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DISASTER RISK INSURANCE For Microfinance Sector PAKISTAN
Study Report November 2017
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Acknowledgements
We are grateful to the:
- Securities and Exchange Commission of Pakistan (SECP), - National Disaster Management Authority (NDMA), - Pakistan Microfinance Investment Company (PMIC), and - Pakistan Microfinance Network (PMN)
for their valuable input, without which this publication would not have been possible. The report also draws from useful suggestions given by various stakeholders, who also attended the GIZ-RFPI’s Workshop on October 5, 2017 in Islamabad, Pakistan. These include:
- EFU General Insurance - Federal Insurance Ombudsman - Insurance Association of Pakistan - Jubilee General Insurance Limited - Kashf Foundation - Khushhali Microfinance Bank - Ministry of Climate Change - National Insurance Company Limited - National Rural Support Program - Pakistan Meteorological Department - Pakistan Reinsurance Company Limited - Provincial Disaster Management Authority, Punjab - Provincial Disaster Management Authority, Sindh - Sindh Enterprise Development Fund - State Bank of Pakistan - State Life Insurance Corporation of Pakistan - Zarai Taraqiati Bank Limited
Contribution of all other stakeholders who have provided their helpful support during the preparation of this report is also gratefully acknowledged.
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Table of Contents
Acknowledgements .................................................................................................................... 1
Table of Contents ....................................................................................................................... 2
List of Tables ............................................................................................................................. 4
List of Figures ............................................................................................................................ 4
Abbreviations ............................................................................................................................. 5
Foreword .................................................................................................................................... 6
Executive Summary ................................................................................................................... 7
I. Introduction ........................................................................................................................ 8
A. Objective of this report ................................................................................................ 8
B. Methodology ............................................................................................................... 9
C. Macroeconomic Summary of Pakistan ....................................................................... 9
D. Pakistan’s Financial Sector ....................................................................................... 10
1. Microfinance Sector and Branchless Banking ....................................................... 10
2. Insurance Sector ...................................................................................................... 12
II. Risk Assessment .............................................................................................................. 14
Chapter Summary ................................................................................................................. 14
A. Hazards ...................................................................................................................... 14
B. Vulnerability Analysis............................................................................................... 19
1. Stakeholder Discussion ........................................................................................... 20
C. Impact Estimate ......................................................................................................... 21
III. Disaster Risk Management Mapping (DRM) ............................................................... 23
Chapter Summary ................................................................................................................. 23
A. Government’s Policy on DRF ................................................................................... 23
B. Prevention and Reduction ......................................................................................... 24
1. Stakeholders’ Feedback ........................................................................................... 25
C. Mitigation .................................................................................................................. 25
1. Stakeholders’ Feedback ........................................................................................... 27
D. Coping ....................................................................................................................... 29
1. Stakeholders’ Feedback ........................................................................................... 32
E. DRM Assessment Matrix .............................................................................................. 33
IV. Identification of Gaps ................................................................................................... 37
Summary .............................................................................................................................. 37
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A. Inventory of DRM Strategies .................................................................................... 37
1. Crop Loan Insurance Scheme ................................................................................. 38
2. Livestock Loan Insurance Scheme ......................................................................... 38
3. Index-based Crop Insurance ................................................................................... 39
4. Stakeholders’ Feedback ........................................................................................... 40
V. Exploration of DRM Options (Insurance) ....................................................................... 44
Summary .............................................................................................................................. 44
A. Scope of Insurance for Disaster Risks....................................................................... 45
B. Summary Overview of DRM system – Pakistan Microfinance Sector ..................... 46
C. Financial Literacy Campaigns ................................................................................... 47
VI. Implementation Strategy and Future Direction ............................................................. 50
A. Macro, Meso and Micro-level Strategy..................................................................... 50
B. Working Group Formation ........................................................................................ 51
C. Future Direction ........................................................................................................ 53
VII. Summary and Conclusion ............................................................................................. 56
References ................................................................................................................................ 57
Appendix 1 ............................................................................................................................... 58
Ghana and Philippines Strategies ......................................................................................... 58
Ghana .............................................................................................................................. 58
Philippines ...................................................................................................................... 59
Appendix 2 ............................................................................................................................... 60
Developing a Disaster Risk Insurance Framework for Microfinance Sector .......................... 60
A Consultative Questionnaire ....................................................................................... 60
Part A ............................................................................................................................... 60
General Questions .......................................................................................................... 60
Part B ............................................................................................................................... 60
Disaster Risk Assessment, Mapping and Evaluation ................................................... 60
Risk Assessment .............................................................................................................. 61
Disaster Risk Mapping.................................................................................................... 62
Identification of Gaps ..................................................................................................... 62
Exploration of DRM Options ......................................................................................... 62
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List of Tables
Table 1: Emergency level definitions by the NDRP (March 2010) ...................................... 15
Table 2: Snapshot of Sectors Risk (PMN 2014) ..................................................................... 17
Table 3: Top Ten Risks to Microfinance Sector (PMN 2014) ............................................... 17
Table 4: Stakeholder views of risk (PMN 2014) .................................................................... 17
Table 5: Vulnerability categorization to natural disasters ................................................... 20
Table 6: Summary of Risks from Workshop ........................................................................ 20
Table 7: Trends in Microfinance (MicroWatch Issue 44: Quarter 2 Apr-Jun 2017) ........... 26
Table 8: DRM Assessment Matrix .......................................................................................... 34
Table 9: Premium rates on agricultural insurance ............................................................... 39
Table 10: Workshop summary of areas to be addressed ..................................................... 41
Table 11: Lessons from various microinsurance and reinsurance models ........................ 45
Table 12: Proposed objectives of the Working Group ......................................................... 52
Table 13: Questions and Indicators related to Disaster Risk Insurance for Microfinance sector ....................................................................................................................................... 53
List of Figures
Fig 1 Natcat Analytical Framework
Fig 2 Major Recent Natural Disasters in Pakistan
Fig 3 Individualistic Incentives
Fig 4 Collectivistic Incentives
Fig 5 Overview of DRMM Prevention and Reduction, Mitigation and Coping
Fig 6 Overview of the DRM System Pakistan Microfinance Sector
Fig 7 Old Paradigm on Financial Literacy Campaigns
Fig 8 New Paradigm on Financial Literacy Campaigns
Fig 9 Marketing Collaboration Fig 10 Macro , Meso and Micro Level Strategic Plan to Implement Disaster Risk Insurance
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Abbreviations
DRF Disaster Risk Finance DRI Disaster Risk Insurance DRM Disaster Risk Management GIZ-RFPI Deutsche Gesellschaft für Internationale Zusammenarbeit – Regulatory
Framework Promotion of Pro-poor Insurance Markets in Asia IAP Insurance Association of Pakistan MFBs Microfinance Banks MF-CIB Microfinance Credit Information Bureau MFIs Microfinance Institutions MFPs Microfinance Providers MSMEs Micro, small and medium enterprises NatCat Natural Catastrophe NICL National Insurance Company Limited PMIC Pakistan Microfinance Investment Company PMN Pakistan Microfinance Network PPAF Pakistan Poverty Alleviation Fund RSPs Rural Support Programs SBP State Bank Pakistan SECP Securities and Exchange Commission of Pakistan SLIC State Life Insurance Corporation
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Foreword
The microfinance industry in Pakistan has grown rapidly over the last few years and the trend is likely to continue in the coming years. With National Financial Inclusion Strategy (NFIS) in place, the industry is geared up to play an important role in furthering the financial inclusion agenda in the country. In addition, with recent regulations issued by the Securities and Exchange Commission of Pakistan (SECP) for the non-banking microfinance institutions, it is expected that the industry is poised for further growth and development. However, given the imminent reality of natural disasters in the country a new approach in addressing risks is necessary. Although the mostly affected by natural disasters are the vulnerable and poor people, damage at client level tends to ripple throughout the microfinance industry which is particularly exposed to the threats emanating from disasters for several reasons: a) Populations worst hit by disasters tend to be the same as those targeted by microfinance; b) Microfinance providers tend to have a low capital base and thus a limited buffer to absorb losses; c) Microfinance is a financial business susceptible to liquidity problems; d) Microfinance tries to balance the social and financial bottom line, creating a political risk, if it pursues recovery after a calamity.
Against this background, there is a critical need to advice the microfinance sector, as well as its clientele who are the micro businesses, as to how they can reduce their risks against natural disasters and create a protection mechanism ultimately through the use of insurance. Realizing this imminent need, the GIZ-RFPI carried out in 2016 a timely contribution through the development of a “Diagnostic Toolkit for insurance against Natural Catastrophes for Micro, Small and Medium Enterprises (MSMEs) in Agriculture and other sectors” mostly in developing countries.
Continuing this effort the GIZ-RFPI in agreement with SECP and other relevant stakeholders aims to help the microfinance sector in Pakistan in combating risks due to natural disasters. For this purpose it is customizing the Toolkit specifically for the low-income clients of Pakistan’s microfinance sector. Various missions of GIZ to Pakistan in the period 2016/2017 to promote inclusive insurance resulted among others into the organization of a multi-stakeholders workshop in Islamabad on the subject of “Disaster Risk Insurance for Microfinance Sector” on October 5, 2017. The current report of the GIZ-RFPI includes the results of the analysis, the preliminary assumptions and recommendations for building the capacity of the local stakeholders and initiate a process of the DRI Strategy Implementation in 2018 and beyond. This process will be a collaborative effort of all partners involved and we believe there is a momentum to advance in offering effective and efficient protection against Natural Catastrophes for the Microfinance Sector in Pakistan.
Dr. Antonis Malagardis Program Director, GIZ RFPI-II
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Executive Summary
Natural disasters seem to be more frequent and reported in recent times. The end result is devastation of communities and lives, especially in the lower socio-economic sphere. Microfinance is a tool used by MSMEs and households as a means to leverage personal effort to grow household income and improve quality of life. When a natural disaster strikes however, the microfinance providers (MFPs) can be significantly affected and impacted as a result of damage to their client-communities.
Along with the loss due to potential loan write off and rescheduling, MFPs can lose critical data on their clients and, in some circumstances, lose track of their clients due to migration or internal displacement of disaster-struck communities. This amplifies losses to the MFPs and increases the risk to the survival of the industry.
Clients’ ability to repay loans is affected as they continue down the spiral of further poverty, being unable to revive or rehabilitate themselves. It is in the interest of not only the MFPs for revival strategies, but the government too, who are looking for ways to decrease the fiscal burden, on what is already a strained national budget.
This Toolkit, along with its country diagnostic and the reporting content, is designed to provide a strategy to bring industry stakeholders of the Pakistan’s microfinance and insurance industry to collaborate on strategies that can prevent and reduce, mitigate and develop coping mechanisms against the risks of natural disasters. Through individual and group consultations with the MFPs, the Pakistan Microfinance Network (PMN), the Pakistan Microfinance Investment Company (PMIC), the Securities and Exchange Commission of Pakistan (SECP), and the National Disaster Management Authority (NDMA), a series of activities has been provided, including risk assessment, disaster risk management and mapping, identification of gaps and exploration of disaster risk management options. This has been developed while using the GIZ’s NatCat Analytical Framework, published in early 2016.
The endeavor of this effort is to establish enhanced collaboration between stakeholders for alternative insurance and risk mitigation strategies that can lead to a decrease in the impact of natural disasters on the microfinance industry.
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I. Introduction
A. Objective of this report
The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)’s Regulatory Framework Promotion of Pro-poor Insurance Markets (RFPI) in Asia Program developed a diagnostic Toolkit in March 2016 for insurance against the risks of natural disasters. This Toolkit is designed to motivate and promote the Natural Catastrophe (NatCat) insurance for micro, small and medium sized enterprises (MSMEs) in developing countries, with an objective to help in increasing the accessibility of insurance against the negative impacts of natural disasters. The Toolkit provides the following overarching framework:
Figure 1: NatCat Analytical Framework, MEFIN Network and GIZ RFPI Asia (March 2016)
One of the aims of the development of this framework is to encourage governments and policymakers, in developing countries, to integrate the concepts of insurance in their disaster risk management (DRM) frameworks. Taking it one step forward, this document focuses on the application of the framework as well as its impact on the microfinance industry, at the moment in the context of Pakistan. However, the insurance industry will remain the primary driver behind the concept of disaster risk insurance (DRI) and also an integral part of the discussion throughout this document.
According to the Securities and Exchange Commission of Pakistan (the SECP) in one of its reports (SECP, 2012), when it comes to insurance, there has been limited success and interest in targeting low-income earners, which is also the primary target market of
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microfinance. There is, however, an imminent need to minimize both the economic as well as social losses to low-income earners, triggered after the natural disasters. Mechanisms need to be put in place to engage with such people, to make them financially prepared rather than rely solely on the government or donor-funded interventions, which often are found to be delayed or inadequate.
This view is also supported by research from Takashi (2013) whereby it was found that the vulnerability of Pakistan’s households exposed to floods and droughts is high. It was found that such households encounter more difficulty in coping up with disruptions, and that a smoothing mechanism through the development of assets and credit markets would play a pivotal role to mitigate against the natural disasters, such as floods.
The GIZ’s Toolkit for DRI in microfinance sector is expected to provide a framework that can be contextualized for Pakistan, for the provision of suitable DRI products. This report endeavors to provide a background on the current status of the Pakistan’s microfinance and insurance industry. It also aims to customize the NatCat Analytical Framework for Pakistan, including the existing DRM options available to the microfinance and insurance sector, a gap analysis with respect to the forms of insurances to be developed, and the recommendations on the design of insurance products.
B. Methodology
The research and information collected for this report includes synthesis of information from previous studies on microfinance and insurance, in the context of DRM and DRI. In addition to this, information has been collated from sources including but not limited to the National Disaster Management Authority (NDMA), Insurance Association of Pakistan (IAP), Pakistan Microfinance Network (PMN), Securities and Exchange Commission of Pakistan (SECP) and the Pakistan Microfinance Investment Company (PMIC), amongst others. Also, various microfinance providers (MFPs) have been consulted to source the information about existing product demand and distribution methods currently in use.
C. Macroeconomic Summary of Pakistan
According to the World Bank’s report (2017), Pakistan has achieved a reasonable progress towards macroeconomic stability over the past few years. It has achieved a GDP growth rate of 4.7 percent over the past year. Despite issues such as high inflation, fiscal deficits and low tax-to-GDP ratio (12.4%), Pakistan’s fiscal performance and ability to attract direct foreign investment remains high, when compared to its regional counterparts. Although the volatility in the political system is widely acknowledged, Pakistan continues to show significant potential for economic growth. Some of the reasons include deployment of new energy projects, planned privatization of various state-owned enterprises, relatively attractive foreign investment policies and various on-going bilateral projects, such as the China-Pakistan Economic Corridor (CPEC).
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According to the Pakistan Economic Survey (2015-16), the capital market continued its upward levels signifying investor interest in the economy. The Pakistan Stock Exchange has shown robust performance and has also been recently included in the MSCI Emerging Market Index. Foreign direct investment interest remains high in the power, energy, oil & gas, automobile and textile sectors. Growth is also strong with expansion in credit to the private sector which in turn has assisted other industries such as the industrial, food & beverage, and construction sectors.
D. Pakistan’s Financial Sector
Pakistan’s financial sector provides various services, however, much of the population still remain financially excluded from participating in it. Reasons include, but are not limited to, lower literacy (including financial) levels, low income levels, and limited accessibility despite the uptake of mobile banking services during recent years. The increase in mobile phone customers is considered as one of the fastest in the world with approximately 130 million customers throughout Pakistan (PTA 2015). The banking sector has been the backbone of the financial services sector in Pakistan, however, more non-banking finance and insurance institutions are coming forward. It is hoped that with improved regulation and financial literacy campaigns, the financial system can grow further and be in the position to increase the overall financial inclusion. In Pakistan, the banking sector is regulated by the State Bank of Pakistan (SBP), where banking forms the major share of the financial services sector. There are currently ten Microfinance Banks (MFBs) regulated by the SBP, who are also the members of PMN. SECP is the financial sector regulator supervising the entire financial sector, excluding banks. The non-banking microfinance institutions (MFIs) are regulated by SECP. MFBs and MFIs are collectively called as the Microfinance Providers (MFPs). The PMN is the central association representing almost all MFPs in Pakistan.
1. Microfinance Sector and Branchless Banking
Pakistan’s microfinance sector has been ranked among top five (out of 55 countries) in the world by the Economist Intelligence Unit1. The rapid developments in digital financial inclusion and branchless banking have led to the country being seen as the ‘laboratory of innovation’ by the Consultative Group to Assist the Poor (CGAP)2. Formally started almost two decades ago, that microfinance industry in Pakistan has grown at a double-digit rate3 over the last few years and the trend is likely to continue in
1 The Economist, 2016, ‘Global Microscope 2016’, The Economist Intelligence Unit. 2 See http://www.cgap.org/publications/branchless-banking-pakistan-laboratory-innovation 3 See Pakistan Microfinance Review 2015 at http://microfinanceconnect.info/assets/articles/a7248cfa411a34074d03aafd4ed7cd6c.pdf
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coming years. The microcredit outreach, in terms of active borrowers and Gross Loan Portfolio (GLP), as of December 2016, stood at 4.6 million and PKR 137 billion, respectively. The potential size of microfinance market has been estimated by the PMN to be about 20.5 million people4. The SBP implemented its strategic framework for microfinance first in 2001, and then in 2007 allowing the private sector to operate in the microfinance sector as MFBs and MFIs, with the latter being in an NGO-orientated structure. The continued growth of the sector has resulted in multiple borrowings and unhealthy competition to some extent, which has resulted in repayment crises. This has also resulted in further indebtedness, and has increased the overall credit risk of the sector. Recent initiatives have resulted in the Microfinance Credit Information Bureau (MF-CIB) which provides an extensive database on credit history and branch locations throughout Pakistan. The MF-CIB can not only flags problem or extreme/high risk clients, but also help the MFPs in making informed lending decisions. The SBP has also developed financial literacy campaigns to improve consumers’ knowledge about various financial products and terms available to them. The PMN has also created information campaigns about the rights and responsibilities of microfinance clients. With National Financial Inclusion Strategy (NFIS) in place, the microfinance industry is geared up to play an important role in furthering the financial inclusion agenda in the country. In addition, with recent regulations issued by SECP for the non-banking MFIs, it is expected that the industry is poised for further growth and development. Current macroeconomic stability and positive indictors provide a supportive environment for the microfinance practitioners. Also, the recent creation of Pakistan Microfinance Company (PMIC) is a key development in line with the Microfinance Growth Strategy 2020 and the NFIS. The PMIC is meant to provide the much-needed liquidity to the microfinance sector to reach out to 10 million clients by 2020 (currently around 4.6 million), contributing towards the overall objective to increase financial inclusion in the country. All these efforts are made with limited protection against the imminent reality of natural disasters in the country. The direct victims of any natural disasters are the people, and it is the vulnerable and poor population that is worst affected in case of any disaster. However, damage at client-level tends to ripple throughout the microfinance industry which is particularly exposed to the threats emanating from disasters for several reasons5, such as:
4 The methodology for this revised figure (previously 27.4 million) has been explained in the note “Estimating Potential Market Size For Microcredit In Pakistan” published by PMN on December 2015. See http://www.pmn.org.pk/assets/articles/67bf9abc0a78d8557806bd0cbad2b5c6.pdf 5 See Options for Managing Disaster Risks by Pakistan Microfinance Network 2013 at http://www.pmn.org.pk/assets/articles/MicroNOTE%2016%20-%20Position%20Paper%20on%20Disaster%20Management.pdf
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- populations worst hit by disasters tend to be the same as the target market of
microfinance sector; - the MFPs tend to have a limited capital base and small buffer to absorb losses; - microfinance is a financial business dependent on continuous availability of funds,
making it susceptible to liquidity problems; - the MFPs although tend to serve a social objective, they also have to protect their
financial bottom line, which creates a political risk if they pursue loan recoveries soon after a natural disaster.
A major threat to the sustainability of this sector is the impact of natural calamities, the occurrence of which wipes out the earning ability of disaster-affected families, forcing them to default on their loans. This was witnessed in certain areas of Punjab and Sindh in the aftermath of the floods in 2010 and 2011, resulting in loan write offs and negative profitability, and decrease in microfinance outreach as many MFPs stopped future lending in the affected regions. Approximately 10.2% of the sector’s Gross Loan Portfolio (GLP), amounting to PKR 25.5 billion, at the end of 2010 was at risk in the 2010 Floods6. Similarly, 63.9% of the total GLP in Sindh, amounting to PKR 8.3 billion, in 2011 was deemed risky for the heavy rains in that year. Given the nature of these two disasters, the worst hit were institutions working in the rural areas with exposure in agriculture and livestock.
In a scenario like this, there is a critical need to educate the microfinance sector, especially at the industry-level, as well as its clientele who are the micro entrepreneurs, as to how they can reduce their risks against natural disasters and create a protection mechanism, possibly through the use of insurance.
2. Insurance Sector
According to the SECP (Annual Report 2016), there are 41 non-life insurers, including three general Takaful (Islamic) insurance operators, and one state-owned insurer, the National Insurance Company Limited (NICL), in Pakistan. The NICL has a monopoly to insure all public sector property. There are currently three private sector non-life insurers that have close to 60% market share in terms of insurance premiums. This mainly suggests a less competitive and non-innovative future for the insurance sector in Pakistan. Microinsurance is provided by insurers mostly through MFPs and are considered to also be included as a miniscule segment in the mainstream insurance industry. The State Life Insurance Corporation (SLIC), a state-owned life insurer, is one of the largest and most recognizable insurance brands amongst Pakistanis, especially with its large distribution network in the rural areas, strong distribution force and a broad range of life insurance products. It must be noted that the SLIC is earmarked for privatization in near
6 Ibid.
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future, which could move the life insurance segment into a more competitive and innovative future than what it currently is.
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II. Risk Assessment
Chapter Summary
- Floods, droughts and windstorms are some of the most common natural disasters
faced by people in various parts of Pakistan, especially the low-income people who are also the target market of microfinance sector;
- As a result of the significantly disastrous floods of 2010, and the devastating rains of 2011 as well as 2014, some of the MFPs faced significant losses as their clients were unable to repay the loans resulting in loan write-offs and rescheduling;
- Many MFPs were forced to limit their business operations in disaster-prone rural areas, while some completely exited from those regions;
- The PMN has been working to determine the hazards faced by the industry in the dimensions of physical, financial, environmental and social risks, however, no formal detailed vulnerability assessment of the microfinance sector against natural disasters in Pakistan has been done so far.
A. Hazards
With respect to natural disasters in Pakistan, the delayed post-disaster action, asymmetric information and limited effective management, results in disasters becoming exacerbated, causing inertia and chaos associated with them. The need to follow international best practice in post-disaster recovery, let alone prevention and mitigation strategies, requires a greater collective effort to ensure that the effective coping strategies are implemented.
The Figure 2: Major recent natural disasters in Pakistan provides information on recent natural disasters and the impact on microfinance in Pakistan.
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Figure 2: Major recent natural disasters in Pakistan
The 2010 floods were one of the worst in the history of Pakistan, affecting about 84 out of 121 districts, and killing over 1,700 people (United Nations, 2010). The subsequent devastating floods in 2011 then created a need for the government to consider the exploration of options for financial interventions, so as to assist those affected due to such natural disasters.
The National Disaster Response Plan (NDRP), developed in the aftermath of these disasters in Pakistan, provided three levels of emergencies, as shown below.
Table 1: Emergency Level Definitions by the NDRP (March 2010)
Emergency Level Description
Level 1 (small events)
Localized emergency events to be dealt with by the District Disaster Management Authority (DDMA), operational at the district level. For example, small scale fires, landslides, floods, canal or sub-canal breaches and low level epidemics.
Level 2 (medium events)
In case, an emergency overwhelms the capacity of the DDMA, it can request PDMC through the Provincial Disaster Management Authority (PDMA).
Level 3 (large events)
In the event of a disaster beyond the capacity of provincial or regional government, a national emergency is declared.
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According to the World Bank Group and GFDRR’s report (2015), it has been seen that the DRM systems and response plans are not implemented effectively as a result of vaguely defined post-disaster financial responsibilities. Also, there is no formal and reliable mechanism in the country that can calculate the financial impacts of natural disasters. Despite this, funds are made available at district level for level 1 emergencies, taken out from the district resources and budgets. The provincial government then assist if funds are short or a level 2 emergency is triggered. In the event of level 3 emergencies, the federal budget funds are directed towards these events and any deficits are recouped through budgetary reallocations.
With respect to hazards faced by the MFPs, PMN (2014) researched the risks faced by the microfinance industry by collecting data from stakeholders including practitioners, investors, donors, consultants, and researchers. It was found that the biggest risks faced by the microfinance sector are related to the macroeconomic trends, security and profitability. Among the fastest growing risks such as agile competition, security and macroeconomic trends, other important risks are the limited ability to cope with natural disasters, political interference and religious influences.
Table 2: Snapshot of Sectors Risk (PMN 2014) provides a snapshot of their findings. It is to be noted that the brackets represent 2011 survey results.
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Table 2: Snapshot of Sectors Risk (PMN 2014)
An interesting observation when comparing the top ten risk factors across Pakistan, South Asia, and Global data, is that the risks due to natural disasters have been ranked among the top ten risks faced by the microfinance sector in Pakistan:
Table 3: Top Ten Risks to Microfinance Sector (PMN 2014)
In its findings, the PMN (2014) also mentioned the following top five views of stakeholders with respect to their ability of risk to cope with:
Practitioners – MFBs
Political interference, natural disasters, security, inappropriate regulation and interest rates.
Practitioners – Non-banks MFPs
Management quality, natural disasters, transparency, competition and political interference.
Practitioners – outside Pakistan
Competition, internal fraud, management quality, mission drift and ownership.
Donors Credit risk, completion, strategy, operations and profitability.
Investors Competition, external fraud, macroeconomic trends, managing technology and mission drift.
Researchers and Experts
Competition, foreign exchange, credit risk, corporate governance and internal fraud.
Table 4: Stakeholder Views of Risk (PMN 2014)
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It appears from Table 4: Stakeholder Views of Risk (PMN 2014) that the practitioners in the Pakistan’s microfinance industry, whether MFBs or non-bank MFPs, are relatively more concerned about natural disasters. This could be due to being closer to the exposure and having the first-hand experience of facing natural disasters, better understanding of the limitations of the national disaster risk management plans at the country-level to minimize the losses. The remainder of the stakeholders perhaps have an understanding and exposure to countries that may have better country-level national disaster plans in place to minimize losses. This is discussed more in the following chapters, where an overview of Pakistan’s DRM framework has also been discussed.
Our discussion with other stakeholders revealed that the most common risks faced by the MFPs due to natural disasters in Pakistan include:
- Loss of loan portfolios, as clients may not be able to repay the outstanding loans after significant losses due to natural disasters, also affecting the MFPs’ cash flow;
- Clients migration to other regional locations due to the internal displacement of communities;
- Damage to business assets of MFPs that have offices in the disaster-prone regions, including data and other essential infrastructure;
- Limited revival and rehabilitation activities, to ensure clients are in a position to continue on new loans in the future; and
- Loss of clientele due to further increase in the poverty levels after a natural disaster.
The PMN (2014) also referred to political interference as one of the major risk factors. Although what some may consider to be positive for the country, the Prime Minister Youth Loan Scheme and Interest Free Loans which are provided to people living in poverty, are deemed to be a disincentive for the microfinance sector. With respect to Pakistan, it has been regarded that anyone who is earning less than the taxable income is considered to be a low-income person. For the 2016-17 financial year, a person earning less than PKR 400,000 as annual income was considered not considered to be taxable. MFPs and practitioners are of the opinion that such schemes shifts business away from them. It is believed that better regulation is required to assist and protect MFPs from such disincentive policies. In order to lower the interference in the market by the government, the regulators such as the SBP, SECP and MFPs could form a lobby platform to communicate and advise on effective government policies.
Another threat posed against the industry is one from the religious groups in Pakistan, which oppose interest, being considered by a significant percentage of people to be non-permissible for Muslims. MFPs have found it difficult to operate through conventional
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products, however due to the popularity, increased understanding and more products being developed under the aegis of “Islamic finance”, MFPs have the ability to explore new products for the religiously sensitive users of microfinance, in order to negate the pushback on interest.
B. Vulnerability Analysis
At the industry level, natural disasters adversely affect various microfinance programs due to high potential of post-disaster losses. Therefore for those clients in disaster-prone regions, MFPs become reluctant to provide finance as a result of the higher risks associated with clients in those regions. These potential losses also affect the cost of borrowing and access to the capital by MFPs.
In its findings of risks to microfinance in Pakistan, PMN (2014) concluded that MFPs should diversify their geographical exposure rather than completely moving out of the regions prone to natural disasters. However, it has been found that most of the MFPs have little or no experience and ability to cope with natural disasters in the first place.
Microinsurance products in the Pakistan’s microfinance industry were found mainly in the form of credit life insurance for microfinance borrowers, however, the trend has been gradually changing since 2010. The microinsurance is still in its infancy stages with a low availability of products and overall low insurance penetration. According to the Alliance Development Works (2013), Pakistan was rated to be in high to very high-risk zone on the Disaster Risk Index when it came to vulnerability, susceptibility and lack of both coping and adaptive capacity/ capability. It is for this reason that one can argue the importance and priority of implementing suitable risk protection mechanisms for low-income people.
The PMIC assisted categorizing the vulnerability of natural disasters to the MFPs in the physical, financial, environmental and social risks as follows:
Physical The low-income communities in rural areas of Pakistan, which form the primary market for Pakistan’s microfinance sector, do not have adequately robust physical infrastructure to cope with natural disasters.
Financial The microfinance sector in Pakistan does not have adequate financial risk measures when it comes to countering natural disasters. The only viable means adopted by MFPs is the debt restructuring or rescheduling of loans, although in certain cases, MFPs have also written-off these loans. There also remains a complete absence of portfolio insurance products to cater for losses caused by disasters.
Environmental Pakistan’s climate-related policies are not seen to be adequately addressing the risks as MFPs are largely not
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engaged and informed regularly for environmental protection practices by the relevant public entities.
Social In the rural communities of Pakistan, it is not uncommon that strong social bonding exist among the community members. This is also used by most MFPs as collateral while lending. In the context of natural disasters, rural communities remain a dependable source for extending help to their fellow beings. It appears that social risk is not as significant compared to the physical, financial and environmental risks.
Table 5: PMIC Vulnerability Categorization to Natural Disasters
1. Stakeholder Discussion
The GIZ-RFPI carried out a stakeholders’ consultative workshop in Islamabad in early October 2017. The Workshop emanated in the form of interactive discussion among various stakeholder groups such as the policymakers, the insurance industry, the microfinance sector, the national as well as the provincial disaster management authorities, etc. Following are some of the risk indicators as suggested by the stakeholders during the Workshop:
Table 6: Summary of Risks from Workshop
Physical Loss of assets by clients such as crops, livestock, homes, small enterprise assets.
Financial Bad debts, loss of income and livelihood, and diminished cash flows.
Environmental Rapid climate change makes it difficult to predict weather patterns and assess risk zones.
Social Increased reliance by clients on neighbors, as alternative to meet their financing needs, rather than MFPs.
Institutional High default rates, liquidity problems and profitability, loss of data and physical damage to infrastructure.
The quantification of the above vulnerabilities and impact to the microfinance sector was difficult to assess due to the limited availability of information. However, a consistent
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theme was found to be emerging from the discussion related to risk assessment. Some of the key indicators found are:
- Need to create, disseminate and make effective use of Knowledge Management related to risks due to natural disasters;
- Enforcement of “Know Your Client” rule, so as to better understand the client needs and risks faced by them due to natural disasters;
- Development and use of suitable disaster risk insurance products by the insurance sector; and
- Joint efforts by all stakeholders to improve the understanding of target market about the disaster risk insurance and the overall financial literacy.
C. Impact Estimate
Natural disasters also impact the microfinance sector due to the loss of livelihoods at client-level, and loss of infrastructure along with liquidity and data security issues at the MFP-level. From the perspective of an MFP, loan write-offs, security risks, liquidity and credit risks, and reputation could result in its business growth being affected, increased business risk, and in the worst-case scenario, closures of its branches or even the overall operations. Although microinsurance is hardly used as risk mitigation tool by the low-income population, there is an enormous potential for microinsurance to be marketed, through increased client education and product innovation. Currently, most of the low-income population affected by the natural disasters, find it difficult to get insurance due to high transaction costs and the challenges of delivering the insurance services by the providers. According to the World Bank Group and GFDRR (2015), a preliminary liability assessment of the Pakistan’s government exposed to a major flooding event could be around 7% of the national GDP (based on 2013 figures), which was almost 40% of the federal budget. One of the major challenges in this regard is the government’s inaccessibility to liquidity to finance the immediate post-disaster needs. The report also showed on an average that approximately three million people have been affected by major natural disasters in the past, with over 80% of the affected people being in the provinces of Punjab and Sindh. The World Bank Group and GFDRR (2015) provided anecdotal evidence suggesting significant under-insurance for natural disasters, with limited accumulation of premiums at the client-level to cover the costs for disasters such as earthquakes and floods. One of the major challenges with insuring for natural disasters is the lack of risk mapping data and no consistent zoning of risk regions for classification. This all leads to a generally lower level of understanding for development of suitable insurance products for natural disasters, which in turn affects the demand, as there is limited knowledge at the micro, meso and macro levels. Other factors such as low income and education, along with lesser
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outreach to disaster-prone zones deepens the negative impact on the microfinance and insurance sector of Pakistan. One of the possible ways, as discussed with the microfinance industry stakeholders, is the preference to quantify the potential losses to the microfinance sector based on the outstanding loans after a natural disaster. Unfortunately due to the limited collaboration among the stakeholders, quantifying this sort of information makes it difficult to gauge the magnitude of impact. According to the PMIC, efforts made by the PPAF to design the Disaster Risk Strategies included:
- Disaster mapping, including 52 districts of Pakistan, mentioning the type of disasters which can affect each of these districts; and
- Awareness campaigns designed and deployed for communities to educate them about possible measures to take in case a disaster hits their area.
It is important that Pakistan creates a platform to facilitate prevention, coping and mitigation mechanisms through better collaboration of the various stakeholders. The information needs to be obtainable to create the appropriate disaster risk insurance products, jointly with the insurance industry.
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III. Disaster Risk Management Mapping (DRM)
Chapter Summary
The most common disaster risk prevention, mitigation and coping mechanisms proposed to be used by the microfinance sector are:
- The need for MFPs to diversify their operations into disaster-neutral rural and
urban areas, and spreading out their portfolios; - Development of a thorough industry risk exposure analysis and mapping, jointly
with the NDMA to specify vulnerable zones and develop the financing, including insurance, strategies for them;
- Increase awareness given to the clients about potential risks due to natural disasters;
- Increased attention to detail, with respect to knowing clients, i.e. understand the client-specific risks and their needs;
- Backing up and securing data through technology ensuring no damage or loss of data occurs during a natural disaster;
- Improved knowledge collection, dissemination and management practices, with respect to risks due to natural disasters; and
- Developing stronger financial literacy campaigns to educate the importance of risk management which includes the use of insurance.
A. Government’s Policy on DRF
In most circumstances, it is the ability of the government’s decision making that remains critical for efficient recovery and minimizing the post-disaster adverse impacts (Teh 2015). In Pakistan, the government, through the National Disaster Management Act, 2010, has made permanent allocation of for both federal and provinces towards disasters risk management. However, it is mostly a reactive response to emergencies rather than developing an ex-ante prevention and mitigation strategy. It was found in another research (Mayo et al. 2013) that the Pakistan government during the recent natural disasters in Punjab, the largest province by population, had limited capacity to cope with and was unable to reduce the effects of those disasters. Various departments set up for
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DRM, performed largely in an uncoordinated manner, with spot-decisions being made with respect to action in case of any natural disaster, resources were mismanaged and that the various departments failed at establishing plans to combat disasters and often referred to other sources for guidance. The conclusion from this research was that the local government systems have limited capacities to deal with disasters in a timely manner.
Coping with natural disasters remain a challenge and the potential use of microinsurance needs to be considered in assisting the affected population, especially when the government and the donor agencies cannot adequately assist disaster-affected communities.
It has been found that the Pakistan’s local government system operates at the grass root-level collaborating with local communities in the stages of planning and implementation steps of natural disasters. There has been a decentralization of powers from the top to the local levels where Pakistan has been divided into the administration layers known as: the Province; the District; the Tehsil or Town; and the Union Council.
It has been noted that the Rural Support Programs (RSPs) closely interact with the local governments to assist in the coping of natural disasters. Given the importance of agriculture in the Pakistan’s economy, an enhanced collaboration and commitment could lead to better prevention and mitigation strategies. Most of the MFPs interact with the government at federal level along with regulators and relief agencies.
B. Prevention and Reduction
According to the PMN, ex-ante actions that could reduce or prevent risk to the industry revolve at the country-level. It is believed that more infrastructure improvements such as dams need to be built to deal with the floods. In addition to this, the policies on climate change need to be set up in line with the triple bottom line reporting of key performance indicators (KPIs) for the MFPs. Lending for earthquake-grade housing projects should also be considered as one of the many prevention and reduction strategies. The industry stakeholders also suggest that the infrastructure projects related to dams and water storage can provide better prevention and reduction mechanisms due to the increasing effects of floods. It has been observed that there is a limited knowledge when it comes to the technical aspects of disaster risk prevention, mitigation and coping mechanisms. Suggestions to prevent losses faced by MFPs include reducing lending in areas affected by natural disasters as there are no other suitable insurance products available to both clients and the MFPs to provide appropriate coverage. Further, there is a huge importance of creating environmental awareness of the factors that impact climate change.
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1. Stakeholders’ Feedback
Prevention and Reduction related strategies at the client-level can be very much similar to the countries such as Ghana and Philippine, developed previously in the Toolkit by GIZ, as most businesses using microfinance are found to be MSMEs and agriculture-based businesses. These are provided in Appendix 1 of this document. For the microfinance sector, following strategies were deemed appropriate to protect it from natural disasters:
- Diversify the portfolio across various business sectors as well as geographical locations;
- ‘Know Your Client’ rule to develop a comprehensive database segmenting clients and their risk profile with respective to industry, region and demographic information;
- Collaboration with the NDMA and provincial authorities to locate, quantify and synthesize combined efforts of disaster-impact zones;
- Education of clients to change their mindsets to be proactive for risk prevention and reduction;
- Backing up and securing data to ensure no loss of information occurs when a natural disaster occurs; and
- Improving knowledge management practices to ensure improvement occurs for future prevention, reduction, mitigation and coping strategies.
C. Mitigation
The risk to any business is the development of products and services that are not found to be attractive to be purchased by customers. Microfinance and insurance is no different in a sense that they, with a limited range of products, also lack the ability to create attractive disaster risk protection products suitable for their customers to demand. According to Asgary et al. (2012), disaster risk preparedness are not adopted by small businesses and it was the social values and strong family unit that were the key support factors against the risks due to natural disasters in Pakistan. Their study concluded that government and NGOs could assist and facilitate the disaster recovery through pre and post-disaster education programs, in addition to financial assistance. An interesting point to note is that due to the experience of floods, the flood insurance was anticipated to become popular with businesses willing to buy it. Another research (Khan and Sayem 2013) put forward 251 small-scale businesses in Bangladesh, exposed to flood-related natural disasters, that appropriate solutions of insurance and provisionary funds set aside should be a strategy to cover the costs of assets destroyed during the disaster.
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Despite the potential interest in flood insurance discussed, implications of over indebtedness could also result with unsuitable products pushed or over-sold to customers, thus rendering inefficient outcomes. This is what the research (Khan and Sayem 2013) has also found where small-scale business owners who had loans were less likely to recover from the disaster due to overextending credit, exhausting savings and inadequate loan support. Without appropriate regulation and supervision, a negative spiral could result for the users of microfinance and insurance, and worse, for the industry which could suffer with lower credit ratings and subsequent loss of liquidity and capital to continue operating. Following is a snapshot, as compiled by the PMN, showing the trends in the use of microfinance:
Table 7: Trends in Microfinance (MicroWatch Issue 44: Quarter 2 Apr-Jun 2017)
Our discussion with microfinance stakeholders also revealed their views according to which the non-financial services are suggested to be blended with financial products to provide value-additions to improve the take up of financial services, including disaster protection-related insurance products. As a result, this could also provide efficient and effective channels of distribution to access and provide information and the services to communities that are exposed to natural disasters. Mitigation tools to assist the microfinance industry against natural disasters may include:
- Disaster Management Teams or Groups: These teams or groups can establish comprehensive standard operating procedures to deal with potential natural disasters affecting the microfinance clients in their respective geographic locations. The roles, responsibilities and resources would be specified and allocated with the team or group being trained, along with periodical review and refresher sessions, to implement the procedures in the event of a natural disaster. Most importantly, processes need to be put in place to establish communication protocols for zones impacted by disasters, where communication lines have been cut off due to damage of telecommunications infrastructure.
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- Improve Liquidity: MFPs need to establish highly liquid emergency funds or improve their balance sheet positions to ensure that funds are immediately available in the event of a natural disaster.
- Develop bundled microfinance and microinsurance products, inline with government’s DRM policy: Opportunities may exist to combine purchases of particular products that are in line with government’s policy related to DRM. For example, climate change and renewable energy targets would involve the purchase of certain renewable energy products such as solar panels. These products could be financed with the inclusion of insurance by the manufacturer as these products need to have certain ratings to be safe from natural disasters such as cyclones. Furthermore, these products could also help in improving the structure of household roofing and walls to minimize damage from a natural disaster.
1. Stakeholders’ Feedback
For microinsurance to be considered as a mitigation tool, the following factors would need to be considered to demonstrate value to microfinance clients:
- Trust in the microinsurance provider to efficiently and effectively pay claims: Most of the MFPs think that the microfinance clients need to experience the demonstrative-effect of the insurance process, before they can adequately trust it. This is possible by making fair claim payouts and projecting those clients that had microinsurance in the past and received their claims. This will showcase others the benefits of microinsurance as a mitigation strategy.
- Awareness about insurance products: It appears that most of the microinsurance target market has limited awareness about the relevant insurance products, which may be suitable to them and their particular circumstances. The stakeholders largely agreed that the level of awareness among the low-income population that how the insurance products would benefit them, is still a significant challenge. Changing mindsets and developing focused education and awareness campaigns are needed to improve the possibility of increasing demand.
- Affordability of products: It was also discussed among the stakeholders that there is a need to develop suitable products with affordable pricing for clients. However, the insurance industry stakeholders have a view that while the insurance premiums should be affordable, they also need to be sufficient to make it sustainable and support the continuity of the business model. The MFPs have shown their concern that a higher pricing of insurance products will result in blocking out the demand for microinsurance products. Potential strategies to collaborate either with the government support in the form of public-private partnership (PPP), or a completely private sector-driven initiative needs to be explored, which may result in decreasing the insurance distribution costs and thus the insurance premium.
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The following framework was shown to stakeholders in order to establish discussion on what is needed to create demand for microinsurance and encouraging a greater participation of microfinance clients.
Figure 3: Individualistic Incentives (Birchall and Simmons, 2004)
There was an interactive debate among the stakeholders, which resulted in the following useful suggestions.
- Make it mandatory for the MSME sector to have protection through microinsurance: Legislation could make it mandatory for microfinance clients to have microinsurance. Although a good idea, there has been some apprehension that this could lead to a potential decline in the microfinance borrowing if the insurance costs are too high. On the positive side, the client will be insured against a number of risks and similarly, the MFPs would be protected from loan write-offs, should a natural disaster occur.
- Simplify the insurance policy documents in English, Urdu and other local languages: Concerns were raised about the complexity of policy documents for the average borrower who had limited literacy levels. It was highlighted that the clients need to feel comfortable about taking on insurance with clearly explained process with examples to demonstrate the types of payments and under what circumstances the claim would be paid. The potential of visual messages was also discussed, which could be developed to improve the financial literacy, with attention on educating clients about different types of insurance products and how to use them.
- Simplified claim processes: Clients need to have a hassle and stress free experience to make insurance claims. When a natural disaster occurs, it is likely that most of the communications means will also be cut off. A possible strategy to provide confidence to clients about the claims process is to potentially send MFPs or their staff into the disaster struck regions to immediately communicate, in a face-to-face manner, with the affected clients. Definitions of natural disaster events also need to be set as to what, which and when trigger events should result in payment of claims. This should be included in the standard operating procedures.
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- Trustworthy insurance agents: It is generally felt that the insurance agents should
provide insurance products to clients only after assessing the clients’ needs, so that clients not only get suitable insurance protection but also in a non-coerced manner. Better training, supervision and compliance measures need to be put in place for this purpose. Other mechanisms to consider was technology to reach potential clients in remote areas, especially at the time of claims.
- Speedy and trustworthy dispute resolution mechanisms in place: It is important that a clear and open form of communication is available to insurance consumers to have safe and reliable way of grievance handling, should any negative experience occurs. MFPs would also need to set clear guidelines making it clear to consumers about the dispute resolution process. This will certainly result in building trust in insurance. An idea could also be to have all microinsurance clients registered automatically with the Insurance Ombudsman to generate more confidence in the system.
D. Coping
At a macro level for the industry, it is believed that the insurance and reinsurance will play a critical role to strengthen the capabilities of MFPs. In addition to this, compensation methods such as cash, social protection programs, government assistance, debt restructuring and contingent risk financing are crucial to allow MFPs to recover loans and assist clients to overcome their losses. If the stakeholders coordinate their resources and align their mission, vision and core values, MFPs would feel more confident to embed themselves in the high risk areas. This would require a form of disaster risk fund for the industry to be established. Lately, various donor organizations have been providing significant assistance in boosting the coping mechanisms due to the impact of natural disasters; however, the donor fatigue seems to be setting in and causing concern for the industry, and for the country, that the sole reliance on this form of support will become risky into the future. It is understood that the PMN has already started advocating for an industry-wide disaster risk fund in an attempt to be proactive to build sustainable coping mechanisms into the future. According to some stakeholders, the coping mechanisms to assist MFPs could include compensation, social protection and livelihood recovery programs. Livelihood programs are seen to be one of the most suitable options as they can provide both relief and rehabilitation to clients affected by disasters; it can provide the ability for clients to gain confidence in rebuilding their livelihoods to prosper in the long term. It is believed that the donor assistance can have both the positive as well as the negative impact, as shown below:
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Positive impacts
Rescue, relief and rehabilitation of clients
Resources are provided and deployed to provide services to the natural disaster-affected clients by the donor agencies. By leveraging off these services, it may be possible for the MFPs to make themselves visible to affected clients to not only build trust, but more importantly, to ensure a smoother claims process for insurance claim payouts. Being present on ground, also provides immediate information to relay back to head offices on the situation faced by the client so that appropriate strategies can be developed. Donor funds can also be used to rebuild the livelihood of low-income clients, and to replace their income generating assets.
Revitalization of economic activity and creation of livelihoods for affected families
The quicker the clients, who are inflicted by a natural disaster, can be serviced, the quicker it is for economic activity to recommence. Logistical support could be provided by the donor agencies to re-direct business supplies or assets to the clients.
Building of social and physical infrastructure
Having no social or physical infrastructure, such as dispensaries, schools and/or homes, in place could affect the ability to communicate effectively with affected clients and to commence a revival process. Donor and relief organizations, along with the government, can create dedicated zones to organize those people affected by disaster. For example, it may be possible to gather those clients that have microfinance and insurance into a specific area for MFPs to connect with them. At the same time, psychologically-affected clients may be in a position to deal with their loans and insurance paperwork with microfinance and microinsurance agents knowing there is some infrastructure development.
Create linkages between MFPs and disaster response & management authorities
Donor agencies are able to become facilitators to strengthen collaboration and efforts between government agencies to achieve the above outcomes. This would also include sharing information and providing combined assistance from all providers to not only compensate losses, but more importantly to revive clients and generate economic activity sooner, rather than later.
Negative Impacts Increases dependence of communities on donor agencies and activities
If communities become reliant upon donor agencies then this could negatively impact the intentions to have microinsurance products. This would result in clients potentially not being concerned about risk prevention and reduction strategies, let alone mitigation strategies. It is therefore important the industry become more visible and develop an understanding with the community that MFPs and MFIs are working together to not only compensate for losses, but also revive them for the future i.e. having less reliance and expectations on donors.
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Duplication and unequal distribution of development assistance, whereby some communities might get more economic assistance while others might not get anything
If there is no coordination with donor agencies, possibly the duplication of work occurs. For example, clients may receive cash benefits from donor agencies which are not disclosed to MFPs. Therefore some may benefit from the cash benefits and/or microfinance loan write offs or microinsurance payments. This would render unequal distribution and those in desperate need may not get their full compensation due to limited resources as a result of excess unequal distribution.
In most cases, the focus is on relief work only and not on rehabilitation process
Donor agencies’ modus operandi is to quickly implement their relief programs. They may not be in a position to provide adequate resources to revive affected families, businesses or economic activity.
Discussions with stakeholders suggested that following are competencies MFPs should have:
- Establish links with provincial authorities: MFPs need to develop more frequent communication and share information with disaster management authorities regarding clients in disaster-prone areas. In the event of a natural disaster, all parties would be adequately informed and involved in the series of rehabilitation activities in the disaster-affected zones.
- Design credit policies and risk thresholds that respond to clients vulnerabilities to natural disasters: By adhering to the “Know Your Client” rule, MFPs should have all knowledge on the various risks the client is exposed too. This should also involve the location to determine if it is categorized as a risk zone by the NDMA and provincial authorities. It will also assist to determine loaning rules and policies which can be standardized throughout the industry.
- Financial inclusion and literacy on how insurance products can be used by clients: A continuous challenge remains on changing the mindsets of the consumers to be aware of how insurance products can be used. Although a demand study has not been done, it is critical the industry commences a strong campaign to create awareness at grass root levels. This may take some time, but it needs to commence, and the strategy needs to be innovative in all its aspects.
- Collaborate with insurance companies to design affordable and scalable products: MFPs need to work with insurance companies to build business cases and pilot projects of insurances that would be useful to microfinance clients. By knowing the clients exposure to risk, MFPs can assist in the actuarial process in determining appropriate levels of insurance and premiums to determine a
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profitable business case to the insurance providers. Innovation in the business model and strategies must be considered to demonstrate risk prevention and reduction strategies that can also lower the risk to the insurance companies. Information from the NDMA and provincial authorities could be used to also build a positive business case for the insurance industry.
- Becoming a distribution channel for microinsurance: The MFPs are in the best position when interfacing with clients. This would lower the distribution costs for the microinsurance products and potentially lower premium costs. MFPs should be trained to complete the documentation and compliance work, in addition to being the central point of contact for claims.
- Develop a hazard map and institutionalizing a DRM framework: The use of a hazard map with the assistance of the NDMA would clearly identify natural disaster zones. This would assist to facilitate standard operating procedures to cope with specific disasters and zones impacted. The GIZ Diagnostic Toolkit developed for the Pakistan microfinance sector can facilitate the development of a disaster risk management mapping framework along with the necessary prevention & reduction, mitigation and coping strategies.
From the above information it can be seen that effort needs to be made at the macro level, to build industry capacity and increased collaboration. Once a framework has been solidified and coordination exists, it could raise the prospects of both government (local, provincial and federal) along with donor agencies to establish prevention infrastructure and to mitigate natural disaster impacts at the client-level. With this achieved, perceived risk could be lower and premiums for microinsurance could become affordable to increase the potential client-base. Therefore the importance of developing the industry to attract clients with affordable and relevant products requires more effort. The aim would be to establish confidence in the industry to pursue microinsurance clients and generate a strong capital base to strengthen the insurance industry. This could further provide confidence to reinsurers when reinsuring the risks of MFPs and their clients.
1. Stakeholders’ Feedback
The following framework was introduced to discuss Coping mechanisms.
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Figure 4: Collectivistic Incentives (Birchall and Simmons, 2004)
The group discussion focused on how clients coped with disasters with support from families and communities, however, the emphasis was on how clients would rebuild, in terms of rehabilitation and revival of their livelihoods, after a natural disaster. It was noted that for most clients, if paid out through insurance or government methods, funds were used for immediate relief and some to pay off debts. The subsequent impact on particular industries and regions by natural disasters on the supply chain were not easily quantifiable. The MFPs suggest that it would affect their businesses as it takes time for clients to feel confident about re-borrowing immediately after a natural disaster has happened. The stakeholder discussion concluded with the willingness of both the microfinance and microinsurance providers to collaborate further and have roundtable discussions to improve risk protection of microfinance clients through appropriate insurance products. It was agreed that this in itself would assist to protect the microfinance sector as well as the individual MFPs from borrower defaults. Mechanisms would need to be considered for correct use of insurance funds in the case of natural disasters, along with rehabilitation strategies which would require the government and policymakers to be involved to assist in the prevention and reduction strategies needed to reduce high level risks due to natural disasters.
E. DRM Assessment Matrix
Table 8: DRM Assessment MatrixTable 8: DRM Assessment Matrix provides an overview of the potential strategies to assist with prevention and reduction, mitigation and coping strategies associated with natural disasters that could impact the microfinance sector. The information in this table becomes more specific in Error! Reference source not found., in the graphs presented. The scoring methodology was based on discussions with relevant stakeholders to determine the effectiveness and efficiency. The score tool is provided below in the table below.
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Table 8: DRM Assessment Matrix
The formal and informal strategies are rated in relation to both effectiveness and efficiency as per the scale provided in the Table 8: DRM Assessment Matrix. In short, effectiveness relates to the degree of reduction of risk/losses in the status as before the natural disaster and efficiency refers to the amount needed for the action compared to the amount to be spent when coping with the natural disaster. The information from the above is plotted on the following graphs below to provide clearer representation of each recommendation separating prevention & reduction, mitigation and coping strategies.
Note: The scoring has been reversed where 1 is negative (effectiveness) and very expensive (efficiency) and 5 is very useful (effectiveness) and easily affordable (efficient). The top right hand section of the chart provides immediate work which is both effective and efficient. This section is circled and the Prevention & Reduction and Coping strategies have been provided on a separate chart. The lines in the bubbles show the link between each level representing areas of important collaboration.
The realistic short-term achievable goals of the MFPs and government should be linked with the use of the industry stakeholders including, but not limited to the insurance association, NDMA, PMIC and PMN. The objective of the above information is to build a
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solid foundation before tackling the more difficult tasks i.e. prioritizing and staging initiatives to build momentum towards a comprehensive strategy which can be implemented, etc. This also requires knowledge management capabilities.
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Figure 5: Overview of DRMM Prevention & Reduction, Mitigation and Coping
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IV. Identification of Gaps
Summary
- There are no existing specific insurance products in Pakistan to protect MFPs from the
risks due to natural disasters; - There are no emergency loans available to the clients of MFPs, as the loans are
generally rescheduled or seldom written-off; - Pakistan’s government provides two subsidized insurance schemes (for crop and
livestock loan borrowers), however the utilization rates are found to be low; and - Ideally, mechanisms such as an industry-wide disaster risk mitigation fund to absorb
capital losses would fill the gap of MFPs not having appropriate and adequate protection options to overcome natural disasters.
A. Inventory of DRM Strategies
It is given to understand that a large amount of public and donor funds form a major part of the capitalization of MFPs. There still, however, remain significant risks to MFPs due to the market they target for business and as mentioned in the previous section, about donor fatigue setting in. In addition to this, most of the MFPs focus on a handful of risks and are therefore unable to deal effectively with natural disasters which create additional business and sector risk, including liquidity shortfalls, political crises and exposure to macroeconomic slowdowns. There has, however, been growth in the product offering which has led to wider geographic coverage. As a result of the growth, MFPs are orientating efforts to grow by sourcing capital from the market rather than relying on donor funds. Whilst donor funds play a major role, according to a research (Bernhardt and Carpenter 2014), donors are not among the easiest sources because of the emphasis on development impact measurement and performance evaluation requirements puts significant administration burdens. On the other hand, with respect to MFBs, they are able to increase their capital base through deposits and tighter regulation imposed on them by the SBP.
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There are no existing specific insurance products available to MFPs to protect their lending portfolios affected by natural disasters. However, there are two facilities available to MFBs to cater for the protection of a small part of their portfolio from the natural disasters, namely the Crop Loan Insurance Scheme (CLIS) and the Livestock Loan Insurance Scheme (LLIS). Both these schemes are fully subsidized by the government of Pakistan, through SBP.
1. Crop Loan Insurance Scheme
The major banks and insurance companies have developed their crop insurance based on the framework developed by the Crop Insurance Task Force in 2008. In order to promote agriculture loans and protect the loan portfolio of the banks from default, the SBP launched the Crop Loan Insurance Scheme (CLIS) in 2008 for five major crops viz., wheat, rice, cotton, maize and sugarcane. The Scheme is mandatory for farmers requesting a loan from a financial institution for any of the five crops. Some of the features of tis Scheme are:
- Banks pay the insurance premium on behalf of the borrower and then claim full reimbursement of premium from SBP;
- Aggregate liability of the insurance companies is limited to 300% of premiums; - A calamity, declared by the government, is the claims trigger, followed by overall
and specific farm surveys by the insurers; - During the specific survey, identified losses up to 25% are self-insured (i.e. no
claim), while farm losses from 25% to 50% pay 50% of outstanding loans, and losses above 50% the full outstanding loan;
- Insurance cover is a fraction of the output as it is limited to the loan amount; - Stop-loss reinsurance cover is placed by insurers with international reinsurers; - The multi-peril insurance covers excessive rains, flood, drought, hailstorm, frost,
crop related viral and bacterial attacks, and pest attacks; - First four years of this scheme witnessed loss ratios of around 50% (i.e. from 2009
to 2011 premiums collected were USD 20 million, claims USD 10 million) even while Pakistan faced major floods in 20107.
2. Livestock Loan Insurance Scheme
The Livestock Loan Insurance Scheme (LLIS) is an indemnity-based scheme covering the financing bank’s risks of loan delinquency arising from a livestock farmer (borrower)’s mortality (including death due to natural disasters), permanent total disability and theft of animals. The government subsidizes the insurance premium for small farmers. It classifies farmers having up to 20 cows or buffaloes and 50 fattening cattle as small farmers. The LLIS premium rates are transacted at a range between 3% and 4% of the sum insured, which is restricted to the outstanding loan amount. Loss ratios were 101% in 2013 and 97% in 2014. In addition, operating costs like tagging and field surveys of animals
7 https://agrifinfacility.org/sites/agrifinfacility.org/files/vberisha/51/AgriFin%20Webinar%20_HBL_Presentation.pdf
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increase the combined ratio and thus do not render the LLIS as an attractive insurance business proposition. In addition to the LLIS, some private sector insurers offer indemnity-based livestock insurance products, providing value-added services like veterinary and upkeep related advice. Livestock insurance products are not actively marketed due to small profits for insurers in this line of business, hence only a small premium is generated.
3. Index-based Crop Insurance
Weather-index crop insurance and live weight-index livestock insurance remain as the only two inex-based insurance schemes ever launched in Pakistan, and that too at the pilot levels. These were subsidized by the PPAF, and carried out in different parts of Punjab and Sindh. Table 9: Premium Rates on Agricultural Insurance shows the range of premium rates and the approximate average premium rate presently prevailing (FY 2017) for the crop and livestock insurance products in Pakistan. It is noteworthy that while some interest exists for market driven, non-subsidized livestock insurance, there are no transactions for market driven, non-subsidized crop insurance.
Table 9: Premium Rates on Agricultural Insurance
Lowest rate (% of sum insured)
Highest rate (% of sum insured)
Approx. market average rate (% of sum insured)
Crop Loan Insurance Scheme (government subsidized)
1 2 1.25
Livestock Loan Insurance Scheme (government subsidized)
3 4 3.5
Crop Insurance (market driven, not subsidized)
No significant market
Livestock Insurance (market driven, not subsidized)
3 5.5 4
Source: Insurance Association of Pakistan, 2017 In case of CLIS and LLIS, any claims are settled once a natural disaster event has been triggered, but unfortunately there has been an opinion that these insurance schemes have severe impediments in relation to the calamity declaration and claims payment, that affect the implementation, resulting in low adoption rates. The following specific gaps and their underlying reasons are apparent:
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- The government needs to collaborate with the microfinance and insurance
industries to create a holistic Disaster Risk Strategy;
- Most of the insurance products are targeted towards the agriculture sector; however, they do not meet the needs of all farmers as they mostly cover risks for specific crop yields, livestock and credit life of the borrower;
- There is an overall limited understanding on DRF and most MFPs and insurers cannot account for the risks in the pricing of the insurance products. The policymakers need to create policy documents on DRF to create knowledge in the industry so suitable solutions can be created;
- The SBP provides guidelines on risk management, however, those guidelines are oriented mostly towards financial risks, rather than natural disaster-related risks; and
- In case of the existing products, the costs are being passed on to clients to cover financial risk. Other factors that add to the passed-on costs include the accessibility to clients in the risk zones targeted, associated costs for targeting the clients and the fact the premiums are considered as low-ticket sized items.
4. Stakeholders’ Feedback
The current inventory of insurance (and microinsurance) strategies include credit life, health, crop, livestock, accidental death & disability insurance, available to microfinance clients. The uptake of these, however, has been slow due to limited awareness and low levels of trust from the consumer, expense of premiums and a lack of technology as well as sophistication to determine trigger events to payout claims. Many of the gaps identified during the discussion revolved around the following issues:
- Limited coordination among different stakeholders, especially with the NDMA;
- Inadequately developed hazard maps of natural disaster-prone regions and the impacts on the micro, meso and macro levels;
- Limited insurance accessibility to microfinance clients in rural areas of Pakistan;
- Lower financial literacy and awareness, including the need to inform the consumers about the benefits of insurance;
- Pricing of products and payment of commissions by the insurers to the microfinance sector, with limited profit margins as these are seen to be the small ticket-sized products; and
- Limited availability of effective and affordable reinsurance solutions.
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Stakeholders provided a summary of areas needing to be addressed to protect the microfinance industry from natural disasters. The color red represents the areas where the industry is not doing well, whereas green is its opposite.
Table 10: Workshop Summary of Areas to be Addressed
- Industry fund and association; - Co-creation of strategies between
Government and Industry; - Action plan ready to implement
when a natural disaster strikes; - Get to know clients
circumstances better; - Educate clients to increase
microinsurance demand; - Develop tangible indicators; - Better communication and co-
ordination between the Government and industry level;
- New product development.
- Improved distribution methods to achieve scale;
- Improve database capability; - Increase collaboration between
microfinance and microinsurance industry.
Stakeholders voted on the most important matters from above that needed to be developed further:
- Co-creation of strategies between Government and Industry: MFPs want to have collaboration with the government agencies, in particular the NDMA. It was deemed prudent and logical to share critical information on the identified potential natural disaster risk zones. This would also provide insights into how the NDMA commenced operations when natural disaster occurred. For these reasons the information would assist in assessing risk profiles for clients in addition to potential leverage to work alongside the NDMA in disaster risk zones to understand and resolve clients’ immediate needs.
- Action plan ready to implement when a natural disaster strikes: MFPs need to develop comprehensive Standard Operating Procedures (SOPs) to ensure immediate work can be actioned when a natural disaster strikes. This would include allocating the correctly trained personnel with resources and communication strategies.
- Educate clients to increase microinsurance demand: A combined consistent campaign to educate target market on the benefits of microinsurance is needed. The message needs to be consistent to demonstrate to clients the industry is working together to mitigate the effect on their lives after a natural disaster occurs.
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- Better communication and coordination between the Government and industry level: In addition to point 1 above, all stakeholders need to develop communication protocols to deal with natural disasters and impacted clients. This coordination effort would aim to act quickly to assist facilitate the needs of the clients, but also in developing further knowledge to deal with future potential disasters. This would ensure no duplication of work is done and each stakeholder could contribute according to their strengths.
- New product development: MFPs need to work with the insurers to develop an appropriate range of products to service microfinance clients. The insurance products would serve as mitigation tools against natural disasters. The first step will be to identify risks so the MFPs could develop a business case. Once a pilot study is done to demonstrate demand for such products, only then would it be feasible to widen the distribution of new products. The SECP can play a major role in assisting the development process of new products.
- Increase collaboration between microfinance and microinsurance industry: The development of new products, financial awareness campaigns and profitable efficient distribution of microinsurance products would be dependent on committed collaboration between MFPs and the insurance industry. This collaboration would involve task teams and regular meetings possibly chaired by the NDMA. The PMN and PMIC must also be included in the frequent meetings for valuable industry input and to assist with resources, especially in the financial awareness campaigns.
Although discussions between the stakeholders was productive, the result was the microinsurance industry would only be able to develop products if the business case was warranted. The concerns from the industry was about being able to charge an insurance premium that was affordable, but more importantly, ensuring demand for products existed. A demand study for microinsurance products was recommended. The discussion was mostly on pricing, leaving out the possibility of exploring innovative methods to collaborate with non-insurance or financial industry partners to create demand for microinsurance. The reluctance of the insurance industry to create new products seems to be coming from factors that included limited experience with the microfinance clients being targeted and limited availability of information on natural disasters. This perhaps leads to concern over a lack of preventative and reduction strategies developed by the industry and Government which, if addressed, could lower the risk exposure faced/perceived by the insurance industry. Pilot studies were recommended by the insurance sector to determine what type of products would work in certain circumstances or regions. This is where potential collaboration of partners would benefit in the development of new products i.e. working with the NDMA to identify risk zones, understanding prevention & reduction mechanisms that are established to lower the risk profile of certain microfinance clients.
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The payment of suitable commissions was discussed. It was the view that the microfinance industry conducted most of the work to “sell” the microinsurance. Unfortunately it was felt that the microinsurance industry benefited more financially as the commission structures did not incentivise the microfinance providers. Business model innovation and design could provide the needed solution. This includes re-exploring the value proposition espoused to the market, how it would be delivered and ensuring equitable outcomes for all parties. Another important factor in the business model would include developing stronger demand through insurance literacy campaigns along with streamlined distribution methods to reach the remote rural regions of Pakistan. The role of the regulatory authority would be to ensure compliance of the industry and strong consumer protection laws, which should be made explicit to the consumers of microinsurance products to inspire greater levels of confidence.
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V. Exploration of DRM Options (Insurance)
Summary
- An opportunity for establishing a Disaster Risk Fund for MFPs and the
microfinance sector needs to be explored; - Lessons from various microinsurance programs suggest that stakeholders’
collaboration is important, along with the geographical spread of risks; - New business models and approaches for the provision of microinsurance to the
microfinance sector need to be developed; - Quality of service and insurance delivery methods need to be innovated, so that
efficiency can be improved; - Non-banking MFPs should be better capitalized to absorb uninsurable losses due
to natural disasters; and - Increasing financial literacy, especially awareness about insurance, is critically
important. According to a research (Mathison 2003), the provision of microinsurance is difficult for providers due to inefficient scale, difficulty in the defining processes for trigger events and less affordability of premiums by the potential clients. This therefore requires intermediary interventions to create relationships with reputable and larger insurers and reinsurers to develop required products which would be demanded by microfinance clients. This would also be subject to demand analysis and focused financial literacy campaigns to influence microfinance clients to purchase microinsurance as a mitigation tool to complement prevention & reduction, as well as the coping strategies. The development of a disaster risk fund for microfinance sector could also assist mitigation and coping strategies, with synergized relationships between donor agencies and microfinance sector. It is important that funds should also be put aside to facilitate in the rehabilitation strategies, along with Government spending, to rebuild infrastructure which, as much possible as, resilient to future damages from natural disasters.
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A. Scope of Insurance for Disaster Risks
In their report, Bernhardt and Carpenter (2014) also examined how natural catastrophes could be diversifiable to smooth out the losses from another region. This would work best for countries that had a larger geographic region compared to smaller countries. Without business model innovation, the only way for reinsurers to write microinsurance successfully was by targeting larger programs, of which normally only a few exist. The lessons learned from some of these programs include:
Table 11: Lessons from Various Microinsurance and Reinsurance Models
Programs Lessons
ICMIF LARG • Consortium approaches to increase volume and hence purchasing power of members providing discount on premiums, risk diversification and administrative efficiency.
• Alignment of interests between members and reinsurers led to group solidarity & ideology leading to best practice standards.
Orchard Insurance Group
• Full service microinsurance model is best for sophisticated, experienced and larger MFIs as it provides control on product offerings.
• Periodically renewing reinsurance support is needed if the full service model is used as a result of more risk.
Microinsurance Catastrophe Risk Organization (MICRO)
• Concern over reliance on donor capitalization which impacts risk coverage and pricing.
• Innovation could be expensive. After the Haiti floods and three years of operating MICROs fund reserves needed a boost to remain sustainable. Developing new business models to diversify away from reliance on donor funds requires resources and takes time.
Co-operative Life Insurance and Mutual Benefit Services (CLIMBS)
• Wholesale aggregation of risk will lead to scalability rather than partnering with individual cooperatives or programs.
• Shared operating platform facilitates enhanced management of risks amongst members smoothing out payouts across entire groups/communities.
It appears that the ability to bring people together via cooperative arrangements, in the form of bigger groups, across various geographic locations of the country, provides better risk syndication making it more attractive for reinsurers. Reinsurers can bring many
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benefits to the value-chain, especially claims and risk management practices, to assist in improving the business models of insurance providers.
B. Summary Overview of DRM system – Pakistan Microfinance Sector
Figure 6: Overview of DRM System – Pakistan Microfinance Sector
The focus of the toolkit has been on risk assessment, DRM mapping and identification of gaps. It can be seen that functions of protecting the microfinance industry, and ultimately the borrowers, can be synthesized with the government policies. At the levels of SECP and SBP, collaboration should occur with respect to developing stronger and sound regulations which can be enforced on the microfinance and insurance industries to not only protect the industry from disrepute, but also to provide relief and trust at the client-level. This could provide confidence in the purchase of products by the client. Should products have the backing and partial underwriting of insurance products by the Government, through state-owned insurers, this may motivate clients to be more proactive in their demand of insurance products to serve as mitigation tools in the case of a natural disaster. Overall public policies could also amplify Government action to work with the industry with examples such as:
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- Improved housing infrastructure to minimize damage against natural disasters
and to reduce internal migration of populations;
- Developing the SME sector and value-chain to minimize disruptions to the overall economy;
- Introduce renewable energy products into housing construction to combat effects
of climate change, but also provide strength to homes, power to communities and supply-chain involvement with organizations, with focus on climate change;
- Working with industry to produce Good Agricultural Practices and building
infrastructure such as water catchments and dams to assist store water for irrigation; and
- Financial literacy campaigns that could involve the use of picture books and
technology for branchless banking to increase financial inclusion and the opening of bank accounts to improve liquidity in the financial sector.
C. Financial Literacy Campaigns
Generally, it has been understood that insurance products are sold to clients based on little understanding by the client, as to what they are actually purchasing. Under this modus operandi, clients continue the status quo of using these products on ad hoc basis without actually moving forward in their lives to expand beyond how they currently live and operate their businesses. This renders an approach/paradigm as follows in Figure 7: Old Paradigm:
Figure 7: Old Paradigm
The risk profile determines the products selected, which assists in meet the client’s objectives, thus maintaining the status quo. A potential strategy to promote financial inclusion through financial literacy is to switch the above model into the following new paradigm:
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Figure 8: New Paradigm
In Figure 8: New Paradigm, the objectives drive the selection of insurance products which starts to investigate the level of risk clients are exposed too. By focusing the education and marketing campaign on how natural disasters effect clients and communities, it could prepare clients to consider using disaster risk insurance, or use prevention and reduction strategies. These could also be in line with the industry and government’s prevention and reduction strategies, making the implementation more credible in the eyes of the communities, as the strategies could be seen as efforts to lower the overall risk to the community. When all stakeholders’ approaches are aligned, the disaster risk insurance premiums may be lowered, as the overall risk will be reduced. For example, if clients know they are using microfinance to purchase an asset, and use microinsurance to protect the asset, the client could be working towards a specific lifestyle or financial goal with less risk, more control and greater certainty i.e. the asset could be used more strategically to maximize revenue and profit generation. By having a financial plan, the client would know how best to use excess surplus to either re-invest or diversify their businesses away from natural disaster zones to self-insure against a part of their business suffering from a natural disaster. The development of training and learning modules on financial literacy for MFPs to educate clients on disaster risk insurance needs to involve how debt and risk management tools can assist growth and prosperity. Reframing of disaster risk insurance would need to involve strong centres of influence to add credibility and importance to natural disaster impacts and the use of DRI. These centres of influence could involve religious scholars who can use religion-backed explanations on the importance of taking ownership and responsibility to protect one’s assets. Other forms could be using the public figures to influence people on the importance of DRM and planning, using insurance as a tool to
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protect their livelihoods, as shown in Figure 9. This would also assist in the rehabilitation of clients after a natural disaster. The education and awareness campaign should send a consistent message to the clients where all stakeholders are sending a message which is centrally aligned.
Figure 9 : Marketing Collaboration
Trainers can be developed through ‘train the trainer programs’ to roll out education modules for the staff of microfinance and insurance industries. Various forms of media can be provided, such as the use of picture and audio books, printed media, seminars, mobile apps and web platforms, etc. In short, whichever mechanism can reach the intended audience, given the various limitations and obstacles, should be used. The ultimate financial literacy campaign must bring DRI availability to the minds of those who use microfinance and purchase assets to make for their livelihoods. In order to achieve this, the campaign should bring natural disasters to the attention of communities, demonstrate how the DRI products will protect their futures and above all, build trust and credibility with the microfinance and insurance industry. This will build a strong future client-base who are aware of how insurance is something purchased for the peace of mind.
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VI. Implementation Strategy and Future Direction
A. Macro, Meso and Micro-level Strategy
The low-income population is seen to be highly exposed to natural hazards and there is a strong need to create protection mechanisms against natural disasters. Although microinsurance regulatory framework was issued with the intention to support insurance access for the low-income population and stimulate microinsurance business, but the growth has been nominal so far. The insurers seem to shy away from microinsurance due to reasons such as small premium size, lesser rural and semi-urban outreach, limited commercial viability and dependence on subsidies, high administrative costs, limited market understanding, etc. However, the DRI market segment for low-income people requires a different strategy and business model, along with multiple partnerships between diverse groups of stakeholders. For this, a robust implementation strategy remains critical and needs to be executed at all levels i.e. macro, meso and micro. Following is a snapshot in Figure 10: Macro, Meso and Micro Level Strategic Plan to Implement Disaster Risk Insurance, giving an overview of such a strategic collaboration:
Figure 10: Macro, Meso and Micro Level Strategic Plan to Implement Disaster Risk
Insurance
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B. Working Group Formation
The recommendation of creating a Working Group will not only help in the development and implementation of realistic and tangible goals, but will also assist in the short term-actions leading to the achievement of long-term goal of developing a DRM scheme for the microfinance sector. Of the recommendations in Figure 10: Macro, Meso and Micro Level Strategic Plan to Implement Disaster Risk Insurance, it is suggested that the representatives of each stakeholder group to be involved. The representative must have the authority and knowledge to make decisions and act as a conduit between the Working Group and their organization, ensuring that the transfer of knowledge occurs, and momentum is built towards the ultimate goal of protecting the MFPs and their client from natural disasters. It is suggested that the following objectives be among the list of priorities:
- Data management: Most stakeholders suggest that they are reasonably satisfied with their data management practices. However, during the Workshop, it was discussed that the database could be improved to reflect detailed information about the risks faced by the clients. This can include further segmentation of clients with respect to their source of livelihood, potential prevention and reduction strategies they use or can use to protect their livelihood, and matching their location vulnerability with the disaster mapping done by the NDMA. It has also been found that the Data loss poses a serious threat to MFPs, and the data should be backed up on a regular basis.
- Disaster risk education and awareness: Clients require more education on the importance of disaster risk management and insurance. Details have been outlined in section 5.3.
- Action plan/SoPs to implement when a natural disaster strikes: The action plan/SoPs should be developed and tested for preparation and training, to ensure that they are adequate when a disaster actually strikes. Advance warning systems also need to be developed. This action plan/SoPs would then be able to cope with post-disaster identification of clients and to relay the critical information to head office and updating the client database. The end result should be able to assist with any insurance payout and most importantly, livelihood recovery plans to rebuild clients and the microfinance business community eco-system.
- Disaster Risk Insurance Products: The need to develop specific insurance products require considerable involvement and commitment by the insurance and microfinance sectors. This would also need involvement of the regulators, the government and donor agencies, to develop relevant DRI products to protect from the impacts of natural disasters.
The following table is a summary of a suggested plan of action, which needs to be further elaborated and improved, when Working Group convenes, along with developing specific
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KPIs and timeframes. It is suggested that a Working Group have specific goals with a defined timeline, say six months, to achieve the suggested results.
Table 12: Proposed Objectives of the Working Group
Objective Responsibility Key Results Achieved
Data Management
PMN, MFPs
1) Detailed categorization of clients, including types of natural disasters they are potentially exposed to.
2) Sharing details to provide an industry view of exposure in each region.
3) Developing and managing the data back-up and recovery plans.
4) Establishing processes for regular updates on client information.
Disaster Risk Financial Literacy
and Insurance Awareness
PMN, IAP, SECP, SBP,
MFPs
1) Develop content, in various mediums, with common objective, to educate clients of MFPs about natural disaster impacts, benefits of microinsurance, post-disaster claims process and livelihood renewal.
2) Utilization of “centers of influence” to provide support and credibility to campaign i.e. leading religious scholars, sportsmen, political and business leaders, etc.
Action Plan/SoPs
NDMA, PMN, PMIC
1) Develop an action plan for pre and post-disaster protocols.
2) Deployment of teams with responsibilities and resources to implement the protocols.
3) Client database updates and backups.
Disaster Risk Insurance Products
GIZ, PMN, PMIC, SECP, NDMA, IAP and MFPs
1) Development of relevant DRI products.
2) Development of DRI marketing campaign, education of staff of MFPs on products, claim processes, etc.
3) Strategizing the involvement of government, donor community, etc. to support premium subsidies, disaster risk education campaigns, etc.
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C. Future Direction
With limited disaster risk protection options, most of the responsibility for the protection of low-income clients is with MFPs and the microfinance sector as a whole. This will not only help in protecting the clients and their livelihoods, but also the profitability and sustainability of the sector. For future work to be done, in the following table, Table 13: Questions and Indicators related to Disaster Risk Insurance for Microfinance sector, a snap tool has been provided to help in generating relevant information required for an effective DRI scheme in a country for microfinance sector.
Table 13: Questions and Indicators related to Disaster Risk Insurance for Microfinance sector
Area/ Activity Relevant Indicators/ questions Financial risks to the microfinance sector
1. What are the risk exposures of microfinance sector associated with natural disasters (loss of loan principal, loss or delay in interest payment, loss of clientele, etc.)?
2. What implicit (i.e. social or economical) liabilities has the microfinance sector assumed in the past related to a natural disaster?
3. How much has the microfinance sector spent on post-disaster response over some of major disasters in past years? This needs to be provided in the forms of costs for humanitarian relief, early recovery, reconstruction, loan rescheduling, emergency loans, etc.
Risk assessment by the microfinance sector
1. Does the microfinance sector have data on historical losses to the sector, or the individual MFPs, as a consequence of disasters?
2. How are losses estimated by the MFPs and compiled at the industry level?
3. What data are included in these records? 4. For how many years (and/or for how many disaster
events) are records available?
Risk assessment by individual MFPs
1. Do the individual MFPs assess and disclose their risk exposure due to natural disasters in its regulatory and financial statements?
2. Do the regulators conduct this analysis for the microfinance sector (e.g. for various geographical locations, for various business segments like agriculture, etc.)?
3. What and how are the risks to MFPs due to natural disasters categorized as short-term to long-term, and low to high severity?
4. Do and how the MFPs account for potential financial shocks related to disasters?
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Area/ Activity Relevant Indicators/ questions 5. Has the microfinance sector identified any financial gaps
in its post-disaster response (i.e. funding shortfall during post-disaster relief, recovery, or reconstruction phases)?
Ex ante disaster risk insurance
1. What portion of the MFPs’ annual budget is or could be allocated to a disaster risk insurance for protection against unforeseen natural disasters?
2. Do and how the MFPs maintain annual contingency budgets?
3. What purposes these resources can be used for (as allowed by the regulators)?
4. Does the microfinance sector have a sector-level fund for protecting itself against risks due to natural disasters? If not, how can it establish one? What are the possible ways to capitalize such fund, including sources such as the government, private donations, development partners, etc.?
5. What could be the best purposes of such a fund, including disaster risk reduction, preparedness, relief, early recovery, reconstruction, insurance, etc.
Insurance for non-financial assets of MFPs
1. Do and to what extent the MFPs purchase any disaster risk insurance to protect their non-financial assets and employees?
2. What is the usual scope of cover and what are the basis of cover (such as replacement value, etc.)
3. Who are the responsible insurers for underwriting these types of insurance? Are there any foreign reinsurers involved as well?
4. What are the current amounts of insurance cover, premium rates, and associated premium payments? Are data available on specific assets insured?
Ex post disaster risk financing
1. What budgetary reallocations are made post-disaster to meet the unforeseen costs which were not insured? What are the limits on such amounts?
2. What impact does it leave on the financial standing of the MFPs do to such reallocations?
External and donor assistance
1. How much external and donor assistance has been provided to the microfinance sector in response to recent natural disasters? What was not done which could have been done?
2. What form of financial assistance will the microfinance sector be able to accept in the wake of natural disasters, such as grants, loans, credit guarantees, etc.? What will be the advantages and disadvantages of these options?
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Area/ Activity Relevant Indicators/ questions 3. What relief has been provided in past or could be
provided in future to the MFPs and their clients by the federal or provincial governments?
It is important to note that the above tool of questions and indicators can also form the basis of the tasks of the proposed Working Group. Answering these questions will help in setting up the direction of the work needed to be done by the Working Group. While the above set of questions and indicators have been garnered by looking at the microfinance sector in Pakistan, the same can be used, with necessary modifications, to assess the need for a DRI scheme in any other similar jurisdiction. However, it is to be noted that these questions and indicators are not exhaustive, and may require significant detailing as and where required. A detailed template of a Consultative Questionnaire has also been provide in the Appendix 2, which is expected to yield a thematic and qualitative assessment of the background issues, risk assessment, mapping, and evaluation procedures. This will not only help in the identification of gaps, but will also help in the exploration of suitable DRM options for the microfinance sector. Once again, the set of questionnaire is non-exhaustive and generic in nature, but the same can be easily customized for application in any jurisdiction. A comprehensive and thematic analysis model can be developed in future, based on the responses of the microfinance stakeholders, however, that remains beyond the scope of this report.
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VII. Summary and Conclusion
It is clear that through collaboration of all stakeholders, solutions to protect microfinance clients from the risks of natural disasters will have beneficial outcome for the microfinance and insurance industries. Pakistan’s government will also gain through less strain being placed on their resources once disaster risk prevention & reduction, mitigation and coping strategies are put in place. This Toolkit provides a macro view of the risk assessment, disaster risk mapping and management, identification of gaps and the exploration of DRM options for the microfinance industry. Strategies can be designed with the input from the stakeholders, individually and through the consultative Working Group. The overview of the DRM system in Figure 1: NatCat Analytical Framework, MEFIN Network and GIZ RFPI Asia (March 2016) provides key results that need to be achieved between the MFPs, Industry and Government levels. The short-term achievable goals from the DRM assessment matrix, as given in Table 12: Proposed Objectives of the Working Group, Table 8: DRM Assessment Matrixcould be targeted initially by the Working Group. While, Figure 10: Macro, Meso and Micro Level Strategic Plan to Implement Disaster Risk Insurance, has laid down a broad set of recommendations to be implemented at various levels and collectively by all stakeholders, it will remain a challenge to gather all stakeholders on one forum for this purpose. One of the possible ways could be to initiate a Working Group, with clearly defined objective, where all relevant stakeholders, including policymakers, have their representation. The Working Group can then devise a detailed Strategic Plan which is conducive to provide DRI to the microfinance sector. Some of the specific areas which will require immediate attention include:
- The formation of a Working Group, comprising of stakeholders, to prepare realistic action plan, which every stakeholder agrees upon, is accountable to and resourced to implement;
- The identification of disaster risk zones affecting the microfinance sector and its clients, along with impact measurement abilities, need to be developed and shared with the industry;
- The discussion on insurance product development, along with insurance literacy to create demand with an innovative strategy; and
- MFPs need to address the recommended prevention & reduction mechanisms which involves client segments identification, client education, database management, SoPs and team development to allocate to disaster zones working with relief agencies to keep clients informed and involved, improve financial strength, and diversify their business operations to cover wider geography.
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References
Pakistan Economic Survey 2015/2016. Economic Adviser’s Wing, Finance Division,
Government of Pakistan, Islamabad. http://www.finance.gov.pk/survey_1516.html
United Nations 2010. Pakistan Floods Emergency Response Plan, September, New York. United Nations.
World Bank Group and GFDRR 2015. Fiscal Disaster Risk Assessment Options for
Consideration, Pakistan.
World Bank 2017. http://www.worldbank.org/en/country/pakistan/overview#1
Pakistan Telecommunication Authority (PTA) Annual Report 2015.
ASGARY, A., ANJUM, M. I. & AZIMI, N. 2012. Disaster recovery and business continuity after the 2010 flood in Pakistan: Case of small businesses. International Journal of Disaster Risk Reduction, 2, 46-56.
BERNHARDT, A. & CARPENTER, G. 2014. FILLING SUPPLY AND DEMAND GAPS. ILO, 11, 3.
KHAN, M. A. U. & SAYEM, M. A. 2013. Understanding recovery of small enterprises from natural disaster. Environmental Hazards, 12, 218-239.
MATHISON, S. 2003. Microfinance and disaster management. Foundation for Development and Cooperation, Australia.
MAYO, S., AHMAD, I., MIRZA, A., RAHMAN, A. & SHARIF, M. 2013. ROLE OF LOCAL GOVERNMENT SYSTEMIN DISASTER RISK REDUCTION: A CASE STUDY OF PUNJAB PROVINCE IN PAKISTAN. Pakistan Journal of Science, 65, 4.
TAKASHI, K. 2013. Vulnerability of Household Consumption to Floods and Droughts in Developing Countries: Evidence from Pakistan. Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
TEH, T.-L. 2015. Sovereign disaster risk financing and insurance impact appraisal. British Actuarial Journal, 20, 241-256.
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Appendix 1
Ghana and Philippines Strategies
Ghana
Source: GIZ 2012, GIZ-FAO 2014
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Philippines
Source: GIZ 2012, GIZ-FAO 2014
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Appendix 2
Developing a Disaster Risk Insurance Framework for Microfinance Sector
A Consultative Questionnaire
Part A
General Questions
1. What are the most common risks faced by MFPs due to natural disaster? E.g. floods, droughts, earthquakes, etc.
2. What are the frequency and severity of these risks, when they affect the MFPs? Please provide few examples.
3. Has there any hazard mapping done to quantify the risks faced by MFPs and their clients? If so, please provide some details.
4. What are the prevention, mitigation and coping mechanisms adopted by MFPs against natural disasters?
5. Are there any emergency loans available to be provided to clients of MFPs struck by natural disaster? If so, please provide some details.
6. Are there any existing insurance products available to MFPs to protect their lending portfolios affected by natural disasters? If so, please provide some details.
7. Are there any existing insurance products available to the clients of MFPs for protection against natural disasters? If so, please provide some details. What are the most popular products demanded?
8. What are some of the obstacles faced when trying to write premiums for natural disaster prone regions?
9. What specific abilities need to be addressed to ensure clients and MFPs are able to cope with natural disaster prone regions?
10. How do MFPs work with local districts/Government agents when a natural disaster occurs? Has a formal working relationship and plan been developed to try and assist with question four above?
11. To what level, if any, does the Government and Donor funding impact the microfinance sector in a post-disaster scenario? Positive and negative impacts?
Part B
Disaster Risk Assessment, Mapping and Evaluation
Note: For this purpose of this disaster risk analysis for microfinance sector, the focus will be on four areas:
i. Risk Assessment ii. Disaster Risk Management (DRM) Mapping iii. Identification of Gaps iv. Evaluation of DRM options (e.g. Insurance)
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Risk Assessment
There are various but relatively similar approaches to Risk Assessment (See Figure 1). We will be using the Food and Agriculture Organization (FAO)’s model for our assessment of natural disaster risks faced by the Pakistan’s microfinance sector:
Figure 5: Summary of Risk Assessment Approaches
12. The microfinance sector’s risk assessment is a critical basis for comprehensive DRM. The collection of data on hazards, vulnerabilities, losses and the potential impact of disasters is crucial to define the most suitable DRM strategies of risk prevention and reduction measures, mitigation including contingency planning, financial preparedness, and/or risk transfer, and coping with the impacts of natural disasters. What are your views and what information is available in this regard?
13. Hazard Analysis: Is there any hazard analysis done for the microfinance sector? What are the issues and challenges in areas such as Market Risk, Public Policy Risk, etc.? Who should be addressing them?
14. Vulnerability assessment: How much is the microfinance sector found to be vulnerable in the context of disaster risks in areas such as Physical Risk, Financial Risk, Environmental Risk, Social Risk, etc.
15. Impact estimate: Quantification of the exposure of microfinance sector (clients, assets, etc.) can permit a precise and comprehensive understanding of potential damages and losses. This also allows for the calculation “expected annual loss” or “probable maximum loss”. What has been done in this regard for the microfinance sector and what could be done further?
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Disaster Risk Mapping
16. Risk preventions and reduction (ex ante or before disaster): Actions could be taken to reduce the likelihood of risk or to reduce the severity of losses. What can be done by microfinance sector?
17. Risk mitigation (ex ante or before disaster): Actions could be taken to lessen or limit the adverse impacts of hazards and related disasters. This include risk transfer to a third party (e.g. insurance, reinsurance, financial hedging tools), financial services, and for instance access to markets (e.g. link to supportive business associations). What are your view on this?
18. Risk coping (ex post or after disaster): Actions could help the affected clients of MFPs to cope with the loss. They usually take the form of compensation (cash or in-kind), social protection programs, and livelihood recovery programs (e.g. government assistance, debt restructuring, contingent risk financing, coordination between stakeholders). Which if these you think could work in the country’s context and which cannot? Why?
Identification of Gaps
19. Identification of DRM gaps involves prioritization using the results from the risk assessment and the risk mapping. It can assist MFPs in decision-making and the selection process for appropriate DRM tools. What gaps asre there in risks faced by MFPs and the available protection options? How these gaps can be filled?
Exploration of DRM Options
20. What can be done for “Risks that are frequent but do not imply large losses” faced by the microfinance sector?
21. What can be done for “Risks of medium frequency and medium magnitude”? 22. What can be done for “low frequency but high severity that cause large damages”?
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On behalf of the
German Federal Ministry for Economic Cooperation and Development (BMZ)
64
Deutsche Gesellschaft für Internationale Zusammenarbeit
Regulatory Framework Promotion of Pro-Poor Insurance Markets in Asia
RFPI Asia Office, Insurance Commission 1071 UN Avenue, Ermita, Manila 1000
T: +63 2 353 1044 to 45
F: +63 2 353 1043
M: +63 998 841 0732
I: www.giz.de; www.inclusiveinsuranceasia.com