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 27 th 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) Heatwave: 50 000 Earthquake: 30 000 Windstorms: 230 000 Earthquake: 205 000 Tsunami: 60 000 Flooding: 40 000 Windstorms: 30 000 Epidemics/famine: 260 000 Landslides: 15 000 Windstorms: 40 000 Flooding: 45 000 Drought: 500 000 Earthquake: 155 000 Epidemics/famine: 120 000 Tsunami: 170 000 Source: EM-DAT: The OFDA/CRED International Disaster Database - www.em-dat.net - Université Catholique de Louvain - Brussels - Belgium

Regional Distribution of Natural Disasters (Economic Losses in billion USD, 1980- 2005) Flooding: 69 Windstorms: 39 Earthquake: 50 Flooding: 194 Flooding: Windstorms: 8 30 Windstorms: 90 Earthquake: 10 Drought: 3 Earthquake: 170 Earthquake: 11 Wild Fires: 18 Flooding: 23 Drought: 5 Flooding: 3 Windstorms: 3 Drought: 11 Earthquake: 9 Tsunami: 4 Windstorms: 14 Source: EM-DAT: The OFDA/CRED International Disaster Database - www.em-dat.net - Université Catholique de Louvain - Brussels - Belgium

Economic Losses are Increasing Geological Billions of USD per decade 4 9 5 5 0 0 Hydrom eteorological 4 5 0 4 0 0 3 4 5 3 5 0 3 0 0 2 5 0 2 0 0 1 6 0 1 5 0 1 0 3 8 8 1 0 0 4 7 2 4 5 0 1 1 1 4 4 0 5 6 -6 5 6 6 -7 5 7 6 -8 5 8 6 -9 5 9 6 -0 5 decade Source: EM-DAT: The OFDA/CRED International Disaster Database - www.em- dat.net - Université Catholique de Louvain - Brussels - Belgium

Disaster Risk Management Involves a Wide Range of Decisions and Actions Disaster Risk Management Risk Identification Risk Reduction Risk Transfer → Financial tools → Historical hazard data → Sectoral planning and analysis • Insurance → Early Warning Systems → Changing hazard trends • Weather derivatives → Emergency • Cat bonds → Vulnerability assessment Preparedness planning • Sidecars → Risk quantification • ILS → Education and training → Fail Safe Technology → Black Box Data Centre

We will discuss briefly : - ✔ Microfinance Issues ✔ Securitisation for Microfinance ✔ Catastrophes and Global Warming Issues ✔ Technology Issues ✔ Payment and Collection ✔ Conclusions and Future Vision Commercial in confidence

HISTORY Commercial in confidence

The MICROFINANCE MARKET Micro Finance Stakeholders Governments Banks Donors, Foundations Investors Insurers Investment Funds NGO’s Reinsurers Credit Bureaus MFI’s MFI Networks Micro Entrepreneurs Villages/Urban Regulators/Rating Agents/Brokers Micro Insurance Delivery Channel Commercial in confidence

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

Things Happen ….. natural disasters and epidemics exclusion – no such thing as micro reinsurance Commercial in confidence

Microfinance in Shaanxi and Ningxia, China Microfinance in Shaanxi and Ningxia, China Enabling Rural Innovation & Entrepreneurship vvv vvv Enabling Rural Innovation & Entrepreneurship What is “microfinance” and how it is helping people • Microfinance is the provision of 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

Agenda : - ✔ Microfinance Issues ✔ Securitisation for Microfinance ✔ Catastrophes and Global Warming Issues ✔ Technology Issues ✔ Payment and Collection ✔ Conclusions and Future Vision Commercial in confidence

HOWEVER… There is an ample supply of capital to service the catastrophe capacity requirements of any emerging market Emerging markets present an attractive opportunity for further reinsurance or ART market diversification It makes long term economic sense for any developing economy to take advantage of this capital

SWISS RE Model Expertise in capital & risk management Broad product offering Single risk Whole Company Risk transfer � Property and Casualty Portfolio of risks � Reinsurance underwriting risks: Solutions to hedge � Risk management services � Claims against natural perils, fire, agriculture, aviation & � Enhance Risk taking capacity space, motor liability, � Optimise use of capital Balance � Stabilise after – tax earning sheet environmental liability, � Improve ROE management � Optimise cash management product recall, medical malpractice, patent Intensive know-how transfer infringement, etc. CatNet online Technical mapping tool online & publishing classroom training

Example Protection seeds Farmers Association loan Micro-Lenders Groundnut (e.g. Opportunity Farmers International Bank) production output Trigger: Rainfall Index 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

Interpretation of who can act as a “National Reinsurer” World Bank A National Government often National Government acts as a reinsurer of last resort In the current environment Reinsurer Traditional reinsurance protocols any one of these entities Retrocession suggest that reinsurers use could act as a National retrocession covers to expand Reinsurer Reinsurer and seek reinsurance, capacity, diversify, and reduce retrocession, or alternative risk Retrocession exposures transfer support Local Reinsurer Reinsurance treaty Insurance Company or Insurance Pool Insurance Policy Natural Disasters World Bank - June 2-3 Property Owner Insured Andrew Castaldi - Swiss Re

Alternative Market Solutions 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

Emerging Market Comparison Features ILS Traditional Increases capacity especially in peak Perceived avoidance of low Limits of areas & independent of insurance frequency and high severity insurability cycle events Capital markets are uncorrelated to Areas of peak exposure have high Diversification insurance - improving portfolio areas of insurance concentration diversification Investment grade securities held as Ratings uncertain especially Counterparty collateral servicing only specified during times of industry duress or credit risk contract extreme events Multi-year Multi-year programs of up to 10 years Natural catastrophe programs contracts have been issued typically run for one year Three types, indemnity (cede Flexible Loss sustained loss), index (industry loss) Tyically indemnity based but can trigger or parametrc (physical event be somewhat flexible characteristic) Activation of Based on trigger regardless of actual Paid on development of cede cover claims losses Requires - pricing based on Flexible - pricing based on coverage Data expsoure data as well as limit limit and event probabilities and event proabilites Swiss Re