Indonesia: New insurance to keep microfinance institutions and their customers afloat in times of emergency

In addition to shattering lives, homes and infrastructure, earthquakes also have a devastating knock-on effect on a country's economic growth and development. For example, after a natural disaster, clients of micro-finance institutions (MFIs) need additional financing to rebuild their businesses and ensure their income is protected. But when these crucial financing lifelines default because their borrowers can't pay them back, the whole economy stalls.

Swiss Re is partnering with PT Asuransi Wahana Tata (Aswata) and Mercy Corps in Indonesia to address this vicious circle, by introducing the first parametric insurance solution benefiting MFI's in the earthquake-prone provinces of Aceh and West Sumatra.

How does it work?

Unlike traditional insurance which compensates the policy holder after a claim has been made for actual damage, parametric insurance pays out in response to defined triggers – in this case the strength of the earthquake. This means that insurance beneficiaries receive their payouts sooner, reducing the process from months or years, to just days or weeks. This insurance cover will help MFIs to access funds and provide bridge-loans to their clients even when their own liquidity and equity are under stress.

The need for insurance comes amidst the high frequency of earthquakes that happen in West Sumatra. In December 2004, an earthquake with a magnitude of 9.1 hit Sumatra and generated a tsunami that led to widespread devastation. The total estimated loss in the Indian Ocean region amounted to of USD 16.3 billion*, with insured losses of USD 2.5 billion*. Five years later in September 2009, a magnitude 7.6 earthquake occurred 55 kilometers west northwest of Padang and is estimated to have caused total economic losses of about USD 2.5 billion*, with insured losses of USD 55m*.

Swiss Re's role

"We're proud to be supporting this new parametric insurance solution for Indonesia with product structuring, pricing and underwriting, as well as reinsuring the risks. Efficient, simple and transparent – this type of innovative insurance is designed to also protect government and private assets from natural hazards, and help cities and individuals rebuild and recover quickly, thereby building up Indonesia's resilience to natural disasters," said Vincent Eck, Head of Global Partnerships, Asia, Swiss Re.

*Source: Swiss Re Economic Research & Consulting, 2015 prices