Partners for the journey
Swiss Re is innovating to expand re/insurance solutions in Vietnam and Mexico.
Vietnam relies on the success of its farmers. As the world’s largest exporter of farm-raised fish, and the second-largest exporter of both rice and coffee, agriculture accounts for about one-fifth of the nation’s economic output. The government has been investing heavily to enhance the sector’s productivity through irrigation, pest control, farmer outreach and other means. Nevertheless there is no amount of investment that can eliminate the risk of cyclones and floods — though there is insurance.
Swiss Re and the government of Vietnam are working together on a pilot insurance scheme that seeks to protect millions of Vietnamese farmers from the risks from natural disasters, epidemics and disease. The programme’s first policies were sold in the middle of 2012.
Swiss Re was the first reinsurance company to create a dedicated team – Global Partnerships – to work with governments on their risk-transfer needs.
The scheme is a bold example of public-private partnership in the financial sector in an emerging market setting. The Ministry of Finance designed the overall programme and is responsible for regulating it. Swiss Re offers the technical support of its agriculture experts and reinsures the scheme through its strategic partner the Vietnam National Reinsurance Corporation (Vina Re), in which it retains a 25% equity stake. The Ministry of Agriculture takes on the farmer outreach work and is responsible for declaring when an outbreak of disease or epidemic has occurred. Distribution of the policies is in the hands of two local insurers.
For policyholders the programme is no panacea, and there is no guarantee of success for either the re/insurers or their clients. The insured risks are complex and varied; the data on which solid underwriting depends are often lacking. The programme also requires thorough explanation to farmers who are buying insurance for the first time.
Nevertheless policies are selling briskly and the scheme is already enjoying one of the indisputable signs of success: imitation. Private insurers as well as non-governmental organisations are now offering similar products in the 14 provinces (of Vietnam’s 58) where the programme has been piloted to date.
A long-term view
After 1985, when a seismic event off Mexico’s Pacific coast caused nearly 10,000 deaths in Mexico City and more than USD 3 billion in damage, the Mexican government set up FONDEN, the national fund for natural disasters. In 2006 Swiss Re worked with FONDEN to deliver USD 160 million in earthquake cover by means of an insurance-linked security (or “catastrophe bond”). The bond was designed to pay out in the event of an earthquake measuring over 8.0 on the Richter scale within a defined area. Fortunately, no such disasters occurred within this period and by 2009 bond owners had earned a tidy return.
By 2009 Swiss Re and FONDEN had expanded the programme to which, in addition to earthquake protection, they added coverage of catastrophic Atlantic and Pacific hurricane risk — hence its name, MultiCat. In April 2012, the MultiCat programme was extended again, tapping capital markets for USD 315 million of cover for another three years.
The MultiCat bond pays out automatically when agreed triggers are reached. Such coverage provides speedy funding in the immediate aftermath of a catastrophe. In effect, the Mexican government has locked in the funding for disaster relief before the disaster happens.
Luis Videgaray Caso, Mexico’s Minister of Finance, comments: “The Mexican government is very committed to its disaster risk financing strategy, of which MultiCat is a very important element. These financial instruments are essential to managing the fiscal contingencies that stem from natural disasters.”
Reto Schnarwiler, Head Americas, Europe, Middle East and Africa at Swiss Re Global Partnerships, added: “The Mexican government has designed the most advanced, comprehensive public approach to catastrophe risk management we have seen anywhere. We are honoured to work with them.”
Swiss Re was the first reinsurance company to create a dedicated team to work with governments on their risk-transfer needs. The Global Partnerships team and other Swiss Re experts work with public sector officials in Vietnam, Mexico and around the world to build capacity and raise awareness about how re/insurance can protect public finances and enhance economic development.
Partnering for a secure future
Every year brings new headlines about how devastating natural catastrophes have put a country’s resilience to the test. Developing countries — which have suffered an average of roughly USD 55 billion in economic damage from catastrophes every year over the past ten years — are particularly vulnerable.
Swiss Re is reaching out to governments to help them manage natural disaster risk. In 2012 Swiss Re teamed up with the Swiss State Secretariat for Economic Cooperation (SECO ) to develop a training course for representatives from developing country governments that focuses on ways to prevent and prepare for disasters. Officials from ten countries took part in the first course held at Swiss Re’s Centre for Global Dialogue alongside representatives from SECO, the World Bank, the Inter-American Development Bank and other organisations.
With its emphasis on practical risk mitigation, the eight-day course looked at how both traditional and innovative risk management strategies could be applied in participants’ own countries. The case studies, presented in part by fellow government officials, ranged from funding schemes for immediate disaster relief to insurance for shortfalls in food production. Participants especially valued the session on climate change adaptation as the methodology presented is readily available and highly practical.
For more information on Swiss Re’s engagement with the public sector go to: www.swissre.com/globalpartnerships