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“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
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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 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
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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 ….. 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
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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 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
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Government Relief and Capital
Reinsurers/Brokers
Catastrophe Pool
Insurers
Loaning Banks
Contingency DebtWeather Derivative
Cat BondsSecuritization
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 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
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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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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 $Mill)
Traditional
Cat Bonds
Sidecars
Syndicated
Pre KWRSidecarAlliances
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Agenda : -✔Microfinance Issues
✔Securitisation for Microfinance
✔Catastrophes and Global Warming Issues
✔Technology Issues
✔Payment and Collection
✔Conclusions and Future Vision
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Global Warming
Source: Climatic Research Unit and the UK Met. Office Hadley CentreBrohan, P., J.J. Kennedy, I. Haris, S.F.B. Tett and P.D. Jones, 2006
The year 2006 was sixth warmest on record, exceeded by 1998, 2005, 2003,
2002 and 2004
Combined global land and marine surface temperature record from 1850 to 2006
Climate Change
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Global Warming/Climate Change
• Research predicts> more intense rainfall> stronger storms> stronger hurricanes> sea level rises> more severe droughts> heat stress> malaria spreads north/south from equator> insect borne diseases spread more easily > impact countries not contributing to global warming
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Calculate Flood Calculate Flood DepthsDepths
Calculate Calculate DamageDamageDefine EventDefine Event Quantify Quantify
Financial LossFinancial Loss
90%$ 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)
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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 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
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CHINA Fault Lines
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CHINA Floodplain
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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 services2
Innovative Technology 1
Improved
MIS/Data Warehousing3
Sound regulatory and
legal environment4
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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
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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
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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
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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 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
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Kisan / Agriculture
Emergency Loans
Remittances
Claims and Emergency
Identity/MedicalLoyalty
MICRO FINANCE CARDS
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Green and ECO Friendly
DEMO NOW
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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
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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 GrantedIn Flood Risk toCustomer 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 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
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The exploding ‘Remittance’ space
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Economies of scale will definitely be needed…..
MONILINK™ - Smartbanking 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 relativesin 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
MobilePhone
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
Inter
net U
sers
2000 2007 20102005
1.5 Billion
19950