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Bundling agriculture index insurance
with financial and non financial
services
Interfacing with the webinar system
2
Tell us what you think. Type your questions/ commentshere even while the presentation is going on.
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Polls will also be opened during the webinar –participate by clicking on your answers
How can index insurance be bundled
with other financial and non financial
services
3
Presenter:Michael R. Carter
Professor and DirectorBASIS Research Program
University of California, Davis
Presenter:François-Xavier Albouy
Vice PresidentPlaNet Guarantee
Presenter:David Muigai
Actuarial OfficerACRE
Presenter:Shadreck Mapfumo
Senior Financial SpecialistWorld Bank Group
Moderator:Pranav Prashad
Impact Insurance Facility
3
YES
NO
Poll: Do you as practitioners bundle
insurance with other services
4
Global perspectives
‒ With credit
‒ With complementary services
‒ With farm inputs
‒ Incentive for purchase
‒ Loyalty benefit
‒ Value added services to the insured
What is “bundling”
5
Bundling Insurance with Credit to
Crowd-in Farmer Investment
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Michael CarterI4 Index Insurance Innovation Initiative
University of California, Davis, USA
Logic of bundling
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By itself, agricultural insurance offers reduction in incomevariability in return for some reduction in average income(unless insurance is subsidized)
While risk averse farmers will in principal make this trade-off, it is a pernicious one for low income households
Problem made worse by insurance index where there issome probability that the contract will fail
One solution to this trade-off is to link insurance with theexpansion of economic opportunity
See in a moment that an interlinked credit-insurancecontract in Mali led to a reduction in income variabilityAND a 25% increase in area planted & investment incotton
How & Where Bundling Can Work
8
A “bundled” contract with credit can be treated as one inwhich the creditor has first claim on insurance pay-outs tocover farmers’ debt obligations
Such bundling makes most sense in environments whereloans are under-collateralized
When loans are under-collateralized, lender bearsdrought and other risk
Often the case in value chain finance where a standingcrop partially collateralizes the loan
How & Where bundling Can Work
9
In low collateral environments, standalone insurance contracts will haveminimal impact on investment profitable activities
Requiring standalone insurance will actually reduce investment!
Interlinked insurance interlinked crowd in investment
Importantly, this assumes that the loan market is competitive and that thelender reduces interest rates on interlinked loans
Note also that even interlinked insurance will have zero impacts in certainrisk environments
Positive Impact!
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For the 2011-12 crop year, a dual trigger area yield interlinkedcontract (with very low failure probability) was offered toVillage-based cotton cooperatives
Farmers enjoyed ready access to credit via monopsonisticvalue chain (CMDT)
They also faced substantial risk, which they traditionallymanaged by restricting area planted in cotton
Results of a randomized controlled trial revealed that insuredfarmers expanded borrowing, input purchase and expectedoutput and income by about one third!
Impact Results (LATE Estimates) from
Mali
11
Area Planted(hectares)
CottonProduction
(kg)
Borrowing(‘000 CFA)
Fertilizer Expenditure(‘000 CFA)
Area in Other Crops
(hectare)
Impact on Insured
1.68* 755 156 86* -0.5
Mean of Control Group
2.5 2534 294 123 4.1
* statistically significant
It Can Work, but …
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These ex-ante behavioural impacts require that farmersknow they are insured and will receive some protection
A danger of mandatory insurance is that these conditionswill not be met
Same problem with pure portfolio insurance for thelender
Need to think hard about our development objectives aswe design contacts
A similar, but earlier contract with small-scale cottonfarmers in Peru met with more modest uptake
NAIS and WBCIS mandatory schemes bundledwith agriculture loans from banks for listed crops
Helped in scaling index insurance to over 25million farmers
Private sector initiative “mainstreamed” withgovt. support
Other credit linked examples: India
growth story
13
Bundling Index Insurance With Other
Financial and Non-Financial Services
14
David MuigaiActuarial Officer
ACRE
ACRE Africa in the Insurance Value Chain
15
Acre Africa is a pioneer in developing index insurance for agriculture in East Africa, with over 5 years of experience in providing innovative index insurance solutions to farmer aggregators in three countries.
How it works
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Financial Services
Banks
MFIs
SACCOs
Non Financial Services
Farmer Groups
Seed Companies
Agrochemical companies
Social enterprises
ROLE OF ACRE:
Link in the entire value chain
Product design & implementation
Leverage on existing farmers
Leverage on existing distribution
Technological implementation
ROLE OF AGGREGATORS:
Advancing insurance linked credit
Advancing insurance linked inputs
Insured on behalf of farmers
Farmer education
How it works
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CHALLENGES
Cost to farmer Financial literacy
Admin. costs Basis risk
Weather data Retention
Triggers and design
OPPORTUNITIES
New geographies
Alternative indices
Product bundling
IMPACT
Lower Premiums
Increased loan uptake
Quality inputs
Basis Risk Management
Mobile Phone Aide
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Get farm location from SMS and monitor satellite imagery
for that location
Insurance in the bag
Germination fails after 21 days without rain
Compensation sent to Farmer via
M-PesaFarmer can replant and
harvest the same season
SMS unique code to
short code
Opens bag on planting, finds
card inside
→ → →
↓
←←
Growth stats 2009-2014
19
2014
11,650,523
233,795
2014: Scaled the mobile-enabledreplantingguarantee
Mandatory
Voluntary
Poll: Bundling can be an effective
mechanism for scaling up when it is
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PlaNet Guarantee: Bundled products
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François-Xavier AlbouyVice President
PlaNet Guarantee
Bundled products – PlaNet Guarantee
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In OECD countries,insurance bundledproducts are designedto:
‒ Minimizedistribution costs
‒ Increase customerretention
‒ Optimize distributionchannels
In emerging countriesbundled products havedifferent aims:
‒ Protect income ofvulnerablepopulations
‒ Optimize contactwith clients
Bundled products – PlaNet Guarantee
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Income of ruralpopulations aresensitive to:
‒ Climate conditions:
• Yield
• Crop prices
‒ Exchange Rates
‒ Health situation ofthe households andin the community
Bundled Index insurancemay cope with all theseissues:
Index crop insurance isalready protecting ruralhousholds againstclimatic related events
Derivative productsshould in the futureprotect rural populationagainst global climaticevents
Purchasing power inhealthcare is sensitiveto income
Global climate index
24
Price of production mayvary rapidly due toclimate conditions inother regions:
‒ Price of rice
‒ Price of maize
‒ Price of coffee
Often the medium termtrend is positive (coffee,cocoa…) even if yearlyvolatility is high
A matrix of covariancemight provide amodelization ofvariations in price
Financial productsshould be designed toprotect households
Already future pricesand derivative productseffectively protect theagro-industry operators
High volatility in prices
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*source: de Nicola, Francesca et al. « Co-Movement of Major Commodity Price Returns » Finance and Private SectorDevelopment Unit, The World Bank
Health and climate
26
In practice, healthcare expenses are linkedwith income in crop
Protecting health insurance schemes withbasic index products might be feasible
Orange Money Epargne or ‘’SINI TÔNO’’ bundles a savingcontract with a death and disability insurance + healthinsurance focused on severe pregnancy risks.
SINI TÔNO: “Profits tomorrow!”
27
Healthcare insurance designed to vulnerable population,especially in rural areas:
‒ A network of healthcare providers from the GP’s tohospitalization has been contracted.
‒ Selling period is linked with the harvest period i.e. fits withthe new rhythm of underwriting cycle of crop indexinsurance by PG in Western Africa…
‒ 80% of what people are effectively paying (capped at XOF1,000,000)
‒ outpatients, medical imaging, surgery, hospitalisations,drugs, ambulance costs…
Premium: XOF 60,000/ y (2 adults+ 2 children)
Healthcare in rural areas:
28
Planet Guarantee creates products for aggregators to increasetheir profitability
Banks , Investors and MFIs‒ To lend more to customers, the entire portfolio being covered
against climatic risks‒ To reduce credit recovery costs and default risks
CMS (Sénégal) , BIM, BOA (maize, sesame Mali), Ecobank (Burkina for cotton), Oikocredit (Ivory Coast), Fondation Grameen Credit Agricole (Mali)
Inputs suppliers and agri-business:‒ Customers fidelizationOLAM (cattle, health and crop insurance in Ivory Coast)
Aggregator approach
29
SANASA insurance Co. in Sri Lanka offers Weather Basedindex insurance bundles Personal accident andhospitalisation covers
Helped customers’ understanding of insurance
India & Zambia: Weather forecasts and agricultureadvisory services provided to insured farmers
Bundling multiple insurance covers and
other services
30
Bundling Index Insurance With Other
Services
31
Shadreck MapfumoSenior Financial Specialist
World Bank Group
Successful Examples of Bundling
Insurance With other services
32
Third Party Car Insurance / Annual Road Licence
Property Insurance / Mortgage loan
Credit Life / SME loans
Funeral/Life Insurance / Airtime
Key Drivers Of Successful Bundling For
Index Insurance
33
Target Market Key Drivers
Agribusinesses Increased customer loyalty/preventing side-selling
End users Increased net income/wealth
Financial Institution Improved Risk Metrics
Practical Considerations
34
Premium level –Index Insurance premiums much higher thantraditional
Cost of bundling
Source of premium financing
Pitching to the client : Health balance between qualitative andquantitative content.
₋ Client Risk Tolerance = Maximum NPL =4%
₋ 10 year Historical NPL data for 8 geographical areas
₋ 10 year historical payouts for 8 geographical areas.
Sample Risk Metrics for client
engagement
35
With loans and credit
With seeds and fertilizers
Providing complementary value added services
With other insurance covers
Poll: Which is the most appropriate
service with which agriculture insurance
can be bundled
36
Pricing is key, especially when insurance bundled withalready expensive agricultural credit
Evaluating value proposition for each key stakeholder inthe bundling process is critical for a long term sustainablebundling process
Affordability is a critical element when designing bundledproducts
Delivering index insurance as a bundled product tofarmers is one of the key strategies to scale up
Concluding thoughts
37
Bundling agriculture index insurance
with financial and non financial services
38
Presenter:Michael R. Carter
Professor and Director BASIS ResearchProgram
University of California
Presenter:François-Xavier Albouy
Vice PresidentPlaNet Guarantee
Presenter:David Muigai
Actuarial OfficerACRE
Presenter:Shadreck Mapfumo
Senior Financial SpecialistWorld Bank Group
Moderator:Pranav Prashad
Impact Insurance Facility
38