Cooperatives eye insurance vs extreme weather events

BusinessWorld
Finance
Posted on February 23, 2011 09:26:43 PM
BY DIANE CLAIRE J. JIAO

EIGHTY cooperatives are eyeing insurance for their loan portfolios to protect themselves against a rash of defaults when their members are hit by natural calamities.
Insurers have come up with various products to provide protection as the number of storms that hit the country each year increases in number or severity. -- AFP
Global reinsurance leader Munich Re and the German Agency for International Cooperation (GIZ) have partnered with the Cooperative Life Insurance and Mutual Benefit Services (CLIMBS), an umbrella organization of cooperatives, late last year to offer a natural catastrophe insurance product to 1,600 cooperatives with nearly a million members.

“We are currently in the process of marketing the product to our member cooperatives,” CLIMBS Executive Vice President Isagani B. Daba said in a phone interview with BusinessWorld yesterday.

“We are still closing the deals, but we expect 80 cooperatives to avail of the product this year.”

The product, CLIMBS Weather Protect, insures a portion of a cooperative’s loan portfolio, so it remains liquid in the event its borrowers, affected by natural calamities such as storms, default on their loans.

CLIMBS will act as primary insurer, and Munich Re, the reinsurer.

“[Natural catastrophes] interrupt the cash flow of cooperatives as member-borrowers can lose their livelihood and assets in a single storm and become unable to repay their loans,” read the GIZ demand study, a copy of which was obtained by BusinessWorld.

CLIMBS Weather Protect was developed after tropical storm Ondoy and typhoon Pepeng successively hit the Philippines in 2009. The two typhoons had an estimated combined damage of P30 billion, according to the Office of Civil Defense.

Cooperatives suffered financially as the homes, properties and crops of their members were destroyed, Antonis Malagardis, program manager of GIZ Microinsurance Innovations Program for Social Security, told BusinessWorld in an interview on Friday.

The GIZ study also noted that the Philippines is hit by an average of 25 typhoons yearly. The country is also vulnerable to floods, landslides, droughts, volcanic eruptions and earthquakes.

“The amount of payout depends on the severity of the natural catastrophe,” said Mr. Malagardis, explaining the product. The severity is measured either through wind speed or rainfall.

“We developed a unique set of weather indices for each of the 1,700 municipalities of the Philippines,” he added, since the geographic profile and vulnerability to disasters differ for every area.

If a storm exceeds the weather index set for that municipality, the cooperative in that area receives a payout. If wind speed or rainfall is the highest recorded in 10 to 15 years, the insurer will pay 5% of the cooperative’s loan portfolio. If the highest in 15 to 20 years, 10%; and in 20 years, 20%.

Mr. Malagardis emphasized the need to cover cooperatives as loan institutions, but he added that individual members also stand to gain from CLIMBS Weather Protect, even though it’s the cooperatives that are directly insured.

“Currently, to offset this risk [of loan defaults], cooperatives lend money at a higher interest rate, posing an additional burden to the member-borrower, especially to low-income households,” the GIZ study explained.

Moreover, cooperatives are required to pass on the benefits of the insurance payout to their members.

“Each cooperative establishes a separate Natural Catastrophe Fund and special lending window that offer interest-free emergency loans from the fund to help afflicted members recover,” the GIZ study said.

“We are also planning to extend benefits to households directly. This can be done through cash advances, loan discounts or a rescheduling of their loan repayments,” Mr. Malagardis added.