Intervention Summary
Title: Reducing Disaster Risks by providing catastrophe insurance for Fonkoze’s
Micro credit clients in Haiti
What support will the UK provide?
The UK will provide a contribution of £955,000 in 2011/2012 to introduce affordable
catastrophe insurance to protect micro credit borrowers in Haiti against natural disasters.
DFID will provide a one-off payment of £955,000 to a multi donor trust fund managed by the
Caribbean Development Bank (CDB). The trust fund will form the capital base for a new microinsurance institution (MiCRO) that will start operations in Haiti but expand to other countries
and sectors in the Caribbean.
This funding comes from the £2 million allocated to Disaster Risk Reduction after the Haiti
2010 earthquake as part of the UK's commitment to allocate 10% of post disaster
humanitarian funding towards reducing future risks. The UK’s bilateral humanitarian
contribution to the Haiti earthquake response was £20m.
Why is UK support required?
This pilot initiative will introduce a catastrophe insurance mechanism to protect micro finance
institutions (MFIs) and the livelihoods of micro credit borrowers from natural disasters. Without
such protection, the benefits of micro credit will continue to be undermined when disaster
strikes.
The Haiti earthquake of 12 January killed more than 250,000 and injured over 300,000. About
1.3 million people were forced to live in temporary shelters in Port au Prince and over 500,000
people left to find shelter in the rest of the country.1
The earthquake had a devastating affect on micro-entrepreneurs who lost assets,
merchandise and markets. The micro-finance sector, which provides micro-loans to sustain
and stimulate many of these businesses, suffered extensive losses. Almost one year after the
earthquake, USAID estimated that of the $38m outstanding microcredit loans across Haiti, a
quarter could end up in default2.
Fonkoze is Haiti’s largest micro finance institution (MFI) with 45,000 mainly female clients.
Many of its members were killed, injured or struggled to repay loans because of their losses.
Fonkoze, in common with other MFIs across Haiti, suffered significant losses of capital and
many loans had to be written off. This is not unusual for MFIs after sudden onset natural
disasters elsewhere in the world: “When natural disasters strike, clients lose family members,
health, homes, business assets, inventories, livestock, and crops—exactly those things in
1
2
Executive summary, Haiti Post Disaster Needs Assessment (PDNA), March 2010
New York Times, Can Micro Credit Save Haiti? November 13, 2010
which they had invested loan capital.”3 Still indebted to the microfinance institution (MFI),
micro borrowers are then forced to sell assets to repay their debts, exactly when they need
those funds and assets to try to cope with and recover from the disaster. The poorest clients
with the smallest liquid assets or the greatest loss of income often go deeper into dept, having
to sell off remaining assets, take children out of school and seek other coping strategies, such
as migrating in search of work.
Microfinance is increasingly recognised as an effective way of fighting poverty.4 Through MFIs
like Fonkoze, poor people can obtain access to small loans, credit and other financial services
that allow them to make their own enterprise decisions that contribute to raising per capita
income as well as household net worth. But recurrent disasters in Haiti highlight how natural
disasters negate these gains and further exacerbate poverty. To meet clients’ emergency and
recovery needs, MFIs have to reschedule loans, or issue new loans to clients. To survive,
MFIs have to search out new loans from commercial sources or benefit from grants. Both may
not be forthcoming, or take time to materialise.
Fonkoze’s repeated disaster experiences in Haiti led them to pursue more sustainable
financing options and protection for their members. After the 2008 storms in Haiti (793 dead,
876,000 requiring humanitarian assistance) Fonkoze, with funding from DFID and USAID,
supported the recovery of 18,000 members, mostly women, (90,000 families) by cancelling
outstanding debts and providing new loans to restart businesses, earn income, and re-enter
the credit programme. DFID CHASE concluded that Fonkoze provided “essential support” for
the recovery of some of the most vulnerable women in Haiti. Fonkoze built on this success,
deeming it essential to build resilience against future disasters. After 2008, they introduced
disaster risk reduction training for all clients and started to investigate financial protection
options.
Fonkoze has led the way on developing a catastrophe5 insurance scheme for natural hazards
events (rain, earthquake, wind) to protect its microfinance clients in Haiti. It will be the first MFI
in Haiti to offer this insurance and will be a founding member of MiCRO, the co-operative
institution that will manage the insurance mechanism and expand it to other hazard risks,
countries and sectors (e.g. small scale farmers).
MiCRO will use a parametric hazard “index” to trigger insurance payments. Fonkoze will
receive a payout from MiCRO according to the intensity of a hurricane, earthquake or rainfall
event that affects a given area. These payments will in turn be paid to Fonkoze’s loan holders.
Fonkoze uses a four step “staircase” process to reach out to help the poor pull themselves out
of poverty and into a financially secure future for themselves and their families. Different
support and loan options are available at each step. For example, “TI Kredi” (Little Credit)
offers a small initial loan of just 1000 Gourdes (£16.00). The next step “Solidarity Group” is
Fonkoze’s core programme. The current average loan size of the “Solidarity Group” is 10,000
Gourdes (£156.00) repayable over six months. If triggered by a disaster event, the insurance
would:
3
Micro enterprise best practice, rapid onset natural disaster brief,
http://www.gdrc.org/icm/disasters/rapid_onset_brief_7.pdf
4 Micro finance gateway for comprehensive information; http://www.microfinancegateway.org/p/site/m/
5 Catastrophe refers to events that are of a size and spread that will overwhelm normal or anticipated coping
capacities and that will require extraordinary means of support.


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Clear the balance of the existing loan to Fonkoze members
Provide loan holders with a 5,000 gourdes cash grant to cover any immedediate family
needs
Allow loan holders apply for a new loan
Fonkoze’s will make insurance mandatory for all new borrowers. More detail on Fonkoze is
available at www. Fonkoze.org
Significant benefits of a parametric approach include: i) the ease of administration – payments
are made according to measurable hazard thresholds (e.g. wind speed, rainfall) rather than
actual losses on the ground thereby eliminating the timely and expensive process of loss
adjustument; ii) the avoidance of moral hazard (where the security provided by insurance
stops policy holders undertaking risk prevention) and; iii) adverse selection (where the riskiest
are the first to take out insurance). Most importantly, because parametric insurance is
predictable, with pre-determined pay-outs to pre-determined hazard levels, re-insurance is
cheaper than traditional, indemnity insurance schemes. In Haiti re-insurance for hazard
losses is not available for indemnity insurance because of the uncertainty of measuring and
verifying losses. No loss adjustment is needed so payments can be made very quickly, within
two weeks.
MiCRO will be set up in partnership with Fonkoze, CaribRM, Swiss Re, Guy Carpenter Micro
Solutions, Mercy Corps, Caribbean Development Bank (CDB), InterAmerican Development
Bank (IADB) and Swiss Agency for Development and Co-operation. Fonkoze’s contribution is
funded by USAID.
DFID’s contribution will mobilise others to support this innovative initiative. DFID has been at
the forefront of developing and gaining support for the MiCRO initiative; assisting Fonkoze to
develop an insurance product by commissioning a feasibility study in 2009. This initiative
builds on DFID’s involvement in launching and monitoring the Caribbean Catastrophe Risk
Insurance Facility (CCRIF) – the first region-wide parametric insurance scheme for
Governments launched in 2007. Expanding access to micro insurance for low income groups
and farmers outside of Haiti is a core component of DFID C’s 2011-2015 operational plan, and
was assessed as innovative by the Bilateral Aid Review (BAR) panel.
DFID support will highlight the need to maximise DRR components of recovery strategies.
Within the international community DFID takes a lead pushing for post disaster assistance
which better incorporate DRR – reducing the risks and building resilience to lessen future
disaster losses.
What are the expected results?
Insurance will protect the livelihoods and assets of micro credit borrowers, speed their
recovery and reduce the need for post disaster assistance that is expensive, often slow to
arrive or absent.
This will be achieved by setting up the first micro hazard insurance mechanism (MiCRO) for
earthquakes, floods and hurricanes in Haiti and the region. Fonkoze members will be the first
clients of MiCRO.
The project will achieve the following results:

At least 50,000 people in Haiti will have their micro credit loans protected in the first
year of the project - 18,000 persons attributable to DFID.

The establishment of a parametric micro insurance scheme that will be expanded to
incorporate other countries and clients within one year.
The project will:

Provide micro insurance clients with funds when they most need them to pay for
emergency needs and to re-establish their businesses and incomes.

Allow local economies and trading systems to re-establish themselves more quickly
after disasters.

Reduce the need for low income groups to adopt coping strategies, such as using up
their savings or selling their assets thereby making them more vulnerable to future
shocks).

By offering protection against disaster events, financial decision-making by micro
entrepreneurs (e.g. whether to take out a loan, whether to purchase assets) will be
more predictable, sustainable and productive.

Result in more predictable, timely assistance than post disaster humanitarian
assistance.

Demonstrate the effectiveness of incorporating DRR into recovery strategies.
Strategic Case
A. Context and need for DFID intervention
Rationale
Threatened by earthquakes, landslides, floods and hurricanes, Haiti is one of the most
disaster prone countries in the world. Even before the 2010 earthquake that killed over
250,000, Haiti ranked fifth in a list of countries at relatively (based on population) high risk of
mortality from multiple hazards.6
Haiti cannot afford the increasing cost of disasters. During the 20th century, Haiti experienced
56 internationally recognized storm or flood related disasters, with 44% of these occurring in
the 1990s. In 2004, tropical storm Jeanne cost the country 7% of its GDP. The damage and
6 World Bank, Natural Disaster Hotspots, A Global Risk Analysis (Washington, DC: Disaster Risk Management Series, 2005), table 1.2.
losses of four storms in 2008 was 15%. The total value of the damage and losses caused by
the January 12 2010 earthquake is estimated at US$ 7.804 billion, more than 120% of the
country’s 2009 GDP7.
77% of Haitians live on less than US$2 a day. 52% on less than US$1 a day. Disasters not
only make poor people poorer, they also increase future vulnerability. As coping mechanisms
are eroded, there is more pressure on the environment (e.g. through increased deforestation)
and further urbanisation (as people migrate to cities to seek jobs). The impact of disasters in
Haiti is expected to intensify as vulnerability is increased by climate change. According to the
Climate Investment Fund, Haiti is one of the ten global climate change hotspots.
Disasters pose a similar threat to the economic and development progress to the Caribbean
as a whole. Although most countries have attained middle income status and are meeting
most MDGs, there is danger of slipping backwards. Disasters threaten already precarious
economies across the region, especially those already struggling with high levels of debt and
fiscal deficit. The Caribbean is disproportionately vulnerable to natural disasters, including
hurricanes, floods, earthquakes and volcanoes. Between 1991 and 2005, seven of the top 20
greatest losses of GDP to natural disasters worldwide were in the Caribbean – e.g. Grenada’s:
Hurricane Ivan in 2004 - 253% GDP loss, Guyana’s floods in 2005 – 58% of GDP lost. Six of
the 20 countries with the highest mortality risk from multiple hazards are in the Caribbean.8
Haiti and the Caribbean highlight the importance of incorporating disaster risk reduction into all
aspects of development strategies in hazard prone countries. In 2005, the United Nations
International Strategy for Disaster Reduction (UN) launched the Hyogo Framework for Action
(HFA) as the primary multilateral global commitment for DRR, calling for national
governments, international organisations, civil society groups to incorporate risk reduction into
development policies and planning. In 2006, the Global Facility for Disaster Reduction and
Recovery (GFDRR), a partnership of 36 countries (including UK) committed to helping
developing countries reduce their vulnerability to natural hazards and adapt to climate change.
DFID has long promoted DRR. Both the 1997 and 2006 White Papers stated DRR would be
an integral part of DFID development co-operation. In 2006, DFID launched a formal policy
paper “Reducing the Risk of Disasters – Helping to Achieve Sustainable Poverty Reduction in
a Vulnerable World “articulating the goal of “contributing to sustainable development through
vulnerability reduction of the poorest.” The 2006 DFID policy included an innovative
commitment to allocate 10% of humanitarian assistance to recovery and DRR to “build back
better” to avoid future losses. Two weeks after the Haiti earthquake, the then Secretary of
State approved £2m for DRR to supplement the £20m of UK bilateral humanitarian response.
This programme is part of that allocation and follows extensive discussions with partners
operating in Haiti and a DFID field mission to investigate DRR options in June 2010.
Since 2008, DFID Caribbean has recognised the risks posed to regional development
strategies by (recurrent) disasters and climate change. Building community resilience to
7
PDNA; Assessment of damage, losses, general and sectoral needs. Government of the
Republic of Haiti, with the technical support of the UN, the IDB, the ECLAC, the World Bank and the
European Commission (March 2010).
8
Natural Disaster Hotspots: A Global Risk Analysis, World Bank, 2005.
climate change and disasters is a core pillar of DFID’s 2011-2014 business plan.
Why insurance?
The Hyogo Framework calls for activities to “promote the development of financial risk-sharing
mechanisms, particularly insurance and reinsurance against disasters.” However, there are
few disaster specific insurance schemes and they are not generally available to poor people.
“While the poor are the most vulnerable to risk, the majority of them have to manage risks with
their own means. Very few have access to formal insurance.”9 Increasing the availability of
insurance against shocks and disasters is seen to have a multitude of benefits because of the
timeliness and reliability of an insurance pay-out. Benefits include:
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Replacement of productive assets, therefore protecting livelihoods;
Post disaster income and liquidity negates the need to sell assets to meet emergency
needs and to become poorer still;

Avoids externally provided assistance that may be politically driven, be slow to arrive
and expensive to administer. There is a considerable body of evidence showing
external aid can erode local markets, exacerbate social inequalities and undermine
dignity;10
Increased entrepreneurial activity as people can take out loans with confidence. The
availability of insurance may “unlock” access to credit (i.e. if there is an insurance
guarantee, payments can be made).

Developing a regional micro insurance mechanism is closely aligned to DFID priorities and
strategic goals. The 2010 White Paper included a commitment to “pilot approaches to
affordable micro level insurance services for the poor.” In 2010 the Head of DFID’s Climate
Environment Group (CEG) set out two underlying reasons:


The potential for insurance as a component of the financial inclusion agenda aimed at
increasing the economic opportunities for poor people by giving access to loans, credit,
mortgages, etc. Insurance can protect these financial instruments from shocks and
disasters.
The role of insurance within the climate resilience agenda. CEG plans to: “pilot and
demonstrate the potential role of insurance as part of a broader strategy in managing
climate change risks at the regional, country and household level. The lessons
generated (opportunities and constraints) will be useful in designing scaled up climate
insurance”
The DFID Humanitarian and Emergency Response Review (March 2011) is also strongly
supportive of parametric insurance:
"As
the cost of damage caused by extreme weather conditions is soaring, more sustainable
ways to tackle weather risk are needed. Public-private partnerships in risk financing have
become more popular, in particular parametric insurance. Insurance can play a role in
guaranteeing predictable and reliable payouts, allowing for long-term planning, increasing
governments’ self-determination and ownership, protecting livelihoods and diminishing
negative effects of relief interventions on local markets
9
Christian Aid, Micro Insurance and DRR, Challenges and opportunities in the context of climate change, Rachele Pierro
Humanitarian Practice Network; http://www.odihpn.org/. Sphere standards: http://www.sphereproject.org/
10
The initiative will contribute to the implementation of global climate change strategies and the
decisions agreed at the United Nations Climate Change Conference in Cancun, December
2010. Within the call for enhanced action under the Cancun Adaptation Framework is an
invitation for “enhancing climate change related disaster risk reduction strategies…..and
sharing and transfer mechanisms such as insurance, at local, national, sub regional and
regional levels, as appropriate.”
Throughout the Caribbean, recent disaster events have shown the weaknesses of existing
insurance schemes and the potential for a more affordable parametric product. For example,
Hurricane Tomas in 2010 destroyed 80% of the banana crop in St Lucia and a similar
proportion in St. Vincent leaving many thousands of small scale farmers with no income for
months and relying on income support from the Government (St. Vincent) or charities (e.g.
Red Cross in St. Lucia). WINCROP, a banana insurance scheme was operating in both
countries. The scale of losses from Tomas has put WINCROP into near insolvency and it has
not been able to meet claims from its own reserves. WINCROP’s inherent weakness was that
its risk was shared only among countries affected by Tomas - it did not have sufficient
reserves or re-insurance to meet claims if the majority of clients suffered losses at the same
time (as happened in Tomas).
In 2007, Fonkoze and Alternative Insurance Company (AIC) of Haiti offered Fonkoze
members the first micro-insurance product in Haiti: a life insurance policy. The programme has
successfully been administered to all Fonkoze clients. After the devastating hurricane season
of 2008, Fonkoze and AIC began working on a micro insurance product that would extend
cover to natural disasters asset losses.
Context
The initiative builds on DFID’s experiences and the lead role we have taken in developing risk
transfer mechanisms in the region and Haiti. In 2007, DFID were among the first contributors
to the establishment of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the
world’s first parametric insurance facility to protect Governments against hurricanes and
earthquakes.
When DFID provided recovery support to Fonkoze after the 2008 tropical storms, we asked
Fonkoze to investigate possibilities to introduce an insurance mechanism to protect their loans
against future disasters so as to avoid future demands for assistance. DFID subsequently
supported CaribRM, the managers of the CCRIF, to help Fonkoze develop an affordable
parametric hazard insurance mechanism. Implementation plans were being made when the
massive earthquake struck Port au Prince in January 2010.
After the earthquake, Fonkoze used a grant from Mercy Corps (another contributor to MiCRO)
to provide their micro credit clients with emergency funds – as if insurance was already part of
their existing loans. This gave Fonkoze clients catastrophic micro-insurance retroactive to
January 12, clearing the balances of their loans, granting them US $120 to use for any
immediate emergency needs, and making them eligible for new loans.
This allowed a real-time test of many aspects of the insurance mechanism designed by
CaribRM. It tested: the scale of payout in relation to earthquake intensity (the parametric
trigger); the distribution mechanism (Fonkoze’s offices); the speed of distribution and the
impact. This successful testing provides the basis for the MICRO initiative and rationale for
current support from DFID and other stakeholders.11 As a result of the test “the overwhelming
majority (of Fonkoze clients) say they are willing to pay for insurance in the future, despite the
high competition between priority needs.”12
Evidence
Over the last five years DFID has been testing innovative risk transfer and insurance
mechanisms and models. These include:
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Mexican government catastrophe bond 2004;
Caribbean Catastrophe Risk Insurance Facility (CCRIF), 2007;.
A weather-index insurance scheme for farmers in Mali and Burkina Faso with design
support from The Africa Enterprise Challenge Fund; and.
A series of pilots on index-based weather insurance for small farmers and pastoralists
in Kenya with support from the Financial Sector Deepening Trust.
There are now around 20 pilot parametric (“index”) based insurance schemes in low and
middle income countries including China, Ethiopia, India, Malawi, Nicaragua, Peru, Ukraine,
and Thailand.13 Christian Aid undertook a comprehensive study of these schemes in 2008
(released in 2011)14. In 2010, the World Food Programme (WFP) and International Fund for
Agricultural Development (IFAD), with support from the Bill and Melinda Gates foundation,
produced a report on the sustainability of parametric weather insurance based on nine case
studies15. These studies and assessments provide the following lessons and criteria to be
incorporated into new pilot schemes.
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The need for insurance to be linked to micro finance (i.e. as part of a credit loan, not as
stand alone insurance);
Measuring and setting parametric triggers has been a challenge;
Determining the appropriate amount of “basis risk” to be borne by MFIs is critical. Reinsurance companies will not assume all the insured risk. insured. If too much risk is
taken by the MFI, the cost of premiums will increase or the ability to pay may be
compromised.
Those paying for insurance must understand what they are paying for, how the
insurance functions and the payouts expected.
Insurance must be affordable for clients to be willing to purchase (demand).
These issues were also raised in consultations with DFID advisers, micro-insurance experts
and further literature reviews.
Although this is a pilot, DFID’s experiences with CCRIF and Fonkoze indicate strong project
feasibility. Most of the issues above have been addressed by MiCRO design. The metrics for
wind, earthquake and rainfall (i.e. measuring and setting trigger mechanisms) to be used by
MiCRO and Fonkoze have already been developed and are accepted by the re-insurance
market. The MiCRO board structure and operating principles are based on transparent and
11
End of project CaribRM technical support is available on request.
http://www.mercycorps.org.uk/koko%C3%A9visossouvi/blog/20722
13
Natural hazards, unnatural disasters: the economics of effective prevention, World Bank 2010.
12
14
The potential role of Disaster Insurance for disaster risk reduction and climate change adaptation, Christian Aid 2011,
Rachele Pierro and Bina Desai
15
The potential for scale and sustainability in weather index insurance for agriculture and rural livelihoods , WFP, IFAD, 2010;
www.ifad.org/ruralfinance/pub/weather.pdf
regulated CCRIF principles tested and verified in a number of disaster events since 2007.
Extensive evidence based monitoring systems, open to peer review, will be introduced from
the outset to establish baselines that allow an assessment of differences made to livelihoods,
local economies and future disaster impacts. Considerable emphasis will be placed on
evaluating affordability and cost benefit. Although the scheme is considered to be affordable
by Fonkoze, with costs to clients comparable to other micro insurance initiatives, there is less
documentation on cost benefits of micro insurance over time between insured and without
insurance scenarios.
Fonkoze with 44 offices and 45,000 members (all but 600 are women) is well placed to
manage effective disaster insurance for its members using the benefit of past experience and
already established monitoring and data processing systems. DFID provided post emergency
funds to Fonkoze in 2004 and 2008. Fonkoze were positively evaluated both times. In 2005,
The Grameen Foundation awarded Fonkoze its Pioneer in Microfinance Award in recognition
of the institution’s work towards poverty alleviation in one of the most challenging areas of the
world.
DFID’s new strategic vision for girls and women, launched March 2011, has four pillars for
action. The second, economic assets directed to girls and women, outlines a variety of
means to ensure “direct access to, and control over, economic assets”. This includes “support
for initiatives to give women and girls the skills, confidence and networks that will help them to
keep hold of their economic assets and make productive use of them.” MiCRO will protect the
loans and assets of Fonkoze members, mostly women.
B. Impact and Outcome
Impact
Fonkoze members, and those of other micro credit schemes (e.g. saving clubs) in Haiti who
take up catastrophe micro insurance will protect their livelihoods and recover more quickly
when disaster strikes. Local economies will recover more quickly, reducing the need for
external or government assistance. When the micro insurance scheme is expanded
elsewhere in the region, other vulnerable groups will be able to maintain livelihoods and
recover more quickly when disaster strikes.
Outcome
Low income groups in Haiti and across the region will take out affordable disaster micro
insurance to enhance resilience to and recovery from natural disasters and climate change.
Appraisal Case
A. Determining Critical Success Criteria (CSC)
Each CSC is weighted 1 to 5, where 1 is least important and 5 is most important based on
the relative importance of each criterion to the success of the intervention.
CSC
1
Description
Weighting (1-5)
Reliability or predictability of post disaster assistance or 5
pay-out
2
Timeliness of assistance or pay-out to avoid assets being 4
sold
Sustainability
5
3
B. Feasible options
Options for Disaster Risk Reduction are extensive, differing according to location and
hazard. They range from structural protection measures (e.g. more resilient housing and
infrastructure), to non-structural measures (e.g. income diversification, hazard awareness,
regulation, etc). All will have different effectiveness and cost benefit according to a localised
context (e.g. a flood barrier protecting empty fields has less value than a barrier protecting
an urban area).
This appraisal does not assess options to rebuild houses or essential infrastructure better
than before (though this is being done under the other components of the DFIDC Haiti DRR
programme). Instead, a focus is given to how to protect micro-entrepreneurs and those who
have taken out micro credit loans. This is based on the explicit experience of Fonkoze’s
micro credit members in the disaster events of 2004, 2008 and 2010, the effect of disasters
on micro credit borrowers and institutions elsewhere and the findings of research suggesting
that insurance offers a means to boost entrepreneurial activity in hazard prone locations and
allow individuals and markets to recover after impact.
The selection of options is demand and experience-led. The first two options relate to
different hazard insurance types that can be considered;
1) Indemnity insurance with pay-outs according to experienced losses;16 or
2) Parametric insurance with pay-outs triggered by hazard characteristics (intensities).
The third option is “business as usual” waiting for a disaster to happen and then determining
what assistance is required and in what form. For example, DFID recapitalised Fonkoze
loans post 2008 tropical storms in Haiti.
3) Business as usual – MFIs and their members continue as to be at risk, post disaster
support is on an ad hoc basis that depends on unpredictable external support.
16
Indemnity insurance compensates the beneficiaries of insurance policies for their actual economic
losses, up to the limiting amount of the insurance policy.
Theory of change
The theory of change behind the desired outcome and impact is set out in the attached
logical framework and described below.
Following disasters, micro credit holders who have lost assets and markets are unable to
pay back loans. Coping strategies include selling assets (therefore becoming even poorer) or
seeking assistance from others (family, government, civil society, etc). This assistance may
or may not be forthcoming, adequate, or equitable.
In 2004, 2008 and 2010, Fonkoze members lost livelihoods, were unable to pay back loans
and could not take out new ones. DFID and other donors provided ex-post funding for
Fonkoze to recapitalise loans and allow enterprises to be re-established. In the immediate
aftermath of these disasters, neither Fonkoze nor their members were certain of what
assistance would be forthcoming. This acted as a brake, reducing confidence to take on
borrowing, placed micro-economic activity on hold, and resulted in different coping strategies
(e.g. selling assets). The DFID funding to re-capitalise loans in 2008 took five months to be
agreed.
The desired impact is a predictable and sustainable mechanism that enables micro credit
borrowers not to go further into debt and that allows businesses to be re-established early so
those affected by disasters can recover faster. This project proposal pilots the development
of a micro insurance scheme to protect Fonkoze and micro-credit borrowers in Haiti against
natural disasters. A scheme that will be expanded later to other countries and other sectors
in the Caribbean – likely to be low income farmers.
To reach this outcome, an assessment of the potential to introduce insurance, the type of
insurance to be offered and for what hazards is required. Once a desirable insurance
“product” is identified, an assessment of the best entity (organisation) to deliver the product
and if necessary to establish a new entity. For Haiti this includes consultation with a
spectrum of stakeholders; the micro finance sector (ANIMH – association of MFIs, the
federation of credit unions, Le Levelt), Fonkoze members, insurance organisations (e.g. AIC,
Fonkoze’s life assurance partner) and reinsurance companies. When a product and delivery
mechanism is decided on, Fonkoze will offer the product to its own borrowers to ensure
acceptance and sustainability.
For the outcomes to be realised, and if a new insurance mechanism is put in place, a
number of outputs will be required. The insurance facility will have to adequately funded and
able to absorb worst case scenario disaster events. An administrative and management
system to sell and distribute insurance will be required. Those purchasing insurance must
understand how the insurance functions and what it is for. Adequate levels of risk transfer –
away from Fonkoze to other institutions (e.g. reinsurance) – must be in place.
These issues and options were examined during the feasibility study conducted by CaribRM
with DFID support in 2009/2010. They resulted in an insurance product that was tested after
the 2010 earthquake and subsequently refined.
The assumptions governing appraisal options are; i) insurance will be taken up by
individuals; ii) the insurance product/facility will be able to absorb a sequence of hazard
events; and iii) distribution of payouts will be acceptable to clients, transparent and well
managed.
A common concern with insurance are the threats of “adverse selection”17 and “moral
hazard18” – that insurance itself may act as a disincentive to reducing risk. This issue has
received significant attention as a core programme purpose is to reduce risk, not to maintain
or worsen it.
Option 1: Business as usual option.
The purpose of the appraisal is to find ways to allow poor people to cope better with the
effects of natural disasters, and to reduce the need for humanitarian assistance post
disaster. It is based on the recognition that “business as usual” assistance is often flawed.
Alongside good practice guidelines for humanitarian assistance and internationally agreed
standards – for example the “Sphere standards” - there is a wealth of evidence that post
emergency assistance, from government or civil society, is often slow to arrive, partial in
coverage, expensive and driven by socio-political relationships.
The rationale for this project is to protect micro-credit institutions and borrowers better from
disasters. It is predicated by evidence that the benefits of access to micro finance and credit
are negated by disasters, and that gains made by that micro-finance to that point may be
reversed. There are numerous examples of this happening globally. Fonkoze itself is the
most relevant – they started to develop the insurance product after recurrent disasters.
Option 2: Micro insurance against natural hazards using indemnity insurance.
Indemnity insurance is where an insurance pay out is made according to losses
experienced, the amount of insurance purchased and a damage assessment. The issue is
whether indemnity insurance could be established for low income micro-credit borrowers.
In the agricultural sector, because of high monitoring and administrative costs, adverse
selection and moral hazard, “traditional" crop insurance has been seen a poor model for
export, particularly in developing countries.”19 Indemnity insurance requires a loss
adjustment process, which is often long, expensive and complicated, especially in rural or
isolated areas, resulting in costs that are passed back to the consumer. These expenses and
the risks of corrupt claims have prevented reinsurance being affordable or viable. In 2010
many banana farmers in St. Lucia and St. Vincent were insured by the WINCROP scheme.
Because WINCROP was unable to sufficiently re-insure, Hurricane Tomas, which affected
both countries at the same time, compromised the company’s ability to payout and
WINCROP’s solvency.
In 2006, Fonkoze introduced a life assurance insurance scheme for its members with AIC,
one of Haiti’s biggest insurers. When investigating the options of insuring members against
natural hazards, their first investigations were into indemnity insurance with AIC. The main
Adverse selection refers to cost effectiveness of insurance. Those most at risk take out insurance –
a balance between high risk and lower risk is desired to spread the cost of insurance.
18 An example of normal moral hazard is when a householder decides not to make repairs to a house
because they have insurance – if it is damaged they will be paid with or without repairs.
17
19
The potential for scale and sustainability in weather index insurance for agriculture and rural livelihoods , WFP, IFAD, 2010;
www.ifad.org/ruralfinance/pub/weather.pdf
reason for not going ahead was the unavailability of affordable re-insurance – AIC (or any
other Haitian insurer) had insufficient capital to hold the risks themselves. Following the
September 2008 floods and January 2010 earthquake, the costs and risks meant that
reinsurance for indemnity products in Haiti effectively became unavailable.
Option 3: Index based, or parametric disaster insurance
Index insurance refers to insurance against specific hazards or perils, e.g. flood or hurricane.
A payout is triggered by a pre-specified event or level of hazard. Parametric insurance has
been tested in the agricultural sector. Agriculture yield insurance has been tried successfully
in Canada, India, Sweden, and USA. In 2007, the Caribbean Catastrophe Risk Insurance
Facility was launched by the World Bank with DFID support offering regional governments
insurance against hurricanes and earthquakes. Parametric insurance is considered to have a
number of benefits:

Payouts can be paid quickly, saving lives and livelihoods. Because an earthquake or
hurricane intensity is known (in real time), payouts can be made immediately. The
CCRIF made payouts to St Lucia and St Vincent seven days after Hurricane Tomas.

Because the insurance is based on an independently verifiable index, there are more
and more affordable options for re-insurance. In the developing world in general and
in Haiti in particular, there are no claims records on which to base an assessment of
indemnity risk – reinsurers will always therefore, assume the worst and add a very
significant uncertainty load to their price. Although hazard data can also be in short
supply, modelling is much more certain for hazards than for indemnity risk – and this
is reflected in price of re-insurance.

There is no requirement for lengthy or expensive verification, and no chance of fraud
when using transparent, easily monitored triggers. Payout can be more predictable
when attached to clearly understood triggers (e.g. category of hurricane).

Moral hazard and adverse selection may be avoided, since all pay the same premium
and receive the same payout; a person has the same economic incentive to manage
risks as someone without.

Parametric insurance, because it is to agreed triggers, is less ad hoc and arguably
more easily understood.

As with normal insurance, a major issue to be examined is whether poor people will
be able to afford the premium, or will it need to be subsidised.
The evidence base for parametric insurance and its cost benefit is being built up. A
considerable amount of background research is available for the Fonkoze/MiCRO initiative.
DFID funded a feasibility study into insurance options for Fonkoze in 2009/2010. This
resulted in firm recommendations on the type of insurance, how it should be organised and
how it should be managed by Fonkoze. Subsequent to the study, further work has been
conducted on affordability, reinsurance rates, premium level etc.
Climate and environment relevance of options.
There is not expected to be any significant impact on the climate or environment from
achieving the outputs. The project will contribute to climate resilience.
The business as usual option, with its reliance on ex-post humanitarian assistance, carries a
medium risk of environmental impact. There is extensive evidence of post disaster
environmental degradation caused by emergency coping measures of those affected (e.g.
deforestation for charcoal production).
The Caribbean Climate Smart Programme Screening and Evaluation report (February 2011)
gives this insurance project a moderate ranking for both risks and opportunities. Under risks,
there was concern that insurance could encourage businesses that will be maladjusted to
climate change because they would be insured against climate variability. Fonkoze are
aware of climate change impacts and consider them in beneficiary selection. Fonkoze
members taking out a loan undertake training in DRR this includes awareness of climate
change consequences. Fonkoze’s interaction and close relationship with clients provides the
opportunity to embrace climate change awareness and positive adaption of small enterprise.
In the table below:


the quality of evidence for each option is rated as either Strong, Medium or Limited,
the likely impact on climate change and environment is categorised as A, high
potential risk / opportunity; B, medium / manageable potential risk / opportunity; C,
low / no risk / opportunity; or D, core contribution to a multilateral organisation.
Option Evidence rating
Climate change and
environment
category
(A, B, C, D)
Ex Ante Humanitarian assistance or Government A
support to micro-entrepreneurs and micro credit
loan holders (cash transfers, cash for work,
recapitalisation of credit loans – as per DFID
2008). Evidence: Medium
Traditional indemnity insurance based on actual B
losses; Evidence: Limited
MICRO – An insurance mechanism with a B
Parametric triggers; Evidence: Limited20
1
2
3
C. Appraisal of options
The costs and benefits of the three options and how they relate to critical success criteria are
summarised in broad terms below:
Sustainability
Business as usual


20
Micro credit gains continue to be threatened by natural
disaster
Livelihoods post disaster depend on external attention
The evidence base globally, explained in context is still slim.
Traditional insurance






Parametric
insurance/MiCRO









Cost
Business as usual



Traditional insurance





Fonkoze/MiCRO






Unassisted poor are made poorer still
MFI’s operations jeopardised
Sustainability depends on external support
High cost limits re-insurance or demand for insurance
product
Examples of insurance failure, e.g. WINCROP.
Fonkoze examined traditional insurance for natural
hazards but could not find partners
Moral hazard and adverse selection
Few global examples but good practice/success
requirements of these have been incorporated into
Fonkoze design.
Potential disparity between actual losses and insurance
trigger.
MiCRO fund designed to absorb a series of 5 years of 1
in 250 year events
Parametric measuring and triggers already in place
AIC willing to be a partner to Fonkoze in Haiti
Insurance scheme test piloted post 2010 earthquake
Governance and regulatory outlines as per CCRIF –
management to a high calibre (CDB to chair, will also
manage trust fund)
Broad-based support from major institutions –Swiss Re,
Swiss Development Cooperation, CaribRM, Guy
Carpenter, Mercy Corps, IADB
New payment mechanisms have to be designed and
introduced post disaster - often by external humanitarian
response agencies with high overheads.
Businesses and household incomes lost post disaster
Amounts invested in micro credit may be negated by the
next disaster event. e.g. DFID’s re-capitalisation in 2008.
Individual loans and MFI investments protected
More expensive than parametric or not available
Insurance may allow further access to credit, new
technologies and more productive investments
Livelihood benefit of re-establishment of income
Avoids selling of assets
Low cost of re-insurance
Set up costs of MiCRO minimal – based on Fonkoze
offices and administration
Trigger mechanisms already tested and in place and very
low cost to operate
Insurance may allow further access to credit, new
technologies and more productive investments
Livelihood benefit of re-establishment of income
Avoids selling of assets
Timeliness and predictability
Business as usual
 Support may be delayed as interest is on humanitarian
assistance before early recovery (e.g. DFID
recapitalisation in 2008 was five months after the floods),
early recovery criticised post 2010 earthquake for being
too slow.
 Time required for external agencies to organise in field
partnerships.
 Assistance may not be forthcoming – It is subject to
public interest and political will
Traditional insurance
 Payment delays because of lengthy assessments
 History of insurance being cancelled (e.g. Montserrat
1997)
 Collapse of insurance company to a large event
Parametric/MiCRO
 Quick and when needed most. CCRIF pays two weeks
after impact
 Trigger mechanisms in place and verifiable within a
matter of hours
Social
Business as usual

Traditional insurance


Parametric/MiCRO



Negative benefits
Business as usual
Traditional insurance
Parametric/MiCRO






Tensions exacerbated by coping capacities and potential
conflicts over access to post disaster assistance
Dependency
Social cohesion aided by maintaining livelihood and
income
Resilience and self determination
Social cohesion aided by maintaining livelihood and
income
Resilience and self determination
Continuing loss of income and livelihood from natural
disasters to MFI members and institutions
Moral hazard, adverse selection, cost, sustainability
Cost to policy holder if no hazard/disaster
Cost to policy holder if no hazard/disaster
Credibility if the trigger does not match losses
False sense of security
Summary and selection of options
Fonkoze’s experience (tropical storms 2004, 2008) is that donor support is required to recapitalise and to re-establish client loans otherwise their members will go more into debt
taking out a new loan. This has been shown not to be sustainable for MFIs in Haiti21. In many
cases, the wellbeing of clients post disaster depends on the level of international attention
and concern. In the case of more localised events, such assistance is unlikely to be
forthcoming. For instance, a small hurricane may not grab international headlines or result in
an international appeal, but it could wipe out the livelihoods of all those affected.
21
New York Times, Can Micro Credit Save Haiti? November 13, 2010
The business as usual option ignores requirements and opportunities to build Disaster Risk
Reduction into recovery strategies or, as is the case with Fonkoze, to address the exposure
of micro credit to natural disasters.
Fonkoze have concluded they can best serve their members by providing insurance for
micro credit loans. Fonkoze investigated options for normal indemnity type insurance and
parametric insurance pre 2010 earthquake. They could not find an insurance company
willing to offer indemnity insurance for disasters. Fonkoze then investigated and selected
parametric insurance as the most viable and cost effective mechanism to meet optimum
design.
D. Comparison of Options
Each option has been compared against critical success criteria in the attached table (D).
Option 3, MiCRO has the highest score (56/possible 70) by a considerable margin.
(see annex for table)
Analysis of options against critical success criteria.
Option
1 Option 2
Business as Indemnity
usual
CSC Description
Weighting score Wt
score Wt
(1-5)
score
score
1
Reliability
or 5
1
5
3
15
predictability of
post
disaster
assistance or
pay-out
2
Timeliness of 4
assistance or
pay-out
to
avoid
assets
being sold
Sustainability
5
3
Option 3
Parametric/MiCRO
score
4
Wt
score
20
2
8
3
12
4
16
1
Total
5
18
1
5
32
4
20
56
Optimum design - MiCRO
Optimal design for Fonkoze insurance requires:



An insurance scheme easily understood by micro-credit borrowers and affordable to
them;
Prompt post disaster pay out;
Sustainability; a) an ability to absorb a series of large disaster events b) micro credit



clients are willing to pay the premiums c)
Payouts proportionate to the amount of premium paid;
Losses which are closely matched to the amount of insurance pay-out; and
Compensation to those who suffer losses to markets/livelihood even if they are not in
the immediate disaster area.
These criteria are met by the parametric insurance mechanism that will be provided by
MiCRO and distributed to Fonkoze’s clients. MiCRO’s design benefits from the technical and
administrative mechanisms used by the CCRIF, and hazard data and trigger mechanisms
will be open to public scrutiny.
Success of the programme for Fonkoze clients, and expansion options, depends on
sustainability. MiCRO addresses the two key determinants of affordability; a) survivability b)
affordability to clients:

MiCRO will absorb a one in 1,000 worst case hazard scenarios and a series of five
consecutive one in 250 hazard events. Models, hazard data and costing information
will all be open to public scrutiny and are set out in the attached MiCRO Business
Plan.

Fonkoze has prepared an outline of how insurance will work for its clients. This states
the cost of the insurance and how it works:
“If there is a natural disaster, such as a hurricane, flood, landslide or earthquake,
during the period that you are covered, Fonkoze will:
• give you 5000 gourds to help you recover*
• reimburse the loan from Fonkoze which was outstanding at the time of the disaster
and Fonkoze will provide you with a new loan when you are ready to restart your
business.
The initial insurance charge will be 2% of the loan taken rising over three years to 6%.
This subsidy is deemed necessary to introduce and validate a new financial
mechanism. The expectation is Fonkoze clients will pay the larger amount once they
see or realise the benefits of insurance.
Even if Fonkoze clients do not wish to pay additional premiums (up to the 6%) in future
Fonkoze may continue to subsidise clients or maintain the insurance to protect their asset
base against future disasters. This is a pilot study. The programme will provide valuable
lessons for future insurance options.
Fonkoze’s confidence in the insurance product offered to its clients is well founded. The
insurance mechanism was successfully tested by Fonkoze after the 2010 earthquake when
assistance to clients was distributed as if insurance was in place (i.e. 5,000 gourde payout
and re-imbursement of loan).
Resource costs of options
The MiCRO business plan submitted to financial regulators (February 2011) sets out the
following financial arrangements:
Gross premium:
$1.1M collected from Fonkoze
Premium to re-insurance;
$750K parametric reinsurance charge from Swiss Re (first year)
Essentially re-insurance is insurance for insurance companies. Only by
sharing some of their risk with re-insurers is it possible for primary
insurers (e.g. MiCRO) to offer cover against key risks. The majority of
risk held by MiCRO (what they will have to pay out) will be re-insured
with (transferred to) SwissRe. This means that MiCRO will always be
able to make a payment should the insurance be triggered and that
disasters do not eliminate MiCRO’s capacity to pay-out or offer further
insurance. 22
Net Premium:
$350K net premium kept by MICRO for basis risk assumed (the amount
MiCRO will pay out before re-insurance is received)less:
Fixed Expenses:
rates
$220K/$175K in year one/subsequent years. All fees are at market
Item
Contractor Name
Tech Ops Manager
CaribRM
General Operational
Expenses
CaribRM
Admin Manager
March Captive Services
Placing Broker
Guy Carpenter MicroRisk
Regulatory Fees
Government of Barbados
Legal Fees
Chancery Chambers
Financial Audit
TBD
Board Costs
Various
D&O Insurance
TBD
Pre-Incorp
Cost (USD)
Annual
Cost (USD)
$
15,000
$
75,000
$
15,000
$
35,000
$
10,650
$
2,500
$
10,000
$
10,000
$
20,000
$
38,150
$
500
$
5,000
$
160,500
Bank charges
External Actuarial Audit
Total
22
TBD
http://www.swissre.com/rethinking/The_essential_guide_to_reinsurance.html
Expected Losses: $251K/Scalable in year one/subsequent
Growth Projections: 10% per annum based on expectations of increases in number of
Fonkoze loans and client base (other metrics scaled accordingly)
Investment Income: 2.35% on all investable capital - the premiums received, but not paid
out – including original investment capital (e.g. DFID contribution) will be invested with
returns going against administration and need for future re-insurance. Because investments
will follow CDB low risk investment guidelines the returns will be expected to be conservative
(hence 2.35%).
Initial Capitalization: $5M – UK£3.125m (@$1.6/£)
DFID contribution to capitalisation $1.5m
Mercy Corps
$0.5m
Fonkoze
$0.75m
Swiss Development
$1.0m (to be confirmed, expected June 2011)
IDB
$ 1.25m (considering up to 3m)
DFID funding will be a grant to MiCRO via a trust fund set up by CDB. The grant will be
drawn down against MiCRO claims. CDB has experience of setting up and managing multi
donor trust funds used by DFID (e.g. CARTFUND), DFID are a major CDB shareholder and
board member. The CDB president elect is a member of the CCRIF board that uses similar
governance and financial management arrangements.
Other alternative delivery channels have been considered for technical inputs and for reinsurance. The chosen partners are:

Reinsurance. For the first year of start up, MICRO will re-insure with SwissRe.
SwissRe are contributing MiCRO development support on a pro-bono basis.

Technical. CaribRM will act as technical operators providing parametric and design of
risk coverage, including parametric trigger calculations and management of claims
settlements.
 Marsh Capital Services will be contracted to provide regulatory and corporate
secretarial support, accounting and policy issuance services.
To ensure/maintain value for money, all providers of contracted services will be put to
competitive tender when the MiCRO board deems most appropriate. The expectation is that
this will happen after the first year when MiCRO will be reviewed. 23
Balance of costs and benefits
23
See MiCRO Insurance Business Summary for full breakdown of MiCRO organisation
MiCRO is a cheaper, more effective option than indemnity insurance. There are no other
parametric insurance options available for micro credit within the region.
In
acknowledgement of the sense of proportion governing appraisals, and the funding for this
project, a full cost benefit has not been carried out.
There is no detailed CBA available for micro-insurance programmes similar to the
MiCRO/Fonkoze initiative. However, there are cost-benefit analyses available for indexbased agricultural insurance in India and Africa. For example “In drought-hit northern
Tanzania, insurance-backed farm loans of about $1,000 per year have helped farmers who
once produced five bags of maize per acre boost their harvests to 28 bags in good years,
said Steve Coffey, VP Strategic Relations, MicroEnsure…… Even after repaying the loans,
interest and the cost of the insurance, farmers are seeing their income per acre more than
triple.”24
As a pilot, it is expected that the project will measurably demonstrate that insurance provides
the means for microcredit clients to risk more of their resources, for greater return, than
would be the case without insurance. In addition it is expected that cost benefit will be able to
be shown for the rapid payment which index-based insurance enables. A survey will be
conducted of Fonkoze’s micro borrowers and compared against a similar sample of microborrrowers who do not have insurance to assess whether insurance has increased their
appetite for risk.
E. Measures to be used or developed to assess value for money
A strong indicator of value for money is ratio of the premium to the “pure risk cost” which is
the annualised loss expected for a particular coverage. The premium price to pure risk metric
indicates the efficiency at which the insurance programme is operating. Conventional
indemnity insurance programmes (e.g. property insurance in the Caribbean) typically run at
multiples of pure risk to premium of 4 to 625. The projected multiple for MiCRO clients (1.5
times pure risk) compares favourably. The nearest equivalent on a global scale is CCRIF,
which is currently charging a multiple of 1.75 over pure risk. In MiCRO’s case this means for
every £1.50 that Fonkoze pays in premium, it will, over time, get £1 back in paid claims (of
which about 50p will go directly to clients and 50p will pay off outstanding loan balances).
For the CCRIF, currently, countries pay £1.75 to get £1 in payouts – but the long-term stable
multiple lies between 1.25 and 1.5. Although this value for money figure is low – it does not
threaten sustainability of MiCRO (e.g. a concern that premiums received will not cover
losses). MiCRO’s financial models allow it to absorb (i.e. provide insurance cover) five years
of successive 1 in 250 year hazard losses.
Another measures for the “economy” of MICRO includes the cost of the insurance as a
percentage of the sum insured. At present this is circa 10% which is comparable to other
micro insurance schemes.
MiCRO has lower costs for four main reasons:
1. Parametric insurance allows reinsurance to be purchased without a heavy premium
for uncertainty – the amounts to be paid out for a hazard occurrence are known in
24
25
Insured loans help small farmers reduce hunger, climate risks, Alertnet December 2010
CaribRM, 2011
advance.
2. Cost of capital is very low (due to initial donor support) – in the high layers (unlikely
events, big payouts) of a regular reinsurance programme, the cost of capital which
has to be assigned to cover that risk is very high.
3. Administration costs are very low – partly due to donor support for product
development, partly due to low marketing costs, but mainly due to the parametric
mechanism – adjusting and claims administration costs are high for any indemnity
programme but especially for catastrophe perils.
4. MiCRO start-up costs are extremely low as parametric hazard assessments have
already been developed by CCRIF and SwissRe. Systems are already in place to
deliver insurance and payments to individual loan holders (as tested by CaribRM
DFID) and Fonkoze is already well established and well run.
The level of MICRO survivability influences the cost of insurance and re-insurance
purchased. Current survivability is put at a 1 in 250 chance of a series of events triggering
MICRO pay-outs.
DFID will track value for money from programme inception. Measures will be introduced to
ensure the MiCRO is being managed efficiently. Oversight of MiCRO, but also how Fonkoze
organises the insurance will be reported on to the board and open to DFID and public
scrutiny.
Close attention will be paid to monitoring value for money; tracking the value of all services
provided to MiCRO, but essentially the cost and benefit to Fonkoze clients. Baseline data will
be collected on Fonkoze clients at programme inception to assess perceptions, affordability
and benefit. Data will also be collected for micro credit holders not taking out insurance so
comparisons can be made (see Management Case section D: Monitoring and Evaluation).
Commercial Case
A. Clearly state the procurement/commercial requirements for intervention
DFID will make one payment to set up MiCRO. The payment will be indirect, in the form of a
grant to MiCRO via a trust fund set up by CDB. This amount will provide a capital base to
establish a re-insurance company licensed and able to provide disaster micro insurance to
Fonkoze. Fonkoze will in turn provide an insurance product to its micro credit borrowers. The
DFID grant will be drawn down against claims payments. This is the same model used for
DFID’s 2007 contribution to the CCRIF capital base.
B. How does the intervention design use competition to drive commercial advantage
for DFID?
There is no other insurance mechanism operating in the region similar to this innovative pilot
initiative or one close to providing a similar process. Haiti’s MFIs operate in a competitive
environment so design has taken into account the cost/benefit of providing this coverage.
All MICRO procurement, of technical inputs, insurance (e.g. Haiti insurance provider and Reinsurance) will be put to tender once the board considers it most cost effective to do so. The
board will consider the optimum time to offer tenders for all consultancy services. The trust
board will review at the end of the first year.
By the end of the first six months the board will agree criteria and processes to be followed
to ensure all technical and managerial inputs to MiCRO are optimised. Criteria will include
value for money, technical proficiency and capacity to deliver without increasing financial
risks (i.e. less return) to Fonkoze and its clients.
The two major costs are those for 1) CaribRM, a private company that will manage MiCRO
for the first year, and 2) Swiss Re, the re-insurance company selected for MiCRO start up for
a fixed fee according to a business case provided to the MiCRO board. The fee will be
reviewed each year. The board will consider the optimum time to offer tenders for all
consultancy services, reporting back after the first year.
At the end of the first year the board will decide when it is most appropriate, using the agreed
criteria, to put the management contract to tender and for how long (e.g. for 2 years if this
lowers costs).
At the end of the first year tendering will take place for the re-insurance contract subject to
criteria agreed by the board.
CaribRM became involved in the initiative in 2009 when they carried out a feasibility and
insurance design study for Fonkoze and DFID. This involved an investigation into the most
cost effective insurance options. SwissRe was selected because they were offered the
cheapest re-insurance, partly because of their desire to offer pro-bono support to Haiti post
earthquake, partly because of their involvement with CCRIF (for which Swiss Re provide the
lowest comparative costs verified by the World Bank). Swiss Re are using the initiative to
build their own knowledge base and added value for future expansion of micro-credit and to
build their own competiveness in new and expanding markets.
C. How do we expect the market place will respond to this opportunity?
It is anticipated the market place with react enthusiastically to the opportunity of offering and
profiting from, providing financial services to clients they hitherto had limited access to. An
underpinning rationale of Swiss Re providing low initial costs and pro-bono support, is their
expectation of larger markets and using the pilot study to build their expertise and added
value26. SwissRe support to MiCRO will not result in any future unfair advantage.
D. What are the key underlying cost drivers? How is value added and how will we
measure and improve this?
The key cost drivers to the costs of insurance and DFID’s contribution to MiCRO are:






The size of the capital fund and the risk the capital fund can absorb (without reinsurance); So long as the number of pay-outs is not to worse case scenarios (i.e. a
one in 1,000 year event will reduce the capital base to 40%), the capital base will
increase as more premia are paid and as income comes from investment. This
increase will diminish the cost of re-insurance (at 75% of initial premia)
The cost of re-insurance;
Survivability – the scope of disasters the fund and re-insurance can absorb (and payout), e.g. a once in a thousand year earthquake intensity;
Expansion to other countries, spreading risks and lessening the need for re-insurance
Investments by other donors into the capital fund; and
The cost of MiCRO administration, claims settlements and management. To be put to
tender.
The main mechanism and control to ensure value for money and efficiency will be the
MiCRO board. Those sitting on the board include:





Fonkoze Director
Mercy Corps
CDB appointee
DFID appointee
Independent expert (from CCRIF board)
E. What is the intended Procurement Process to support contract award?
None – A one off Grant payment will be made to MiCRO
F. How will contract & supplier performance be managed through the life of the
intervention?
The MiCRO operating company will report to the board on the management of contracts and
supplies. Robust financial and reporting systems will be introduced to meet DFID project
cycle management requirements.
26
http://media.swissre.com/documents/sigma6_2010_en.pdf
Financial Case
A. How much it will cost
£955,000
£2m for DRR was approved in the January 2010 Haiti submission. This £955,000 will be an
accrual from financial year 2010/11.
B. How it will be funded: capital/programme/admin
Programme (RDEL)
C. How funds will be paid out
There will be one payment to MiCRO as a contribution to MiCRO’s capital base. It will be
paid, by grant, when the multi donor trust fund managed by the CDB is established (May
2011). DFID’s contribution includes a £50K towards evaluation and base-line data collection.
The remainder will be used solely against claims and will be drawn down over time.
D. How expenditure will be monitored, reported, and accounted for







MiCRO will submit six month reports to the board of trustees on activities, outputs,
outcomes.
MiCRO will submit six monthly financial reports to board members and investors.
MiCRO yearly accounts will be independently audited, approved by the Barbados
insurance regulator and distributed by the MiCRO board to trustees and investors.
Within two weeks of an insurance pay-out an event report will be produced continuing
all relevant hazard and financial data.
At the end of the first year an independent review and process assessment will be
organised. This will inform DFID project cycle management requirements.
MiCRO will be reported on for DFID PCM purposes for three years.
No funds are expected to be returned during the project cycle.
Management Case
A. Oversight
MiCRO will have a board of directors appointed by mutual agreement of donor and
investment partners. The board will be chaired by CDB. Composition will include
representatives of major investment/shareholders and donor representatives. DFID will have
representation on the MiCRO board.
B. Management
Management of MiCRO will be provided by CaribRM for the first year for a fixed fee at
approximately 2.5% of the DFID grant. By the end of the first year the board will decide on
the optimum length of contract to be put out to tender.
Fonkoze will be the first distributor and facilitator of insurance from MiCRO to Fonkoze
members and to other MFIs in Haiti.
Fonkoze will be responsible for:



Sales and distribution at Fonkoze local offices
Premium collection through regular interest payments
Claims settlements
C. Conditionality
None
D. Monitoring and Evaluation
A monitoring and strategy will be in place from the outset. Baseline data of Fonkoze
members taking out insurance will be collected at the beginning of the project. A sample will
be taken to assess differences insurance will make on livelihoods over time. This will include
a representative Knowledge, Attitude and Practices survey which will include disaster risk
indicators.
Evidence and data collection will be of a depth and standard to justify any expansion or scale
up of this pilot initiative.
The MiCRO managers will provide six monthly progress and financial reports. An
independent performance review will take place at the end of the first year.
Because the project is innovative it has been selected by DFID C for independent evaluation
after three years. This will require extensive base line data collection of Fonkoze members
but also from un-insured micro credit holders to enable comparative assessments of impact
and effectiveness. £50k from DFID’s contribution is earmarked towards evaluation.
The micro board will determine and agree any scale up of MiCRO to other countries or
sectors.
E. Risk Assessment
The key risks that threaten delivery
Category
Risk
Risk 1
Political
unrest
Risk 2
Low
demand
for
insurance
Political and civil unrest stops
Fonkoze and MFI operations
Fonkoze clients do not want to
spend extra amounts on
insurance. This has been tested
and verified post 2010. If the
insurance is seen to be too
expensive, many will not renew
borrowing. .
Risk 3
Mismatch
between
insurance
payout and
damage
Risk 4
Natural
Disasters
Risk 5
Funding
Mismatch between loss of policy
holder (MiCRO) and the payment
under the insurance contract
(Fonkoze member) – jeopardises
capital base, demand for
insurance or assistance provided
to clients
A severe series of disasters
destroys the capital base
This ratio will be increased by
increasing re-insurance if
collections are more than
disbursements and more income
is received.
Funding amounts do not
materialise to provide insurance
to Fonkoze members.
Funding does not materials from
Swiss Development or other
donors
Reduced potential to offer
insurance to other MFIs in Haiti
and elsewhere in the region
Mitigating action
 Fonkoze maintains its non
political stance
 Fonkoze maintains ability to
function in midst of crisis (e.g.
Post Aristide violence, 2010
earthquake)
 Transparent insurance
mechanism and information
to insurance clients
Residual
probability
Residual
impact
Low
Low
Medium
Medium
Medium
Low
Low
High
Low
Medium
Medium
Medium
 Pricing of insurance to be
reviewed; premium vs. risk
insured
 Continuing refinement by
CaribRM of hazard data and
triggers
 Access to data being
developed by KAC,
Caribbean Institute of
Meteorology
 MiCRO/Fonkoze able to
absorb basis risk with capital
base
 Re-insurance
 An acceptable level of
survivability – 5 x I in 250
minimum – the high end of
global insurance company
standards
 The worst case scenario is
that MiCRO has to pay out all
its assets because of a
sequence of disasters – the
money will still go to
vulnerable people in need.
 DFID approval given early
 There are firm commitments
from elsewhere (e.g IADB,
Mercy Corps, USAID)
 DFID promotes and
influences other donor
 DFID engagement will
prompt, be a stimulus for
others
 Early MiCRO performance
F. Results and Benefits Management
Milestones and targets against indicators are set out in the programme logframe. The project
log-frame is attached.