZ, 2007

National Statistical Coordination Board: 2003 City and Municipal Level Poverty Estimates; 2003

M. E. Hellmuth, D. E. Osgood, U. Hess, A. Moorhead & H. Bhojwani: Index insurance and climate risk:

Prospects for development and disaster management; IRI, 2009

M. R. Carter, C. B. Barret, S. Boucher, S. Chantarat, F. Galarza, J. McPeak, A. Mude & C. Triveli: Insuring

the never before insured: Explaining index insurance through financial education games; Basis, 2008

Documents

Summary_Study on Demand of Insurance for Natural Catastrophes Final