VisionFund International, a division of global charity World Vision that oversees the entity’s microinsurance operations, is targeting parametric insurance and risk transfer as a way to back its innovative recovery lending programme.
Through collaboration with Global Parametrics, a parametric and index-based risk transfer start-up that’s backed by the UK and German governments, VisionFund is looking to utilise parametric insurance to underpin its innovative recovery lending programme, with a first transaction set to be completed soon.
This will be Global Parametrics first deal, backed by its natural disaster fund that is capitalised with the support of UK and German government entities.
Global Parametrics work also involves sourcing efficient risk capital from reinsurance and ILS markets to support its capacity requirements and the company aims to structure a fund to enable it to offer the most efficient parametric risk transfer solutions possible.
In response to an expectation of a very strong El Nino, VisionFund established a market-based approach to providing microfinance loans to 14,500 families in rural parts of Kenya, Malawi, and Zambia, that were impacted by severe flooding and drought conditions owing to a strong El Nino.
The funds provided clients with the ability to avoid “extreme poverty” post-event, and was funded by the Department for International Development (DFID), and launched in February 2016 as a recovery lending programme.
Commenting on the recovery lending project, Stewart McCulloch, Global Insurance Director, VisionFund, said; “Because of DFID’s help we were able to provide 14,500 clients with loans, impacting 87,000 beneficiaries. These funds have now been returned to DFID and can be utilised in new projects, changing even more lives in vulnerable communities around the world.
“Recovery Lending has the potential to be self-sustaining, complementary to other disaster recovery interventions, and scalable to other countries. Along with our project partners, we are optimistic about the potential that Recovery Lending has to change the way the international community responds to people impacted by weather-related events.”
VisionFund has now revealed that it’s been working with Global Parametrics and other partners from the microfinance funding world, to develop a Financial Disaster Risk Management (FDRM) tool that can serve as funding mechanism for its recovery lending programmes of the future.
The FDRM solution, says VisionFund, will combine advanced climate science modelling, portfolio level catastrophe insurance and contingent liquidity to deliver a funding tool for recovery lending. Initiatives like this will benefit from efficient reinsurance capacity, with the capital markets clearly a source that would be a good fit.
Global Parametrics is developing sophisticated modelling tools which will no doubt play a vital role in assisting VisionFund with its FDRM goal.
Essentially, VisionFund is looking to utilise parametric insurance protection to underpin its recovery lending initiatives, where Microfinance Institutions (MFIs) can secure funding via the developing FDRM solution in order to provide vulnerable, poorer communities with valuable funding post-event, when loans might default as a result of extreme weather.
“Furthermore, FDRM preparations will provide in depth understanding of exposure to risks, supporting product/process preparation and mitigation against these hazards. Paired with quality lending, this FDRM solution will equip microfinance institutions to continue serving their clients through disasters, at modest fees of about 1% of their portfolio,” explains VisionFund.
Parametric insurance solutions are growing in popularity across the world, and especially in poorer parts of the world that require rapid payout post-event, a hallmark of a parametric trigger, and that perhaps are home to perils that lack the most sophisticated modelling capabilities.
Utilising parametric risk transfer, backed by efficient insurance and reinsurance capital, VisionFund can tie in risk transfer and management with its recovery lending, ensuring that it has the necessary liquidity to help its clients when disaster strikes.