Natural Catastrophe Insurance – In Conversation with Mr. Ulrich Hess

By Vipul Sekhsaria, IFMR Holdings

In the below video we share a brief conversation with Mr. Ulrich Hess, GIZ. Mr. Hess is currently a Senior Advisor, InsuResilience Initiative at GIZ, and has worked extensively in the field of natural catastrophe risk insurance market. In the video he shares his insights on the impact of natural disasters on the livelihoods of households and the risks associated with it. He also talks about the challenges in designing a natural catastrophe insurance product and addressing issues associated with both inefficiencies and effective delivery of the product.


Developing the Natural Catastrophe Risk Insurance Market for Low-Income Households in India

By Vipul Sekhsaria, IFMR Holdings

Natural disasters leave behind them a tale of death and destruction that affects the economy on the whole and severely impacts communities, especially low-income households, which bear its brunt. While little can be done to prevent natural calamities like floods, cyclones, drought etc. from occurring, what perhaps can and should be done is how best households, especially the vulnerable ones, can mitigate the financial losses that such calamities have on their lives.

Flood & Drought Risk

In terms of number of people affected, India tops the list of 163 nations affected by river floods as cited by World Resources Institute[1]. Close to 76% of India’s 7,516 km long coastline, is prone to cyclones with over 40 million hectares (12 per cent of land)[2] being prone to floods and river erosion. Floods can severely disrupt livelihoods, especially in low-resource settings. Flooded households are affected by a plethora of adverse conditions including food insecurity due to crop failure or affordability concerns due to sudden price changes. Daily care of children is importantly challenged during floods as in worst scenarios all basic services become disrupted, including water and sanitation conditions, or the provision of basic community health and social services.

Like flood, drought in India is also a major disruptor of financial well-being with 68% of the country being prone to it in varying degrees[3]. It is difficult to provide a precise and universally accepted definition of drought due to its varying characteristics and impact across different regions such as rainfall patterns, human response and resilience etc. Last year (2016) more than 300 million people living in 256 districts were affected by drought after two years of sparse monsoon rains[4]. The latest findings suggest that while there have been alternate dry and wet spells over the past three decades, the frequency and intensity of drought years has been increasing – for instance Tamil Nadu was declared drought hit in January 2017 after it recorded the worst rainfall in 140 years[5]. What’s important to note is that while the direct effect of drought could be on the farmer and the agriculture economy, but due to its high incidence, the local rural economy also gets severely affected thereby expanding its impact base beyond the farm sector to rural labourers and small rural businesses.

Natural Catastrophe (Nat-Cat) Insurance

Given the fragile economic livelihoods of the underlying households that microfinance institutions and small business lenders serve, even significantly diversified originators typically have a large percentage of their capital at risk in case of a localised natural catastrophe, resulting in a higher cost of capital. This leads to either no catastrophe cover or cover that is unaffordable to people living on low incomes. Further a majority of households never have access to any insurance that protect their assets and livelihoods in the event of a shock. The existing PMFBY (Pradhan Mantri Fasal Bima Yojana – Prime Minister’s Crop Insurance Program) is a restructured Weather Based Crop Insurance Scheme covering only Farmers – it does not take care of many other rural customer segments like Labourers, Small businesses that form 60% of the rural population. Even for farmers it doesn’t provide the much-needed liquidity during the constrained circumstances of a natural disaster like flood nor any protection towards assets other than crops (example: house & contents, livestock, other small holdings). The PMFBY structure is also highly subsidised by the government (to an extent of 90% subsidy)[6], which is a good first step to drive adoption, but without an exit strategy, the long term continuance of subsidy always remain questionable.

India was the first developing country to pilot weather indexed insurance and, despite the recent spread of weather indexed insurance programs across the world, more farmers purchase weather indexed insurance in India than in any other country. However, despite the large public subsidy, as mentioned above, a significant majority of India’s farmers have remained uninsured largely due to issues in design, particularly the long delays in claims settlement.

In terms of product development, designing an Index Based Parametric Cover is somewhat comfortable at a portfolio level rather than at the individual level (micro level), since at a portfolio level, rate makers have access to more managed data of the spread and concentration of assets across the geography. The return periods of the calamities and the portfolio data make it possible to arrive at a commercial rate for the Index Based cover. Recent experience suggest that while products are available but they are also limited to perils like Earthquake which are usually perceived as low-frequency event affecting a much smaller geography in India and therefore are of lesser demand as against for Flood and Drought.

More products for protection around Flood and Drought should also appear in the near future but cost of such solutions is yet to be evaluated. It’s worth mentioning here that, trigger of such portfolio level product results in a payoff to the risk originator (Micro Finance Institutions or similar) to cushion their own portfolio from delayed receipts of the loan repayments due to the stressed situation caused by the catastrophe. The challenge in this segment as it seems is that most originators who are already working on tight margins find it difficult to cover the cost of an earthquake protection product at a portfolio level and the high price still continues to be a dampener.

Designing a Nat-Cat Micro product

While the subject of Index Based Parametric cover is largely centred around loss of assets (whether fixed or movable), there has been very little or no work done so far as to protect the loss of Individual Income due to the incidence of perils like say, flood and drought, through an Index Based Parametric cover. The advantage of originating such cover is making the end consumer (micro level) ‘Nat-Cat-Resilient’.

The biggest challenge in developing the Nat-Cat Micro product is the absence of structured income data at the micro level. In absence of any close estimate of the different income profiles and the effect of Nat-Cat perils on this income, it is not possible to initiate the ratemaking of the risk – ‘Loss of Income’. Since the potential customers are mostly from unorganized sector, a great deal of primary research work will be involved in estimating the different income profiles of the constituent occupation classes.

To address this challenge we have undertaken a detailed primary research activity (details on which we will share in subsequent posts) to capture insights on the impact of natural calamities on income of rural customers, length of the impact as well as coping mechanisms. Joining in this detailed research work is a leading DFI (GIZ InsuResilience Direct Insurance Implementation Team) who has partnered with IFMR Holdings (IFMRH) in developing Catastrophe risk protection market along with weather based technical service provider based in India. In its current phase the goal of this project is to develop probability curves that can be externally assessed and then used to pilot differing approaches like the one detailed above as a “Micro Nat-Cat Product”. If successful, the aim would be to make these probability curves available to others to develop similar coverage and products to serve a much larger population in India.

As part of this blog series we intend to share insights from our research and interactions with expert stakeholders in subsequent posts.

[1] http://www.livemint.com/Politics/hjUVTrwyI0I4p4b4enBg1K/India-tops-list-of-nations-at-risk-from-floods.html
[2] http://www.worldfocus.in/magazine/disaster-management-in-india/
[3] http://www.ijesmjournal.com/issues%20PDF%20file/Archive-2017/Jan-Mar.-2017/4.pdf
[4] http://www.thehindu.com/todays-paper/tp-in-school/Reeling-under-dry-spell/article17052569.ece
[5] http://www.business-standard.com/article/economy-policy/ne-monsoon-worst-in-140-years-144-farmers-dead-tn-declares-drought-117011100782_1.html
[6] http://indianexpress.com/article/business/business-others/pradhan-mantri-fasal-bima-yojana-crop-insurance-plan-to-entail-rs-8-8k-cr-outgo/


The Innovative Finance Revolution

Foreign Affairs magazine in association with The Rockefeller Foundation has published a special issue titled “The Innovative Finance Revolution”. The issue focuses on how innovative finance, characterised by financial tools such as pooled insurance and securitised debt among others, can put the power of private capital markets to work for the public good and can unlock new resources and lead to cost-effective interventions.

Img_FAThe report features essays that lay out the context of innovative finance, and focuses on innovative finance solutions, technological innovation and policy frameworks. As part of this publication, Sucharita Mukherjee, Deepti George & Nikhil John have authored a chapter titled “Investing in the Transformation of Financial Access in India”. In the chapter the authors lay out the financial access scenario in India and provide a perspective on the innumerable challenges that a well-functioning financial system can effectively mitigate for India’s individuals, households, enterprises and local governments and IFMR Holdings role in addressing it. Through the chapter they highlight the underlying core philosophy that drives all our efforts and the work of each of our entities towards our mission of ensuring that every individual and every enterprise has complete access to financial services.

You can read the full publication here and the particular chapter here.


IFMR Holdings Annual Update 2016 – Sowing Seeds for Transformation

In this Annual IFMR Holdings update for FY2016, Sucharita Mukherjee, CEO, IFMR Holdings, in conversation with a Wealth Manager in the video below, narrates the journey so far and the road ahead. IFMR Holdings invests in, and operates financial services companies in India with the mission of ensuring that every individual and every enterprise has complete access to financial services. As of March 2016, IFMR Holdings and its group companies have reached over 18.5 million people across India, working through its own network and that of its partner originators.

Watch the video below:


Curating Innovative Ideas through I-Innovate

By Nikhil John, IFMR Holdings

In our endeavor to achieve our mission of ensuring that every individual and every enterprise has complete access to financial services, we realize the crucial role that innovative ideas can play in this journey. These innovations, either the big-impact ones or the incremental steps forward, play a critical role in aligning our efforts to serve our customer better and are a constant source of inspiration that nudges us to reflect and adapt to future challenges.

To systematically channelize these ideas from our colleagues across the board, right from our KGFS branches to our corporate offices, we had launched “I-innovate”, an organization wide-effort aimed at inspiring and expediting the spirit of constant innovation by facilitating the generation of the next wave of innovative ideas. Each idea received through the platform is funneled through a screening process and the selected ones are allocated resources, incubated and taken to scale.

To qualify the idea must achieve two outcomes:

  • Solve a fundamental client problem – where the client can be a household, financial service provider, regulator, or internal clients like IFMR employees.
  • Accelerate the mission of IFMR Trust.

Since opening the call for proposals in the first cycle the submissions from KGFSes covered a wide spectrum of areas, pertaining to customer engagement, product design, infrastructure and system design, human resources management and administrative processes.  The ideas ranged from and included loan management system improvements, installing Everywhere Teller Machines (ETMs), combining equipment like biometric embedded thermal printers to save costs, a rewards and recognition program for employees, inter-branch idea exchange for best practices, business intelligence improvements, and product improvements in credit and non-credit products.

The submissions from Chennai office ranged from a rewards program for KGFS customers, incentivizing savings up behaviour, digitizing payments to gain insights on migration from cash to cashless solutions, creating a repository of the occurrence of natural disasters and its effects at originators, a customer self-service IVR system, and a social game designed to immerse the user to decisions faced by the Indian low-income household.

After careful deliberations we have shortlisted the below ideas from the first cycle that have made it to the final stage. These ideas and the innovators behind them are developing the ideas further and are in the process of structuring relevant pilots where necessary. With successful pilots and further development appetite the following ideas will be implemented in the current cycle:

Informing customer consent at KGFSes – Rachit Khaitan

Objective: A more responsible financial services provision at KGFS – through a point of sale engagement with the client– facilitating better customer outcomes & documenting the challenges and lessons for advocacy towards a stronger customer protection regime in India.

Description: There are often instances when customers of retail financial products are inadequately informed and caught by surprise about the financial contracts they enter into, leading to unplanned and adverse financial outcomes such as over-indebtedness and delinquency. While there is an important role for norms on transparency and product disclosure in bridging the information gap between the provider and the customer, it is not clear whether the point of sale processes of Indian retail financial services providers today take into account a customer’s truly informed consent. This innovation seeks to design and pilot a small but key process at KGFS to better ensure the informed nature of customer consent at the point of sale of a particular financial product (which could be determined based on mutual stakeholder agreement), based on a customer’s demonstrated understanding of its key aspects. The process entails administering a short verbal quiz to customers, at the point of sale, on the key aspects of a financial services product such as specific features, customer obligations, and potential risks and benefits in a manner that is understandable to the customer, to form the basis of more meaningful informed consent.

FAQ and answer database platform for originators and investors – Arjun Subramanian

Objective: Web-platform/Mobile App that serves as an answer database for the key questions asked by originators, investors, partners and management to serve as a best practices sharing tool for IFMR Capital.

Description: The idea is to have an interactive web platform that would answer the top questions/best practices from originators, investors, senior management and get answers from stakeholders in the context of specific clients. As an organization that has multiple access points with clients and teams that constantly change in terms of managing relationships this innovation will make the organization’s journey more inclusive.

KGFS rewards card – Deepa Anand

Objective: Rewards card to enhance customer experience and enable higher customer retention, stronger customer referrals, incentivize uptake of particular products, encourage timely repayment and other good financial behavior. 

Description: The KGFS reward program is intended to be offered to all KGFS customers. Every time a customer avails a KGFS product or repays on time for the life of a loan, or exhibits any other financial behavior that is to be encouraged, the customer earns reward points that accumulate on her rewards card.  The points can then be redeemed at the end of the year or at product closure date/renewal date (for example at loan closure date or insurance renewal date) in exchange for discounts on the next product availed (for example discounts on the EMI or processing fees of the next loan availed, or discounts on remittance charges etc.), or free mobile recharges.

Inculcating saving-up behavior – Aditi Kumar

Objective: To deploy a program at the KGFSes designed to inculcate saving-up behaviour.

Description: Saving up requires discipline and gives slow gratification.  The idea is to incentivize saving-up behavior through a program at the KGFSes that could be designed in either of the following ways:

  • Mobility of services – Local Agent model for savings transactions, which could include:
    • Door step collection of savings amounts
    • Transactions through smart cards and point of transaction machines with local agents (present in the village)
  • Piggy bank method – Give the customer a KGFS piggy bank in which she deposits what she can and get it at the end of the month to the branch to unlock and get her savings – probably do an activity around this in a group and reward the customer who has the highest savings balance – this is purely to inculcate savings behavior. Gradually instead of the piggy bank, one can move the customer to a savings bank account under a mobility model.
  • Using a JLG group structure to encourage savings in different ways (individually or as a group) – Could involve savings as a group and one of the people in the group gets access periodically and cyclically. More like a reverse SHG bank linkage model. This would also involve looking at whether we currently tap into the SHG network for lending and if we can mobilize their savings.
  • Via a micro-saving platform delivered through an investment/savings planning tool that determines how much each customer is to save periodically and then synchronize it with their repayment schedules.

 Development Impact Bond (DIB) to ensure suitability of MFI products – Nikhil John

Objective: A product that affords MFIs a source of cheaper debt to incentivize them to ensure their employees are offering suitable financial products to customers – an outcome social impact investors and grant funders are willing to fund.

Description: Through this idea the intent is to launch a Development Impact Bond in which IFMR Capital invests in the equity tranche with DFIs/ financial institutions, interested in suitability, investing in the mezzanine tranche. The objective is to fund the outcome where MFI employees are tested to ensure products they offer are suitable, with financial investors participating in senior tranches, getting an additional return if the outcome of suitability is achieved.

 Through I-innovate we aspire to engender new grassroots thinking and believe that over a period of time it will pave the way for systematic innovation that propels us further in our path towards our mission.