Global Parametrics, a parametric and index-based risk transfer start-up that’s backed by the UK and German governments, has launched a new climate insurance initiative, targeting African and Asian smallholder farmers, alongside VisionFund International, World Vision’s microfinance arm.
The initiative, which has been targeted with meeting 1% of the G7 goal to increase access to climate risk insurance for up to 400 million people in developing countries, will launch the insurance scheme in six countries in Africa and Asia, could result in over 690,000 families totalling up to four million people benefitting from coverage they did not have before.
The insurance programme, named the African and Asian Resilience in Disaster Insurance Scheme (ARDIS), could be the world’s largest non-governmental climate insurance programme, and will leverage parametric risk transfer and advanced climate risk modelling from Global Parametrics to deliver affordable insurance solutions to people in the launch countries.
“ARDIS will increase access to finance and provide post disaster recovery lending to rural families and smallholder farmers who live below the poverty line and participate in VisionFund’s microfinance network. In its first year, ARDIS protection will be provided to VisionFund’s clients in Kenya, Malawi, Mali, Zambia, Cambodia and Myanmar, of which around 80% are women,” the companies involved explained.
The product sees Vision Fund International leveraging parametric insurance and risk transfer as a way to back its innovative recovery lending programme, helping to pay for those affected by disaster to receive rapid access to the credit required by farmers and small businesses after a climate shock.
Recovery lending involves small or micro loans with special terms,which are provided by VisionFund’s microfinance institutions and disbursed immediately during and after disasters.
The goal is to help clients continue or restart economic activities, a complementary source of financing to relief aid which can be the difference between clients being able to continue their livelihoods after climate disasters strike.
Vision Fund uses the parametric risk transfer protection to ensure that its microfinance institutions have access to liquidity to provide the recover loans precisely when disaster strikes.
Global Parametrics, using advanced climate modelling, verifies that an event has occured and triggered the terms of the policy, thus providing access to both contingent liquidity and risk capital to VisionFund’s microfinance institutions.
The just-in-time capital provided by the parametric climate insurance restores the balance sheets of the microfinance institutions, enabling them to continue providing the recovery lending services just when their clients require them most.
The contingent liquidity for the ARDIS programme is provided by the InsuResilience Investment Fund, which is managed by BlueOrchard Finance, and backed by KfW on behalf of BMZ, the German Federal Ministry for Economic Cooperation and Development.
The risk capital is provided through the Natural Disaster Fund, which is managed by Global Parametrics and currently funded by the British government via DfID.
Global Parametrics has always been open to work with third-party capital providers, which may include investors in reinsurance and ILS, once its operations have scaled up, in order to bring the most efficient risk capital to its clients through the Natural Disaster Fund.
This way the programme has been structured provides disaster risk financing at costs of approximately half a per cent of loan portfolio value per annum payable by the microfinance institution, the companies involved said.
Michael Mithika, President and CEO, VisionFund International, commented on the launch, “ARDIS uses an innovative financing structure making recovery lending scalable. This scalability means greater opportunities for more people to access emergency finance to restart businesses and restore incomes. We’ve already seen the benefits of recovery lending initiatives in sub-Saharan Africa in 2016/2017 which were supported by a £2 million returnable grant from DfID. We are excited about rolling this out on a wider scale.”
Jerry Skees, Chief Strategy Officer and Director of Global Parametrics, said, “We are thrilled to have worked jointly with VisionFund to develop this innovative programme. Together, we have the potential to meet ambitious social goals that improve financial inclusion, facilitate recovery lending and build resiliency for communities. The adoption of ARDIS also assists microfinance institutions to protect their exposure to climate risk, ensure continuity of services and continue business growth. The closing of this transaction is a major milestone as we build market-changing risk models and offer solutions to communities needing them most. We plan to repeat this type of offering with other firms serving the poor and vulnerable in emerging markets.”
Stefan Hirche, Chairman of the Board of the InsuResilience Investment Fund, also said, “African and Asian countries are highly vulnerable to the effects of climate change and natural catastrophes. We are looking forward to partnering with VisionFund International and Global Parametrics to reduce the vulnerability of small businesses and low-income households in these regions and to contribute to achieving the G7 goal to insure 400 million vulnerable people.”
Mithika added, “ARDIS consolidates VisionFund International’s leadership in the provision of on-the-ground agricultural finance. This is the first step for VisionFund in the use of climate science and Financial Disaster Risk Management tools to create extremely low cost climate protection. We are already working on additional countries, risks, features and services with Global Parametrics to build on ARDIS.”
It’s encouraging to see this development, as the Global Parametrics model of utilising advanced risk modelling and data analysis, alongside parametric insurance triggers, backed by an investment fund structure, is akin to the work of the ILS market and other alternative reinsurance strategies.
It’s an example of the efficiencies of the global capital markets work in reinsurance being replicated at scale but to help those in less developed and low-income locations, where risk transfer and risk capital efficiency are essential for any insurance or reinsurance schemes to work over the longer-term.
Global Parametrics Natural Disaster Fund could become a very interesting opportunity for large investors looking for ways to allocate risk-linked returns through sustainable and ethical finance initiatives, hence as it scales and requires more backing some ILS or reinsurance investors may find it a very attractive business model.