Issues and Challenges in Implementing Parametric Insurance in … · 2017-04-19 · Competitiveness of Philippine Rice in Asia. Science City of Muñoz (Philippines): Philippine Rice

Page 1

Issues and Challenges in Implementing

Parametric Insurance in the

Philippines: Lessons Learnt and

Recommendations

10 February 2017

GIZ RFPI Asia

Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia) www.inclusiveinsuranceasia.com

http://www.inclusiveinsuranceasia.com/

Page 2

Outline: The Philippines Case

I. Factors Affecting Agriculture Micro insurance

II. Natural Catastrophes and Crop Insurance

III. Index Insurance Overview and Philippines

Experience

IV. Lessons Learnt

V. Recommendations



Page 3

I. Factors Affecting Agriculture Insurance Development in the

Philippines: Internal and External Factors


Ageing Labour

Force

Underdeveloped

Agro System High Input Cost

Agriculture Microinsurance Policy Framework

Agri-Agra Law

High Agro Loan

interest Low Production


Page 4

I. Factors Affecting Agriculture Insurance Development in the

Philippines: Internal and External Factors


Extreme Weather

Risks

Unfair Regional

competition

Low Credit and Crop Insurance Supply and Demand

(-) Impact of

Trade


Page 5

19.87

2.59 4.65

80.13

97.41 95.35

89.52

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Nueva Ecija Iloilo Leyte

Province ALL

(in Percent)

Adoption of crop insurance, all crops, 2007-2011.

Insuredfarmers

Non-insuredfarmers

Source: Tanzo, I. The Pinoy Rice Farmer. PhilRice

Type of insurance Percentage

N.Ecija Leyte

Traditional 73 0

Weather-index based 20 100


in 3 Provinces, Philippines

Page 6

Crop

Insured

Farmers

Insured

Hectares

Amount of

Cover

(Insurance,

Php M)

GoP

Premium

Subsidy

(Php M)

Rice 202,259 302,935.89 5,585.063 318.226

Corn 12,562 14,067.17 254.515 15.545

Total 214,821 317,003.06 5,739.578 333.771

2012 Crop Insurance Penetration Rate, Philippines

Enrolment Rate: 6.96%


Source: PCIC, 2012

Page 7

Reasons for Buying Crop Insurance Percentage

N. Ecija Leyte

Peace of mind/security 20 0

Access to credit 37 0

Influenced by other farmers 17 75

Attractive policy 47 0

Just want to try 0 25

Subsidized by seed grower 3 0

*Reason for not insuring: addn’l prodn cost

Source: Tanzo, I. The Pinoy Rice Farmer. PhilRice


Page 8

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%G

ove

rnm

en

t

Cla

ims

So

ld A

sse

ts

Re

du

ce

Co

nsu

mp

tio

n

Le

nd

er/

MF

I

Sa

vin

gs

Fri

en

d

Risk Coping Mechanisms

Risks NatCats

RisksForeseeableRisk Events

RisksUnforeseeableRisk Events

Household Risk Coping Mechanisms in Four Provinces, Philippines

Source: GIZ Study on Risk Coping Mechanisms in Four Provinces

Page 9

III. Index Insurance Overview and the Philippines Experience

Weather Index

Insurance:

Rainfall as the “Index”

Page 10

Instrument for

Measuring

Weather Index

Insurance

(ex. Rainfall):

Automatic

Weather Station

What is Index-based Insurance?

Page 11

Index Insurance: Trigger

Drought

Flood Rainfall, mm

Page 12

Hybrid Index Insurance: Rainfall as Trigger;

Yield estimate

(kg/ha)

5303

Agreement (%) 90

Nueva Ecija yield estimate

map, Wet season 2014

Area Yield to determine

Pay-out

Page 13

Comparison: Multi-Peril Crop Insurance, Index Insurance

Multi-Peril Crop Insurance Index Insurance

Various perils covered (Flood,

Drought, Hailstorm, Fire, Pest

and Diseases, etc.)

Either: Excess Rainfall (Flood),

Lack of Rainfall (Drought),

Temperature, Typhoon, etc.

Individual farm adjustment One overall measurement

Higher Premium (10%-12%) Lower Premium: ≥ 3%-6%

Individual farm lot assessment

(slower)

One-off measurement

(faster)

Individual assessments and

payments based on damage

One uniform payment

Disadvantage: Moral hazard;

limited expansion; high admin

cost

Disadvantage: Basis Risk:

Risk that Payment ≠ Damage

Page 14

RIICE Dry-test Timeline of the core processes

Un

derl

yin

g c

ore

pro

ce

ss

es

The RIICE project deliverables (product, distribution, yield estimates) need to be delivered at the

right time in the course of the under-lying processes (crop cycle, loan cycle etc.).

Explanation

1 Insurance product design and tariff

Product marketing and distribution

Service to customer and distributor / agents

Claims payment process (insurer & distributor)

Monitoring and yield estimates

2a

2b

3 2c

Option for early pay-out, day 72

Final Yield Pay-out, day 120

Januar

y

Jul

y

Decembe

r

February March April May June Augu

st

Septemb

er October Novemb

er

Crop cycle

Loan cycle (Peak) 2a Loan cycle

(Peak)

Insurance product cycle 1

2c 2c

SAR-based loss & yield monitoring 3 3

RIICE Project

deliverables

Philippine

stakeholders

deliverables

Crop cycle

2b 2c

Sales cut off, w/o

Flood cover

Sales cut off, w/ Flood

cover

Page 15

Insurance product features

Key Inputs and deliverables

Product design

Product type: Area-based yield index

Risks covered: Flood, drought, typhoon, pest and diseases

Sum insured: Agro Loan (rice), Min Php5,000 – Max 15,000

Summary Technical rates per municipality:

Description of commercial loadings: Basic rate: (Net Premium / (1-(XX% Overhead + XX% Profit Margin + XX% Commission)))

Gross Rate: Basic Rate x (1+(12% VAT + 12.5% Documentary Stamp Tax + 0.2% Local Gov’t Tax))

Type: Compulsory Current distribution channel: MFIs, Rural Banks

2.79% (DS) 5.5% (WS)

on average in 6 municipalities in Leyte @80% coverage

Page 16

Policy Pest/Disease Included

Province Leyte

Municipality Ormoc Hilongos Hindang

Coverage

Level

guaranteed

yield

[t/ha]

rate

[%

of SI] Forecast Pay-out

guarantee

d yield

[t/ha] rate

[% of SI] Forecast Pay-

out

guaranteed

yield

[t/ha]

rate

[% of

SI] Forecast Pay-out

70.00% 2.75 2.0 3.51 None 2.68 2.0 2.64 2.0

80.00% 3.14 4.5 3.51 None 3.06 2.3 3.01 2.4

90.00% 3.53 8.3 3.51

54,368.30 3.44 5.6 None 3.39 5.8 None

Wet Season, 2014

Page 17

SAR-technology & insurance features

Key Results of the Simulation @ 90% average yield coverage

Pay-out in 2 out of 6 Municipalities in 6 cropping

seasons, 2012-2014 @ 90% coverage

Details Amount

Technical premium rate Php7,587,720.00

Rice Farmers Covered: 5,084

Gross Pay-out: Php414,430.18

Page 18

IV. Philippines Lessons Learnt: Government Policy


1. Current financial penalties for banks that do not meet the

25% required allocation under the Philippines Agri-Agra

Law is not effective in encouraging crop insurance

product development, and reigning in demand.

Agriculture loan portfolio was 14,4% out of 15%; and

agrarian loan portfolio was 1,1% out of 10% required in

2015.

2. A Policy Framework on Agriculture Micro insurance is not

enough to mobilize the Philippine Agriculture insurance

market.


Page 19 Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia) www.inclusiveinsuranceasia.com

3. Area Based Yield (ARBY) Index insurance works! Had pay-

outs in 2 out of 6 municipalities in Leyte Province in 2012-

2014 based on actual yield results!

4. Area Based Yield index insurance for rice using remote

sensing can be done in the entire Philippines! DA is

gathering rice yield data for ALL MUNICIPALITIES in the

Philippines using remote radar satellites, which can be used

to insure area yields.

IV. Philippines Lessons Learnt: Product Level


Page 20

V. Philippines Recommendations: Government Policy


5. A direct and strong link between access to agriculture

credit and agricultural insurance has to be addressed

through the Philippine Agriculture Microinsurance Policy

Framework.

6. A separate and dedicated joint Circular strengthening

access to finance on agriculture, and access to

agriculture microinsurance, among the Department of

Agriculture, Central Bank (Bangko Sentral), the

Department of Finance and the Insurance Commission

could aid market development.



7. More incentives (limited tax deduction?) for banks who

offer agro credit in partnership with the Philippines

Department of Finance, Department of Agriculture and

the Bangko Sentral could mobilize agriculture finance

and insurance.

8. Philippine Government smart subsidies that increase

agricultural competitiveness must be provided through

the Department of Agriculture along with access to

finance and agricultural insurance development.




9. Lowering tariff for all index insurance products

distributed by the private insurance industry, lower than

property insurance, up to a level allowed by Philippine

law, could entice companies to engage.

10. Creation of a pool of insurers offering agriculture

insurance through the Insurance Commission, PIRA and

established distribution channels.

a. Nationally pooled risks for natural catastrophes,

assignment of share of risks for all participating non-

life insurance companies; and corresponding

reinsurance




11. More studies on agricultural insurance at the macro, meso

and micro levels in the time of climate change are needed to

understand the financial impacts of NatCats, and create

effective options for insurers to develop products that

manage risks and losses adequately.

12. Creation of a data sharing protocol for insurance addressing

the following issues:

- Data granularity: level of aggregation

- Who can access the data

- Cost of accessing data

- Policy governing data use

- Legal independence of data source




13. Delimit the features of weather index insurance by allowing all

stakeholders to choose the level of insurance protection they

prefer against natural catastrophes, instead of insuring specific

crops.

a. Design weather index insurance products on a unit basis

ex. P5,000, P10,000, etc.

b. Targeting all stakeholders in the agro value chain

c. Require proof of insurance interest

d. Use satellite-powered weather data to ensure

uninterrupted monitoring




1. George C. 2010. The Truth About Trade: The Real Impact of

Liberalization. London, Zed Books.

2. Kawai M, Wignajara G. 2010. Asia FTAs: Trends, Prospects, and

Challenges. ADB Economic Working Paper Series No.226. Manila, the

Philippines.

3. Teves G. 2014. Improving Credit Access for the Food and Agriculture

Sector Through Enhanced Implementation of Existing Policies and New

Strategies. UP School of Economics Discussion Papers no. 2014-15.

Philippine Center for Economic Development, University of the

Philippines.

References:



4. Bordey FH, Moya PF, Beltran JC, Dawe DC, editors. 2016.

Competitiveness of Philippine Rice in Asia. Science City of Muñoz

(Philippines): Philippine Rice Research Institute and Manila

(Philippines): International Rice Research Institute.

5. FAO, CTA, IFAD. 2014. Youth and Agriculture: Key Challenges and

Concrete Solutions.

6. GIZ MIPSS. 2010. Study on Demand Insurance for Natural Catastrophes.

Manila, the Philippines.

7. Bangko Sentral ng Pilipinas. 2015. The Philippine Banking System 2015

Status Report. Manila, the Philippines.

References:


Page 27

Thank you

www.inclusiveinsuranceasia.com


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Issues and Challenges in Implementing Parametric Insurance in … · 2017-04-19 · Competitiveness of Philippine Rice in Asia. Science City of Muñoz (Philippines): Philippine Rice