CONCEPT DOCUMENT
CO-VARIANCE RISK OF MICRO INSURANCE AND CAPITAL MODELING
1. Introduction to co-variance risk
a. Risk under micro insurance is a constituent of many inter-dependent and nondependent factors of the environment in which it operates
b. The overall risk profile can be assessed by a risk matrix which can capture the
relativity, dependency, non-dependency and complexity of these constituents.
c. An incidence of risk can affect all such constituents of risk and/ or any combination
of constituents irrespective of its mutual relationships.
d. Events of risk can lead to loss/ damage of insured in isolation or can lead to
collateral and compounding effect leading to overall damage/ loss in all walks of
life.
e. Any risk of micro insurance need to be evaluated on the basis of such compounding
impacts
f. The risk of such multiple and compounded levels of risk leads to the terminology of
co-variance risk.
g. An aggregate risk emerging as a result of events resulting into compound impact/
loss can be referred as covariance risk.
h. A claim incidence with an element of co-variance risk can lead to multiple claims
and unlimited liabilities.
2. How to identify and model covariate risk?
a. Identification of events, measurements/ possibilities of incidence of those events,
severities and assessment of financial impacts.
b. Preparation of risk matrix with events, all constituents of risk/ damage in isolation
and in combination.
c. Each constituent further split into the product/ product category as applicable.
d. For eg., crops to be split into Wheat, Rice, Soybean, cotton etc.,
e. The risk matrix format differs depending on the insurance offered.
f. Assign probabilities for each of the events, viz., natural calamities, epidemics, civil
war, etc., it’s probable risk constituents and covariate factors of any two or all of
constituents of risks.
g. Evaluation of risk matrix for potential risks related to events in isolation and in
combination and constituents of risks leading to loss/ damage in relation to the
type of insurance.
h. Understanding of the most significant factors/ events in relation to the
environment in which the system operates, viz., geography, region, culture, etc.,
i. A simple model of risk matrix is as under:
Events/ Constituents
(1) Geographical
(a) Earth quake
(b) Volcanic eruptions
(c) Avalanches
Crops
Livestock
/ cattle
Theft/
fire
Health
Term/
Life
Disabi
lity
Natural
disaster
(2) Meteorological
(a) Cyclic storms
(b) Droughts
(c) Blizzards
(d) Tornadoes
(e) Heat wave/ cold wave
(f) Hail storms
(3) Hydrological
(a) Floods
(b) Tsunamis
(c) Limnic eruptions
(4) Health
(a) Epidemics
(5) Space disasters
(a) Solar flames
(b) Impact events
(c) Gamma ray burst
(6) Fire
(7) Others
(a) Civil war
(b) Sanctions
(c) War
(d) Ruling regime
3. Risk mitigation and capital modelling
a. Risk mitigation and capital modelling of covariate risk is based on the environment
in which the society lives in and all players in the scene.
b. The success of mitigation depends on how best the pooling of risks by way of
diversification and re-insurance
c. This also based on social needs of the society and duration for which the solutions
to be implemented.
d. The capital management is based on a number of factors of the society and systems
in place.
e. The interaction of society, systems and needs can also be viewed in a matrix and
can be a basis of capital management.
f. A matrix on which the risk mitigation and capital modelling can be built is as under:
Items
Social
Policy
Approach
Social
Risk
Manage
ment
Basic
Social
security
Social
Insurance
Social
Assista
nce
Safety
nets
Social
Security
Legislation
X
X
X
X
X
X
X
Actors
(a) Public Action
(b) Collective Private
Action
(c) Market-based
(d) Individual Private
Action
Risk focus
(a) Risk prevention and
mitigation
X
X
X
X
X
X
X
X
X
X
X
X
X
X
(b) Risk Coping
(c) Non-risk
management policies
that may affect risk
management
Duration of Action
X
X
X
X
X
(a) Short term measure
X
X
(b) Long term measure
X
X
X
X
X
X
X
X
X
X
X
Type of capacity deficit
(a) Measures to support
those who cannot help
themselves
(b) Focus on the ablebodied
(c) Measures to provide
basic food, health,
housing and education
security for all
Key function
X
X
X
X
X
X
X
(b) Assistance
X
X
(c)Enabling/empowering
social services &
infrastructure
X
Explicit focus on the
poor and deprived
X
X
X
X
(a) Insurance
Type of risk addressed
(a) Co-variant
X
(aggregate)
Dimension of well-being addressed
(a) Income and
X
consumption
(b) Non-income
dimensions of wellX
being (social, political
etc)
Includes a right focus
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X