Bundling agriculture index insurance

with financial and non financial

services

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How can index insurance be bundled

with other financial and non financial

services

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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”

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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

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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

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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

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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

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Bundling Index Insurance With Other

Financial and Non-Financial Services

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David MuigaiActuarial Officer

ACRE

ACRE Africa in the Insurance Value Chain

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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

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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

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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

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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!”

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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:

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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

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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

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Bundling Index Insurance With Other

Services

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Shadreck MapfumoSenior Financial Specialist

World Bank Group

Successful Examples of Bundling

Insurance With other services

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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

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Target Market Key Drivers

Agribusinesses Increased customer loyalty/preventing side-selling

End users Increased net income/wealth

Financial Institution Improved Risk Metrics

Practical Considerations

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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

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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

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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

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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