Micro Finance and Disaster Risk Management ASTF October 2007 David - - PowerPoint PPT Presentation

“Micro Finance and Disaster Risk Management” ASTF October 2007 David Piesse Global Head of Insurance

David Piesse Head of Insurance Worldwide ASIAN Banker Summit March 27th 2007

Hazards occur – but we can risk mitigate

Everyone and Everything Participating on the Network

Social Networks and Communities Matter

Regional Distribution of Natural Disasters (Loss of life, 1980-2005)

Source: EM-DAT: The OFDA/CRED International Disaster Database - www.em-dat.net - Université Catholique de Louvain - Brussels - Belgium

Heatwave: 50 000 Drought: 500 000 Epidemics/famine: 120 000 Tsunami: 170 000 Earthquake: 155 000 Flooding: 45 000 Epidemics/famine: 260 000 Windstorms: 230 000 Earthquake: 205 000 Earthquake: 30 000 Tsunami: 60 000 Landslides: 15 000 Flooding: 40 000 Windstorms: 30 000 Windstorms: 40 000

Regional Distribution of Natural Disasters (Economic Losses in billion USD, 1980- 2005)

Source: EM-DAT: The OFDA/CRED International Disaster Database - www.em-dat.net - Université Catholique de Louvain - Brussels - Belgium

Windstorms: 39 Drought: 3 Wild Fires: 18 Earthquake: 9 Flooding: 23 Windstorms: 90 Earthquake: 170 Earthquake: 50 Tsunami: 4 Flooding: 8 Windstorms: 30 Windstorms: 14 Drought: 11 Flooding: 194 Earthquake: 11 Windstorms: 3 Flooding: 3 Flooding: 69 Earthquake: 10 Drought: 5

Economic Losses are Increasing

Source: EM-DAT: The OFDA/CRED International Disaster Database - www.em- dat.net - Université Catholique de Louvain

• Brussels - Belgium

4 1 1 1 4 2 4 4 7 8 8 1 6 0 3 4 5 1 0 3 4 9 5

5 0 1 0 0 1 5 0 2 0 0 2 5 0 3 0 0 3 5 0 4 0 0 4 5 0 5 0 0 5 6 -6 5 6 6 -7 5 7 6 -8 5 8 6 -9 5 9 6 -0 5 Geological Hydrom eteorological Billions of USD per decade decade

Disaster Risk Management Involves a Wide Range of Decisions and Actions

Risk Transfer Risk Identification Risk Reduction

Disaster Risk Management

→ Historical hazard data and analysis → Changing hazard trends → Vulnerability assessment → Risk quantification

→ Sectoral planning

→ Early Warning Systems →Emergency Preparedness planning → Education and training → Fail Safe Technology → Black Box Data Centre → Financial tools

• Insurance
• Weather derivatives
• Cat bonds
• Sidecars
• ILS

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We will discuss briefly : -

✔Microfinance Issues ✔Securitisation for Microfinance ✔Catastrophes and Global Warming Issues ✔Technology Issues ✔Payment and Collection ✔Conclusions and Future Vision

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HISTORY

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The MICROFINANCE MARKET

Micro Finance Stakeholders

Governments Banks Donors, Foundations Insurers Investment Funds NGO’s Reinsurers Credit Bureaus MFI’s MFI Networks Micro Entrepreneurs Investors Villages/Urban Regulators/Rating Agents/Brokers

Micro Insurance Delivery Channel

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Different types of Regulation : 1. Institution-Centric : Regulation encourages the creation of dedicated institutions to develop micro credit and micro insurance activities 2. Services-Centric : Regulation regulates the service line (micro credit and micro insurance) and allows any type of providers to offer those services. 3. Risk Based capital regimes and action against informal schemes

Improvement of Regulatory Framework

+ 50% of developing / emerging countries are controlled by specific microfinance regulation covering in recent times insurance Insurance Industry as a whole enters a period of reform and convergence

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Things Happen ….. natural

disasters and epidemics exclusion – no such thing as micro reinsurance

Microfinance in Shaanxi and Ningxia, China Microfinance in Shaanxi and Ningxia, China Enabling Rural Innovation & Entrepreneurship Enabling Rural Innovation & Entrepreneurship vvv vvv

What is “microfinance” and how it is helping people

• Microfinance is the provision
• f a broad range of financial

services such as – Deposits – loans – payment services – money transfers – insurance to poor and low-income households and their microenterprises (source: Asian Development Bank)

Microfinance in Shaanxi and Ningxia, China Microfinance in Shaanxi and Ningxia, China Enabling Rural Innovation & Entrepreneurship Enabling Rural Innovation & Entrepreneurship

"Since we have started using these phones, we are getting much better prices from the people who are buying our livestock, because now we know what the prices should be and we are able to ask for the best price possible"

• Quote from a villager in Yanchi County, Ningxia

“One of the biggest advantages of having the SMS system is knowing which commodities we should buy and when is best to buy them, like when I buy feed for my penned sheep. The prices of feed often vary widely day-to-day and by having the price sent to me by SMS it allows me to know when is the best time to buy, when I should buy more and when I should buy only what I need until the price drips.”

• Quote from a farmer in Ansai County, Shaanxi

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Agenda : -

✔Microfinance Issues ✔Securitisation for Microfinance ✔Catastrophes and Global Warming Issues ✔Technology Issues ✔Payment and Collection ✔Conclusions and Future Vision

There is an ample supply of capital to service the catastrophe capacity requirements of any emerging market Emerging markets present an attractive

• pportunity for further reinsurance or

ART market diversification It makes long term economic sense for any developing economy to take advantage of this capital

HOWEVER…

SWISS RE Model

Single risk Whole Company Portfolio of risks Reinsurance underwriting Risk management services Claims Enhance Risk taking capacity Optimise use of capital Stabilise after – tax earning Improve ROE Optimise cash management Risk transfer Balance sheet management

Intensive know-how transfer

CatNet online mapping tool Technical publishing

• nline &

classroom training

Expertise in capital & risk management Broad product offering

Property and Casualty risks: Solutions to hedge against natural perils, fire, agriculture, aviation & space, motor liability, environmental liability, product recall, medical malpractice, patent infringement, etc.

Groundnut Farmers Micro-Lenders

(e.g. Opportunity International Bank)

Trigger: Rainfall Index loan production output seeds Farmers Association

Insurance consortium

Insured: Smallholder farmers that are hence able to borrow against insurance Farmers transfer loan partly in return for seeds and to insurance companies for

weather cover

Guarantees to buy harvest at fixed price, loans can be paid back either through

income from harvest or insurance

Example Protection

Traditional reinsurance protocols suggest that reinsurers use retrocession covers to expand capacity, diversify, and reduce exposures Interpretation of who can act as a “National Reinsurer”

Property Owner

Insurance Company or Insurance Pool

Local Reinsurer Reinsurer Reinsurer National Government World Bank Insured

Insurance Policy Reinsurance treaty Retrocession Retrocession

In the current environment any one of these entities could act as a National Reinsurer and seek reinsurance, retrocession, or alternative risk transfer support A National Government often acts as a reinsurer of last resort

Natural Disasters World Bank - June 2-3 Andrew Castaldi - Swiss Re

• New Asset Solutions (Structured Finance / Asset

backed Securities)

Raising capital through the securitization of future cash flows

• Weather Derivatives
• Securitization / Insurance-Linked Securities (ILS)

Innovative way of increasing insurance capacity by accessing the capital markets via bond issue. Capital received is transferred to a special purpose vehicles SPV who then acts much like a traditional reinsurance company. Most ILS are natural catastrophe driven due to the ease and transparency of identifying, isolating, understanding, evaluating the risk

Alternative Market Solutions

Emerging Market Comparison

Features ILS Traditional

Limits of insurability

Increases capacity especially in peak areas & independent of insurance cycle Perceived avoidance of low frequency and high severity events

Diversification

Capital markets are uncorrelated to insurance - improving portfolio diversification Areas of peak exposure have high areas of insurance concentration

Counterparty credit risk

Investment grade securities held as collateral servicing only specified contract Ratings uncertain especially during times of industry duress or extreme events

Multi-year contracts

Multi-year programs of up to 10 years have been issued Natural catastrophe programs typically run for one year

Flexible Loss trigger

Three types, indemnity (cede sustained loss), index (industry loss)

• r parametrc (physical event

characteristic) Tyically indemnity based but can be somewhat flexible

Activation of cover

Based on trigger regardless of actual claims Paid on development of cede losses

Data

Flexible - pricing based on coverage limit and event probabilities Requires - pricing based on expsoure data as well as limit and event proabilites

Swiss Re

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Government Relief and Capital Reinsurers/Brokers Catastrophe Pool Insurers Loaning Banks

Contingency Debt Weather Derivative Cat Bonds Securitization

Create Risk Financing Team

Aspects of Microfinance Reinsurance

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Catastrophe Risk Financing Strategy

Promote Risk Management Reduce Customer Vulnerability Limit Government Fiscal Exposure Passes Risk to Capital Markets Create Policy Trigger for Natural Calamity

Planet Finance Institutional Investors Re insurers Donors World Bank/ Asian Development Bank Pandemic Preparedness Risk Evaluation Facultative Reinsurance ALTERNATE RISK TRANSFER CATASTROPHE Bonds Parametric Triggers

RISK FINANCING RISK FINANCING

Risk Assessment Underwriting Treaty Reinsurance

CLAIMS CLAIMS SETTLEMENT SETTLEMENT INSURED RISKS INSURED RISKS DISTRIBUTION DISTRIBUTION RISK REDUCTION RISK REDUCTION

Communities NGO’s MFI’s Insurers/Banks Pervasive Computing Micro loan Agents Loss of Breadwinner Loss of shelter and Contents Loss of Crops Healthcare Indemnity Motor / Tractor Vehicles Personal Accident – Operating Times Commercial Banks Government Islamic Finance Reserving Salvage Communities NGO’s Insurers MFI’s Customer Portals Funeral Costs Self-Service Post Disaster Morbidity

Enables Enables……… ………

Post Office

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• Removes Reliance on Post Disaster Funding
• Lack of Liquidity After Disaster Inhibits Recovery
• Years of Unstable Fiscal Deficit Jeopardise Growth
• Poorest Segments are the Most Vulnerable

Benefits

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1997< 1998 1999 2000 2001 2002 2003 2004 2005 2006

11,000 8,500 5,300 5,000 3,300 2,700 2,300 2,000 1,800 1,300 1,000 1,150 1,130 1,000 1,300 2,400 1,300 2,400 1,700 2,800 1,500

World Catastrophe Scenario

(issuance transactions in $Mill) Traditional Cat Bonds Sidecars

Syndicated Pre KWR Sidecar Alliances

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Agenda : -

✔Microfinance Issues ✔Securitisation for Microfinance ✔Catastrophes and Global Warming Issues ✔Technology Issues ✔Payment and Collection ✔Conclusions and Future Vision

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Global Warming

Source: Climatic Research Unit and the UK Met. Office Hadley Centre Brohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006

The year 2006 was sixt The year 2006 was sixth warmest o h warmest on reco cord, e rd, excee ceeded by 1998, 2005, 2003, ed by 1998, 2005, 2003, 2002 and 2004 2002 and 2004

Combi Combine ned global land an d global land and marin marine surface surface temperature record from 1850 to 2006 temperature record from 1850 to 2006

Cli Climate Chang Change

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Global Warming/Climate Change

• Research predicts

> more intense rainfall > stronger storms > stronger hurricanes > sea level rises > more severe droughts > heat stress > malaria spreads north/south from equator > insect borne diseases spread more easily > impact countries not contributing to global warming

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Calculate Flood Calculate Flood Depths Depths Calculate Calculate Damage Damage Define Event Define Event Quantify Quantify Financial Loss Financial Loss

$ Loss $ Loss

Assess Wind Assess Wind Speed Speed Calculate Damage Calculate Damage Define Hurricane Define Hurricane Quantify Financial Quantify Financial Loss Loss

$ Loss $ Loss

Stochastic model Hazard model Vulnerability model Financial model

Risk Based Modeling is Key (RMS)

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Source: WeatherUnderground.com, January 18, 2006.

Hurricane Season 05

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Huge growth in Takaful

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Comparisons for Islamic Finance

Non Islamic Islamic SUKUK Bond

– No intrinsic Value – May make losses or

gains at asset level

– Shield Asset Risk from

Weather Events

– Acts of God Bonds

Weather Weather Derivatives Derivatives

– Correlation of Financial

Behaviour and Terrorism

– Link to activities and

terrorist finances

– No asset – No commercial linkage – Subject to gambling risk – Inappropriate Inducement

Terrorism Terrorism Derivatives Derivatives

– Must have intrinsic value – Carry asset risk directly – Must be an asset related transaction. – Must be affected by weather

Derivatives Derivatives

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CHI NA Faul t Li nes CHI NA Faul t Li nes

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CHI NA Fl oodpl ai n CHI NA Fl oodpl ai n

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Agenda : -

✔Microfinance Issues ✔Securitisation for Microfinance ✔Catastrophes and Global Warming Issues ✔Technology Issues ✔Payment and Collection ✔Conclusions and Future Vision

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Microfinance Profitable Delivery Strategy?

Diverse financial services

2

Innovative Technology

1

Improved MIS/Data Warehousing

3

Sound regulatory and legal environment

4

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Digitalized Globe: Flattened World Virtual technology drives markets

• Decreasing equipment cost
• Proportion of internet users will increase from 21

to 39% until 2017 worldwide

• Proportion of broadband subscribers in world

population will increase from 7 to 17% until 2017

• Increased demand for online information about

retail financial products (consumer lending, savings and investments)

• Increase disintermediation of distributors with

customers acquiring similar services online

• Easier access to customer segments in

emerging countries through direct channels

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Can technology enable microfinance ?

Front-end Point of Sale

• 1. Account creation (loan,

savings & insurance)

1. Collecting client data 2. Screening/ verification

• 2. Transaction data
• 3. Processing claims (savings,

transfers & insurance)

E-payments E-payments

Enabling cashless/ electronic payments Enabling cashless/ electronic payments

1. Disbu Disbursal o sal of amount (loan) amount (loan) 2. 2. Collecti Collection of dues/ paymen n of dues/ payments ts (loan, s (loan, savings & insurance) vings & insurance)

Back Office

• 1. Aggregation of client data

1. Actuarial analysis 2. Target offerings 3. Real Time Risk Mgmt 4. Channel Management 5. Loss Ratio Assessment

CGAP CGAP

Aishwarya Aishwarya Ratan atan, MSR In , MSR India, Ma a, Marc rch 2 h 2007 07 Not for Circulation Not for Circulation

m-banking m-banking

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Low Cost Financing Web Web Services Services Utility Utility Computing Computing Secure Secure Technology Technology Low Cost Financing Web Web Services Services Utility Utility Computing Computing Secure Secure Technology Technology

Permanent Access to Financial Transactions

Outreach

Clients Banks and Insurers Affordability Operating Costs

M at chi ng t he Tr i angl es

SUSTAI NABI LI TY SUSTAI NABI LI TY

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A Microfinance Utility Offering

“Commercial Utility”

Standard Offering, Semi-Customized

“Public Utility”

Standard Offering, Instant Deployment

Typical Customer Medium to Large Enterprise Anyone On the Network Access Customer or SI Hosted Dedicated Portal Availability Longer Term Contract Short Notice On-Demand Scheduling Time-Based Reservations No Reservation Pricing Negotiated Negotiated $/cpu-hr Business Terms Capacity Provisioning Contract Service Level Contract Standard Contract Technology Menu of Options Solaris 10 x64 or Redhat Linux Solaris 10 x64 Storage Menu of Options Customer Defined 10 GB Standard Large Enterprise and System Integrators Dedicated or Time Based Reservation Predictable and all-inclusive $1/cpu-hr

“Variable Cost Infrastructure”

Customized, Modular

Custom Standard One-off Implementations Massive Volume

X

People Intensive Automated / Virtualized

X X X

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Kisan / Agriculture Emergency Loans Remittances Claims and Emergency Identity/Medical Loyalty

MICRO FINANCE CARDS

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G r een and ECO Fr i endl y

DEMO NOW

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Long Term Sustaining Outreach of Customer

Pervasive Pervasive technology technology Cost per Unit Cost per Unit

• f Money Lent
• f Money Lent

BPO BPO Operation Operation Self Self Sufficient Sufficient Identity Identity Manage Manage Total Total Expenses Expenses Active Active Depositors Depositors Gender Gender Active Active Savers Savers

• No. Active
• No. Active

Loan Clients Loan Clients Average Average Loan Bal. Loan Bal. Per Client Per Client Portfolio Portfolio Outstanding Outstanding Low Cost Of Transaction Per Person Loan Portfolio Analysis Technology Responses

Key Performance/Risk Indicators

Loss Ratio IBNR Aggregate Exposure Pricing

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Global On-Request Finance,

• Rapidly create, launch and manage microfinance products

> Via any distribution channel > Any currency, any language, anywhere in the world > Accessible 24x7 via the web > End to end process control - real-time information managing hurricane risk > Switch Off Channels in Exposed Areas Based Limits

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Agenda : -

✔Microfinance Issues ✔Securitisation for Microfinance ✔Catastrophes and Global Warming Issues ✔Technology Issues ✔Payment and Collection ✔Conclusions and Future Vision

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Mobile Platform

• Based on new generation Near Field Communications (NFC) mobile phones;

contact-less RFID smart cards and integrated biometrics.

• Alternate option of attaching fingerprint scanner + card reader to a PC or PoS.

Can also be deployed on PCs - by adding a NFC card reader + fingerprint scanner (both USB peripherals costing about Rs. 6000)

Overdraft Granted In Flood Risk to Customer Service Point

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Mastercard too…

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Advantages of Java NFC Mobiles

• Simple to operate. Exactly like using a mobile. Almost no training

needed.

• Simple to develop. J2ME MIDP 2.0 permits very rapid development.
• Simple to upgrade. Over the air application updates using GPRS.
• Highly secure. NFC includes PKI level of security built-in end-to-end.
• Vendor independent. 6 mobile manufactures have introduced NFC

phones.

• Massively scaleable. Industrially produced in huge quantities.
• Versatile. Bank-in-a-Box + Full features phone, camera, card reader
• Low cost. Models priced at Rs. 4500 by end of this year.
• Portable, low-power. Can last for about 8 days standby.
• Offline+Online. Upto 2 GB local memory to store offline transactions
• Backed by global giants: Nokia, Intel, IBM, Motorola, NXP, Visa,

Mastercard

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Java Powers the Planet

• 5M Java developers
• 1,135 Java Community

Process (JCP) members

• Java on devices −

4 Billion

• Java on the desktop −

800 Million Java Desktops

• Java in the data center −

Java Enterprise System − over 1 Million subscribers

• Java on smart cards –

2 Billion

• $100 Billion Java

economy

Mobile Phones

Webcams Telematics

Game Consoles Lottery Terminals PDAs

Cash Registers

Robots

Autonomous Vehicles Settop Boxes Parking Stations

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The exploding ‘Remittance’ space

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Economies of scale will definitely be needed…..

MONILINK™ - Smart banking on your mobile. WWW.ZOPA.COM

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The Road Ahead …………….

Remittance Remittance Remittance Remittances are a place to offer insurance and catastrophe cover to individual Health Insurance payments for relatives in the recipient country Remittances move to mobile banking

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Agenda : -

✔Microfinance Issues ✔Securitisation for Microfinance ✔Catastrophes and Global Warming Issues ✔Technology Issues ✔Payment and Collection ✔Conclusions and Future Vision

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The Web Lifestyle – “Making things easy”

iTunes Store

What It Is

Google Maps Flickr Albums Basecamp Where is the bank?

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Micro Finance Mobile Phone Web 2.0

Now !!!

Confluence Marking the Future

Maximises risk value here

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Vision, Reality and Conclusions

• The Network is the Computer
• Everyone and everything participates on the network

Internet Users

2000 2007 2010 2005 1.5 Billion 1995

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Thank You

david.piesse@sun.com