“micro finance and disaster risk management” astf october ... › astf › document3 › dr....

“Micro Finance and Disaster Risk Management”

ASTF October 2007David PiesseGlobal Head of Insurance

David PiesseHead 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 000Tsunami: 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 000Windstorms: 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: 3Flooding: 3

Flooding: 69

Earthquake: 10

Drought: 5

Economic Losses are Increasing

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

4 11 1424

47

88

160

345

103

495

0

50

100

150

200

250

300

350

400

450

500

56-65 66-75 76-85 86-95 96-05

Geological

Hydrometeorological

Billions of USD per decade

decade

Disaster Risk Management Involves a Wide Range of Decisions and Actions

Risk TransferRisk 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

Commercial in confidence

We will discuss briefly : -✔Microfinance Issues

✔Securitisation for Microfinance

✔Catastrophes and Global Warming Issues

✔Technology Issues

✔Payment and Collection

✔Conclusions and Future Vision


HISTORY


The MICROFINANCE MARKET

Micro Finance StakeholdersGovernments 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


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


Things Happen ….. naturaldisasters 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 vvvvvv

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 & EntrepreneurshipEnabling 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






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

HOWEVER…

SWISS RE Model

Single risk Whole CompanyPortfolio of risksReinsurance underwritingRisk management servicesClaims

Enhance Risk taking capacityOptimise use of capitalStabilise after – tax earningImprove ROEOptimise cash management

Risk transfer

Balance sheet management

Intensive know-how transfer

CatNet onlinemapping tool

Technical

publishing online & 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. OpportunityInternational Bank)

Trigger: Rainfall Index

loan

production output

seedsFarmers 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 coverGuarantees to buy harvest at fixed price, loans can be paid back either through income from harvest or insurance

Example Protection

Traditional reinsurance protocolssuggest 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 environmentany 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 DisastersWorld Bank - June 2-3Andrew 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 ComparisonFeatures ILS Traditional Limits of

insurabilityIncreases capacity especially in peak

areas & independent of insurance cycle

Perceived avoidance of low frequency and high severity

events

DiversificationCapital 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)

or 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 proabilitesSwiss Re


Government Relief and Capital

Reinsurers/Brokers

Catastrophe Pool

Insurers

Loaning Banks

Contingency DebtWeather Derivative

Cat BondsSecuritization

Create Risk Financing Team

Aspects of Microfinance Reinsurance


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 RISKTRANSFER

CATASTROPHE Bonds

Parametric Triggers

RISK FINANCINGRISK FINANCING

Risk Assessment Underwriting

Treaty Reinsurance

CLAIMS CLAIMS SETTLEMENTSETTLEMENTINSURED RISKSINSURED RISKS DISTRIBUTIONDISTRIBUTIONRISK REDUCTIONRISK 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

EnablesEnables………………

Post Office


• 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

Commercial in confidence1997< 1998 1999 2000 2001 2002 2003 2004 2005 2006

11,000

8,500

5,3005,000

3,3002,700

2,300

2,0001,8001,300

1,0001,150 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 KWRSidecarAlliances

http://nymag.com/news/articles/wtc/gallery/7.htm


Global Warming

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

The year 2006 was sixth warmest on record, exceeded by 1998, 2005, 2003,

2002 and 2004

Combined global land and marine surface temperature record from 1850 to 2006

Climate Change


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


Calculate Flood Calculate Flood DepthsDepths

Calculate Calculate DamageDamageDefine EventDefine Event Quantify Quantify

Financial LossFinancial Loss

90%$ Loss$ Loss

Assess WindAssess WindSpeedSpeed Calculate DamageCalculate DamageDefine HurricaneDefine Hurricane Quantify FinancialQuantify Financial

LossLoss

90%$ Loss$ Loss

Stochasticmodel

Hazardmodel

Vulnerabilitymodel

Financialmodel

Risk Based Modeling is Key (RMS)

Commercial in confidenceSource: WeatherUnderground.com, January 18, 2006.

Hurricane Season 05


Huge growth in Takaful


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 DerivativesDerivatives

– Correlation of Financial Behaviour and Terrorism

– Link to activities and terrorist finances

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

TerrorismTerrorismDerivativesDerivatives

– Must have intrinsic value– Carry asset risk directly

– Must be an asset related transaction.– Must be affected by weather

DerivativesDerivatives


CHINA Fault Lines


CHINA Floodplain


Microfinance Profitable Delivery Strategy?

Diverse

financial services2

Innovative Technology 1

Improved

MIS/Data Warehousing3

Sound regulatory and

legal environment4


Digitalized Globe: Flattened WorldVirtual 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


Can technology enable microfinance ?

Front-end Point of Sale1. Account creation (loan,

savings & insurance)1. Collecting client data2. Screening/ verification

2. Transaction data3. Processing claims (savings,

transfers & insurance)

E-paymentsEnabling cashless/ electronic payments

1. Disbursal of amount (loan)2. Collection of dues/ payments (loan, savings & insurance)

Back Office1. Aggregation of client data

1. Actuarial analysis2. Target offerings3. Real Time Risk Mgmt4. Channel Management5. Loss Ratio Assessment

CGAP

Aishwarya Ratan, MSR India, March 2007 Not for Circulation

m-banking


Low CostFinancing

WebWebServicesServices

Utility Utility ComputingComputing

SecureSecureTechnologyTechnology

Low CostFinancing

WebWebServicesServices

Utility Utility ComputingComputing

SecureSecureTechnologyTechnology

Permanent Access toFinancial Transactions

Outreach

Clients Banks and Insurers

AffordabilityOperatingCosts

Matching the Triangles

SUSTAINABILITY


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 andSystem Integrators

Dedicated or Time Based Reservation

Predictable and all-inclusive $1/cpu-hr

“Variable CostInfrastructure”Customized, Modular

Custom Standard

One-off Implementations Massive Volume

X

People Intensive Automated / Virtualized

XX

X

X


Kisan / Agriculture

Emergency Loans

Remittances

Claims and Emergency

Identity/MedicalLoyalty

MICRO FINANCE CARDS


Green and ECO Friendly

DEMO NOW


Long Term Sustaining

Outreach of Customer

Pervasive Pervasive technologytechnology

Cost per Unit Cost per Unit of Money Lentof Money Lent

BPOBPOOperationOperationSelfSelfSufficientSufficient

Identity Identity ManageManage

Total Total ExpensesExpensesActive Active

DepositorsDepositors

GenderGender Active Active SaversSavers

No. Active No. Active Loan ClientsLoan Clients

Average Average Loan Bal. Loan Bal. Per ClientPer Client

Portfolio Portfolio OutstandingOutstanding

Low CostOf

Transaction Per

Person

Loan Portfolio Analysis

Technology Responses

Key Performance/Risk Indicators

Loss Ratio

IBNR AggregateExposure

Pricing


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

●●


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 GrantedIn Flood Risk toCustomer Service Point


Mastercard too…


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


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 JavaDesktops

• 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 ConsolesLottery Terminals

PDAs

CashRegisters

Robots

Autonomous Vehicles

Settop Boxes

Parking Stations


The exploding ‘Remittance’ space


Economies of scale will definitely be needed…..

MONILINK™ - Smartbanking on your mobile.

WWW.ZOPA.COM

http://www.zopa.com/ZopaWeb


The Road Ahead …………….

Remittance Remittance Remittance

Remittances are a place to offer insurance and catastrophe cover to individual

Health Insurance payments for relativesin the recipient country

Remittances move to mobile banking


The Web Lifestyle – “Making things easy”

iTunes Store

What It Is

Google Maps

Flickr Albums

Basecamp

Where is the bank?


Micro

Finance

MobilePhone

Web 2.0

Now !!!Confluence Marking the Future

Maximises risk value here


Vision, Reality and Conclusions

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

Inter

net U

sers

2000 2007 20102005

1.5 Billion

19950


Thank You

[email protected]

mailto:[email protected]

“micro finance and disaster risk management” astf october ... › astf › document3 › dr....

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