Aerial View of the Damage

Since the monsoon rain season began last month, floodwaters have devastated Pakistan. The floods have displaced more than 20 million Pakistanis, a number that exceeds the entire population of New York State. One fifth of Pakistan’s land mass is submerged, as shown in this photograph provided by the United Nations. Many communities are isolated as traditional transport routes are no longer viable. It is truly a humanitarian crisis with urgent needs for water, food, shelter and sanitation. Public health officials fear the spread of water-borne diseases, such as cholera. For more information about Pakistan’s pressing needs, please click unicef-immediate-needs-document-pakistan-flooding-26-august-2010 to download a current report from the U.S. Committee for UNICEF. To make a contribution to UNICEF for Pakistani flood relief, clear here for a direct link where you can donate online.

I also want to introduce you to Kashf Foundation, an organization that provides sustainable financial services to poor women in Pakistan, allowing them to become economically self-sufficient. I had the privilege to meet Roshaneh Zafar, Kashf’s founder, when she served on the UN Advisors Group for Inclusive Financial Sectors. Click here to learn more about Kashf and how you can support their important work.

I was very impressed by ABC’s late night news program “Nightline” in presenting the day’s testimony at The Hague in the war crimes trial of former Liberian President Charles Taylor. Former 1980’s super-model Naomi Campbell testified about the night that Taylor’s staff gave her blood diamonds. ABC News ran her testimony without interruption for the usual talking head commentary giving the viewers the opportunity to form their own opinions. Campbell’s apparent indifference to those who had suffered in Africa was obvious and any attempt to summarize what she had said would detract from the shock value of her actual words. She actually said, “I didn’t really want to be here. I just want to get this over with and get on with my life, this is a big inconvenience for me.” She just exuded her sense of entitlement, dismissing the practice of men giving her gifts all of the time and her thinking nothing of that. The juxtaposition of her physical beauty and her ugly character could not have been more striking. ABC News then showed the video of the next witness to testify against Taylor. After Campbell left the courtroom, dressed in stunning designer clothing, the next witness placed the stubs that remained of his limbs on the table before him and described how he and his family had been mutilated by Taylor’s regime. I have to commend ABC News for letting the viewers see the video footage and keeping the commentary to a minimum. My respect for Mia Farrow, who had reported her conversation with Campbell concerning the diamonds, just jumped. Disaster recovery is a long slow process, but people take longer to heal from acts of man than we do from acts of God. The former are much more traumatic and what could be more painful to the amputee who testified about his suffering than the indifference to his plight exhibited by one of the most privileged women in the world.

Source: China Daily

More than 700 people died and 347 more are missing following torrential rains and floods in China, the worst that country has experienced in a decade. The floods affected 110 million people in 27 provinces and municipalities; 8 million residents of those areas were evacuated. The Chinese government estimates direct economic losses from the flood to be $21 billion, which includes damages to more than 7 million agricultural hectares and the destruction of more than 600,000 homes. The government also reported that 287,000 military personnel had aided in the flood rescue operations. This year’s flood season, which begins in China in April, has been unusually severe. In more than 230 rivers across the country, water levels have risen above what is considered safe. Areas adjacent to the Yangtze River have experienced the worst flooding in 30 years but, according to the Chinese government, the Three Gorges Dam prevented even more severe flood damage by blocking more than 40% of the water.

I have not yet formed an opinion on whether global warming has induced permanent climate change. But it is undeniable that we are experiencing the most severe weather patterns in some time and it appears to be a global phenomenon. At a time when the recession has stretched resources thin, we are particularly vulnerable to external shocks, such as natural disasters. And public resources are inadequate to fund relief efforts. Many people will try to ease the pressure on their budgets by foregoing “non-essentials”, such as insurance, when times are tough. But that is when you need it the most. Sadly, for entrepreneurs in China, most small businesses don’t have access to adequate insurance coverage. We do, so there is no excuse for us.

Seismically Active Pacific Ring of Fire

The earthquake that struck Chile on February 27 was an 8.8 magnitude event, making it one of the most powerful in history. The earthquake killed hundreds of people and damaged more than one million homes. Preliminary estimates suggest economic losses in excess of $15 billion, with one quarter to one half of those losses covered by insurance. Even without taking into consideration the consequences of the follow-on quakes, this is likely to be one of the most expensive disasters for the global insurance industry. Chile is at particular risk for its location along one of the most active seismic zones in the world, the Pacific Ring of Fire. During my lifetime, Chile has experienced 13 earthquakes of at least a 7.0 magnitude, but most were removed from populated areas. Chile is well prepared to withstand earthquake shocks; it has appropriate building codes and a developed insurance market Indeed, even though the Chilean quake was 500 times more forceful than that of Haiti, it sustained several hundred casualties as compared with 250,000 in Haiti. It will likely take at least four years for the Chile to rebuild, owing to significant losses to its economy. With a recent seismic event in Turkey, this is a sad reminder that natural disasters pose the greatest risks to those with the least to lose.

The only thing more horrifying than the human tragedy in Haiti is the so-called “disaster aid” that compounds the suffering of those who have already lost what little they have. Unfortunately, bureaucracy is the first order of relief efforts. USA Today reports that the U.S. Agency for International Development (part of the U.S. State Department) ordered U.S. soldiers to stop distributing food packages to desperate Haitians. However, the troops continued to give bottled water because they were not forbidden to do so. Sound crazy? Not really. Did you know that counselors of our Small Business Development Centers were forbidden to help their colleagues in the Gulf Coast assist their small business clients in the aftermath of Hurricane Katrina? The U.S. Small Business Administration prevented the counselors from crossing state lines. So many counselors went as unpaid volunteers. Bureaucracies have inflexible rules that get in the way of offering help. But had we acted honorably, the Haitians might not today be in such desperate straits. Tageschau Deutschland is reporting that U.S.-backed governments of developing countries received aid that motivated the relocation of the poor to areas particularly prone to natural hazards. Even worse, a public display of aid assistance may be used to weaken demands to accept more immigrants from Haiti to the U.S. where they would have a credible shot at rebuilding their lives. It is sad, but true, that the poorest are the most vulnerable to disasters, whether in the U.S. or overseas and that relief aid more often than not serves the interests of the donors, not the recipients.

My Photo of the San Diego Border Crossing

“Running naked” refers to the decision to forego insurance for known risks. It is an increasingly popular strategy among states experiencing budget constraints. But it is risky. Pre-financing a natural disaster through insurance is more cost-effective than financing recovery but for governments with falling tax receipts, the temptation to forego insurance arises if probability of a natural disaster is low. Funds spent on insurance premiums are not recoverable, which could lead to regret when funds are diverted from other programs for insurance coverage and the storm season proves mild. To save resources following the credit crisis, states are cutting public reinsurance programs to save premium expense. For example, less than one year after reinsurers paid $1.5 billion in claims related to Hurricane Ike, Texas opted out of its reinsurance program to save premium expense. California soon followed.

Governments typically fund emergency and relief efforts and rebuild public infrastructure after a disaster by issuing debt, raising taxes or reallocating funds from other budget items. These alternatives are considerably more expensive than pre-financing risks, but the states are presumably gambling that the federal government will bail them out in the event of a major natural disaster. European governments have also been cutting their pre-disaster risk bills to alleviate budget strains. But the gamble may not pay off. The U.K. this year experienced unexpected flooding in some parts of central and western England. In any given year, 30% of floods occur in regions that have no prior history of flooding, making the choice to forego insurance a risky one.

Ironically, developing countries are moving in the opposite direction. They face considerably greater challenges, such as the awful trade-off of limited resources and compelling needs to invest in education, health and other infrastructure. To resolve these competing interests, the World Bank structured its MultiCat Program to allow countries to purchase cost-effective coverage through the capital markets for various threats, including floods, earthquakes, hurricanes and windstorms. The first such program was structured in Mexico.

Will the bet pay off? Should a major disaster strike California or Texas, residents of those states will face onerous tax increases if they cannot persuade the federal government to bail them out. But even should the U.S. be lucky enough to avoid a major catastrophe, we are at risk of ceding the lead in financial innovation to other countries.

Made in China

A massive snowstorm in northern China this past week caused $650 million in damages and killed more than 40 people who died in building collapses triggered by snow and ice or in automobile accidents. This provoked fears that the snowstorm was the result of Beijing’s Weather Modification program to seed for snow and rainstorms, addressing crippling water shortages in China’s arid northern regions.  The program is intended to provide drinking water and water for irrigation, but has provoked concerns as to possible misuse. But experts say that a blizzard of this scale could not have been triggered by cloud-seeding efforts. The more relevant concern is China’s disaster level of disaster preparedness, which certainly elicits raw emotions given the casualties following China’s severe earthquake. It is typically the most vulnerable who suffer the greatest losses, both in human and financial terms, for inadequate disaster preparedness. And they are the ones who lack a basic social safety net, such as insurance. In case you were wondering about the photograph, since I have never seen snow in China, I included this picture I took at a Chinese silk factory. These are the silk coccoons made by worms, but as close a resemblance to snow as I could get!

Calm Before the Storm

A typhoon swept the main island of Luzon in the Philippines, killing at least 95 people and displacing more than 337,000 residents. The event sadly recollects Katrina as delays in the rescue of flood victims provoked public anger towards President Gloria Macapagal Arroyo’s government. Civilian and military rescuers have struggled for two days to reach people stranded on the rooftops of their flooded homes waving for food and supplies. As of this evening, they have rescued more than 5,000 people. The Philippines disaster management agency reported that 68,550 people were housed in 118 emergency evacuation centers. The government is scrambling to get as many boats as it can for use as rescue vehicles. San Miguel, the largest food and beverage company in the Philippines, offered to purchase up to 50 boats for that purpose and the national dragon boat rescue team also contributed to the effort. Although the typhoon wind speeds reached only 85 km/hour, the storm deposited more than a month’s worth of rain in the capital city of Manila in just six hours, causing the flooding. The storm has moved on towards the South China Sea. The government declared a “state of calamity” in Manila and the surrounding areas, closing many schools and businesses.  Particularly for those of us who do business in the Philippines, contributions to the Red Cross and other disaster relief agencies will be welcome.

Microinsurance protects very small enterprises against financial ruin from events such as medical emergencies, drought, flood and other natural disasters. Such disasters occur frequently in the developing world; a mudslide in an urban center can eliminate whatever modest shelters slum dwellers had built. Vulnerability to such risks keeps people trapped in the vicious spiral of poverty. They lack basic social protections or any kind of safety net. And as we know from our experience in the U.S., relief aid rarely trickles down.  Microinsurance is complementary to microfinance (the provision of credit) and plays an important role in development.  In Sri Lanka, where less than 1% of the country’s 19 million citizens are covered by insurance, there is strong market potential.  To develop this sector, Janashakthi Insurance PLC announced a partnership with Hannover Re, one of the world’s largest reinsurers, with 8 billion Euros in annual premiums. It will be interesting to see how this market develops and if such products can be successfully exported to low-income entrepreneurs in the developed world.

Natural disasters continue to devastate smaller enterprises in the emerging market countries, where underdeveloped insurance markets do not provide an adequate safety net. A powerful earthquake struck Indonesia’s main island of Java where the capital city Jakarta is located, causing major destruction. In India, where the summer rainfall was 25% less than normal, the driest spell in nearly 40 years, prices of food from recently-harvested crops have risen by 14.5%. The State Bank of India has responded with a drought relief package, including cuts on lending rates for farms and rural producers. The Bank reduced crop loan interest rates from 11.75 – 12.75% floating rates to 10% fixed. The Bank cut loan rates on irrigation programs from 10.50 – 13.25% to 8 – 9%. Both reduced rates remain in effect through March 2010, with an extra percentage point reduction on interest rates offered for timely repayment.