Meso-level distribution: Opportunities and challenges

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Meso-level distribution: Opportunities and challenges

Presenter:Ulrich Hess

Senior AdviserGIZ

Presenter:Vijay KalavakondaFinancial Specialist

Global Index Insurance Facility

Presenter:Marcel KuettelVice President

Swiss Re Corporate Solutions

Presenter:Israel Muchena

Technical DirectorHollard Mozambique

Moderator:Pranav PrashadTechnical Officer

Impact Insurance Facility

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1. Context setting and GIIF’s role2. Different views and models3. What do reinsurers look at4. Perspective from the ground5. Challenges and opportunities6. Q&A

Discussion flow

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Means to reach scale?Tool for cost reduction while improving outreach?Reduce costs of assessing individual risks?

Meso-level distribution and portfolio covers

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Kind of products being structured

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Meso-level productsGroup-based (Insurance)

Product

FI’s

*Bundling Insurance along with Credit

Agri Businesses

* Insurance as a “loyalty” bonus e.g., germination insurance by Kenya Seed Co* “Value-added” service offering e.g., contract farming, aggregators/lead firms

Portfolio (Insurance)

ProductProtecting

Income/Insuring against volatility, * Loan losses and

NPLs* Insuring against liquidity crunch following major catastrophes

More than 95% of agriculture insurance products in developing countries sold via FI’s, i.e. bundled along with credit In India, more than 98-99% of insurance is bundled with credit

‒ MFIs and coop banks also aggregating the riskIn Sub-Saharan Africa, large amount of agriculture insurance is provided through aggregators including lead firms/contract farming organizationsPortfolio insurance is relatively new and still in pilot stage

‒ A few experiments underway including in the Philippines (by Munich Re), in Indonesia (by GIIF/WBG), in Peru (by Global Ag Risk)

Context setting

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Does your organization provide portfolio covers or use meso-

level distribution methodology?

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YesNo

Select your answer

Different views and models

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Different kind of covers and models

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Index insurance written for a meso-level institution as policy holder‒ Mesolevel institutions: lender or bank or

farm association (can help in income smoothing)

Group insurance

Contrasting the two types of Mesolevel insurance – example: Bank

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Agri insurance for farmers Financial engineering for Banks

Product Group Insurance Portfolio InsuranceMaster Policy holder

Bank Bank

Final policy holder and premium payee

Farmer taking out credit Bank

Primary Purpose

Aggregate farmer Agri Policies – protect bank against loan default

Compensate Bank for costs of loan defaults or loan write-offs

Benefit for farmer

Loans is repaid on time, Loan history is not tainted, farmer keeps good relationship with Bank and receives new credit next season

Limited – farmer still has to deal with loan default or rescheduling

Benefit for Bank

Bank reduces NPLs to minimum and stabilizes ag lending business over time

Reduces financial losses from NPLs/write-offs

Challenges 1) Basis Risk: payout from Insurance might not match exactly harvest losses 2) farmer has to pay a little more for the insured credit (if bank lends premium money)

1) Basis Risk: payout from Insurance might not match exactly NPL costs 2) Bank still has to deal with loan defaults/reschedulings 3) Premium might eat all lending profits!

Portfolio insuranceUpside

Perhaps lower basis risk: default impact of weather events can potentially be inferred from portfolio historyEasier to contract operationally

Downsideonly solves half of the bankers’ problem when harvest failures lead to defaults: bank receives financial relief, but still lose the farmers as it still needs to deal with farmer defaults/NPLs/rescheduling because banks cannot/do not want to forgive loans and cannot lend to same farmers again in following seasonFine tuning of WIBI for portfolio is difficult, because lender and farmers tend to contract as late into season as possible, beyond WIBI cut-off dates

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Group InsuranceUpside

Bundling the weather insurance with the credit makes the purpose and cost of the insurance transparent for farmers Comforts farmer and encourages farmer to take out more “protected” credit for increased investments into crops

DownsideWIBI premium makes the bank loan more “expensive” for farmer: e.g. if bank finances premium of say 10%, interest rate of 5% increases to 5.5%

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Empirical evidence

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Portfolio Insurance

Group InsuranceKenya

Commercial Bank,

Rwanda

Equity Bank, Kenya

NWK AgriServices,

Zambia

MicroEnsure Philippines, MFI loans

Fertilizer distributor, Philippines

Syngenta/ACRE,

various Banks, Kenya

Planet Guarantee,

cotton lender,

Burkina Faso

India AP, BASIX 2004 portfolio cover, one

year only

Peru 2014, Caja in Northern Peru insured

agriloan portfolio against El Nino event

(source: Jerry Skees, verbally)

Covering the risk: Reinsurance

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Policy holder is the aggregator (bank, cooperative), i.e. insurance benefits are paid to the aggregator, not the individual farmerConsequently, marketing, education, and sales target the aggregatorIndex can be structured on meso (one index) or micro level (e.g. several indices make up the cover) but payout is on portfolio level onlyPortfolio level compensation is no substitution for retail level product

Define meso-level

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Portfolio

Payout

index calculati

on location

1

index calculati

on location

2index

calculation

location 3

Perspective from the ground

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KEY INDICATORSSize of Population: 25 m

GDP Growth: +/-7.5%

Life Insurance: $22.7 m

General Insurance: $126 m.

Penetration: Less than 1%

Bankable population: 12% of population (2009)

Population below the poverty line: 52%

Mobile phone users: 7.85m (2011)

Mozambique

Weather index pilot projects CROP COTTON INDEX MAIZE INDEX

Index Deficit Rain Excess Rain Low

Temperatures

Deficit Rain Excess Rain

Insurers EMOSE/HOLLARD HOLLARDAggregators IAM/SANAM/OLAM AgDevCo/DFiDCovered Zones

Nampula Province Manica Province

No. insured 43,000

IAM (the Cotton Institute) presented the following opportunities:

Access to existing network & distribution infrastructureAlready known and trusted by end-consumerLow transactional costs by more than 85%Reduction of insurance administration expenses by more than 90%Capacity to influence policy-makersPartner that also brings meaningful insights (crop science)Aligned interests of improving the welfare of farmers

Why an aggregator?

Full support of the insurance regulator – ISSMSpecific treatment of microinsurance in Insurance Law (Decreto-Lei nº 1/2010 de 31 de Dezembro)

‒ Provision for alternative distribution partners‒ Distinct capital requirements‒ Substantial reduction of premium taxes‒ Emergence of elements of consumer protection

Support in clearance of new products

Regulatory framework

Given the emphasis on aggregators, which ones do you think are more

relevant for such covers?

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• Financial services organizations (cooperative banks, microfinance institutions)

• Farm input providers (fertilizer, seed suppliers)

• Farm output off-takers (food processing, warehousing, contract farming organizations)Select your answer

Challenges and opportunities

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What can be improved?Develop programmes for end-consumer awareness campaigns to ensure buy-in Find mechanisms to upscale the weather index to cover more farmersExpand scope of cover to include other crops & livestockDevelop local risk assessment and underwriting capacity through appropriate structures

Improve pricing to ensure affordability

How to make final customers understand the cover‒ Challenge of building trust in insuranceBetter understanding for repeat purchase, both by the aggregator and the farmerHow do the benefits actually percolate to the farmer Education is a 2-way process ‒ Both the financial service providers and the

covered clients have an opportunity to learn

Consumer education and protection

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Opportunities

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Reach larger scale with reduced

administrative costs and

efforts

Aggregator as product owner,

not only service provider

Portfolio effects, if the

portfolio is sufficiently diversified

Create value along the

entire production

chain

Individual farmers can still benefit

from portfolio cover

Portfolio composition needs to be known at time

of pricing

Marketing: talking about balance

sheet vs agricultural yield

How does the aggregator use the insurance benefits?

How does the aggregator handle situations where

there is no portfolio payout but losses have occurred at

micro level?

Challenges

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Clearly specify from the very beginning

who the beneficiary / policy

holder is

Educate aggregator on what is covered (portfolio) and what is not (micro level)

Assess early on whether the index risk period is

in line with e.g. the credit disbursement

process, otherwise risk of not knowing the

portfolio composition at the time of index

inception

Determine all relevant

stakeholders (aggregator, bank

etc.)

Lessons learnt

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Meso-level distribution is critical for ‒ scaling up agriculture/index insurance‒ most efficient and cost effective way of delivering

insurance by insurers and in reaching the last-mile.Consumer education at all levels is a critical component in order to ensure sustainability over the long runMeso level covers are a complement to micro products and can secure income along the entire agricultural value chainFor financial institutions group insurance like approaches can lower distribution costs and empower aggregators, while pure portfolio insurance does not seem to address the FI’s core business risks.  

Concluding thoughts

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Meso-level distribution: Opportunities and challenges

Presenter:Ulrich Hess

Senior AdviserGIZ

Presenter:Vijay KalavakondaFinancial Specialist

Global Index Insurance Facility

Presenter:Marcel KuettelVice President,

Swiss Re Corporate Solutions

Presenter:Israel Muchena

Technical DirectorHollard Mozambique

Moderator:Pranav PrashadTechnical Officer

Impact Insurance Facility

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Q&A