Parametric earthquake cover for micro-finance launched in Indonesia

Reinsurance firm Swiss Re, with partners PT Asuransi Wahana Tata (Aswata) and Mercy Corps, have recognised the protection gap opportunity to provide risk transfer to capital providers, launching a parametric earthquake insurance product targeted at micro-finance institutions (MFIs) in Indonesia.

One of the recognised protection gaps is the capital that pours into developing regions of the world and emerging economies from banks, lenders, MFI’s and the like. This capital is typically not protected against catastrophe or weather risks, meaning that when disaster does strike the capital can be drained from the country just at the time it is most needed.

By leveraging parametric trigger technology, reinsurance firm Swiss Re and the partners involved hope that financial protection can be provided against earthquake risks using risk transfer technology, enabling a rapid payout to be made to the MFI with the parametric insurance policy.

The parametric insurance policy will cover microfinance institutions (MFIs) loan portfolios against losses due to an earthquake occurring in Aceh and West Sumatra areas of Indonesia. The protection will better enable MFI’s to continue to lend money, even at a time of financial stress.

As a result the protection gap becomes narrower, both for the MFI itself but also for the ultimate end-users of the MFI’s loans, as greater continuity can be achieved and offered in terms of financing availability in the quake affected regions.

“Aswata understands Padang and Aceh as two regions with growing economic potential in Indonesia. However, both provinces are prone to frequent and large earthquakes. Learning from previous calamities, we see difficulties at the gross root level as the affected communities face challenges in restoring their lives and economy quickly after the area is struck by an earthquake,” said Christian Wanandi, President Director of Aswata.

The parametric insurance will pay out in response to defined triggers being breached, in this case the strength of the earthquake, meaning that the policyholder can receive their payout much sooner, often reducing what can be a lengthy process of months or years, to just days or weeks.

“Here, we noticed the risks to the financial institutions, especially the MFIs. When their customers face problems in repaying or fulfilling their installments due to the earthquakes, the MFIs’ cash flow may be affected. This lowers the MFIs’ ability to provide funding, which in many case is needed to jump-start their customers’ businesses when they are destroyed. In response to this, we have partnered with Swiss Re and Mercy Corps Indonesia to create and offer this new product,” added Wanandi.

The parametric insurance product has been designed to sit as part of Mercy Corp’s Indonesia Liquidity Facility After Disaster (ILFAD) programme, a mechanism aiming to provide MFIs with insurance payouts and liquidity loans in the event of a disaster.

MFI’s may experience high loan default rates after an earthquake or other major natural disaster strikes, until their customers manage to rebuild their livelihoods. The parametric earthquake insurance product provides the MFI with an immediate source of financing so they can provide their clients with an extension of the loan repayment period and, at the same time, an additional emergency loan to aid rebuilding.

These products can also help to protect the MFI against any bankruptcy risk arising from their borrowers default levels increasing, as a result of the natural disaster. In this way, parametric catastrophe or weather covers are also suitable products for other finance and capital providers operating in disaster exposed parts of the world.

Vincent Eck, Head of Global Partnerships, Asia, Swiss Re, commented; “We support the parametric insurance solution with product structuring, pricing and underwriting, as well as reinsuring the risks. This type of insurance is efficient, simple and transparent. Such innovative insurance solutions are designed to also protect government and private assets from natural hazards, and help cities and individuals rebuild and recover quickly, thereby building the resilience of Indonesia against natural disasters.”

“This insurance cover will help MFIs to access funds and provide bridge-loans to their clients when their own liquidity and equity are under stress. We expect that this insurance can satisfy and reach MFIs located in disaster prone areas in Indonesia,” said Jennifer Bielman, Representative of Mercy Corps in Indonesia.

Parametric triggers are often the right solution for coverage or protection gaps, as these gaps often exist due to the inability of traditional insurance or reinsurance structures to cover them. With gaps such as these, where financing itself or continuity of business or finance is at risk due to natural disaster or weather risks, the parametric insurance and reinsurance product can be often provide a valuable solution.