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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/ comments
here even while the
presentati...
How can index insurance be bundled
with other financial and non financial
services
3
Presenter:
Michael R. Carter
Professo...
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 bene...
Bundling Insurance with Credit to
Crowd-in Farmer Investment
6
Michael Carter
I4 Index Insurance Innovation Initiative
Uni...
Logic of bundling
7
By itself, agricultural insurance offers reduction in income
variability in return for some reduction ...
How & Where Bundling Can Work
8
A “bundled” contract with credit can be treated as one in
which the creditor has first cla...
How & Where bundling Can Work
9
In low collateral environments, standalone insurance contracts will have
minimal impact on...
Positive Impact!
10
For the 2011-12 crop year, a dual trigger area yield interlinked
contract (with very low failure proba...
Impact Results (LATE Estimates) from
Mali
11
Area Planted
(hectares)
Cotton
Production
(kg)
Borrowing
(‘000 CFA)
Fertilize...
It Can Work, but …
12
These ex-ante behavioural impacts require that farmers
know they are insured and will receive some p...
NAIS and WBCIS mandatory schemes bundled
with agriculture loans from banks for listed crops
Helped in scaling index insura...
Bundling Index Insurance With Other
Financial and Non-Financial Services
14
David Muigai
Actuarial Officer
ACRE
ACRE Africa in the Insurance Value Chain
15
Acre Africa is a pioneer in
developing index insurance
for agriculture in East...
How it works
16
Financial Services
Banks
MFIs
SACCOs
Non Financial Services
Farmer Groups
Seed Companies
Agrochemical comp...
How it works
17
CHALLENGES
Cost to farmer Financial literacy
Admin. costs Basis risk
Weather data Retention
Triggers and d...
Mobile Phone Aide
18
Get farm location from SMS
and monitor satellite imagery
for that location
Insurance in
the bag
Germi...
Growth stats 2009-2014
19
2014
11,650,523
233,795
2014: Scaled the
mobile-enabled
replanting
guarantee
Mandatory
Voluntary
Poll: Bundling can be an effective
mechanism for scaling up when it is
20
PlaNet Guarantee: Bundled products
21
François-Xavier Albouy
Vice President
PlaNet Guarantee
Bundled products – PlaNet Guarantee
22
In OECD countries,
insurance bundled
products are designed
to:
‒ Minimize
distribut...
Bundled products – PlaNet Guarantee
23
Income of rural
populations are
sensitive to:
‒ Climate conditions:
• Yield
• Crop ...
Global climate index
24
Price of production may
vary rapidly due to
climate conditions in
other regions:
‒ Price of rice
‒...
High volatility in prices
25
*source: de Nicola, Francesca et al. « Co-Movement of Major Commodity Price Returns » Finance...
Health and climate
26
In practice, healthcare expenses are linked
with income in crop
Protecting health insurance schemes ...
Orange Money Epargne or ‘’SINI TÔNO’’ bundles a saving
contract with a death and disability insurance + health
insurance f...
Healthcare insurance designed to vulnerable population,
especially in rural areas:
‒ A network of healthcare providers fro...
Planet Guarantee creates products for aggregators to increase
their profitability
Banks , Investors and MFIs
‒ To lend mor...
SANASA insurance Co. in Sri Lanka offers Weather Based
index insurance bundles Personal accident and
hospitalisation cover...
Bundling Index Insurance With Other
Services
31
Shadreck Mapfumo
Senior Financial Specialist
World Bank Group
Successful Examples of Bundling
Insurance With other services
32
Third Party Car Insurance / Annual Road Licence
Property ...
Key Drivers Of Successful Bundling For
Index Insurance
33
Target Market Key Drivers
Agribusinesses Increased customer loya...
Practical Considerations
34
Premium level –Index Insurance premiums much higher than
traditional
Cost of bundling
Source o...
Sample Risk Metrics for client
engagement
35
With loans and credit
With seeds and fertilizers
Providing complementary value added services
With other insurance covers
...
Pricing is key, especially when insurance bundled with
already expensive agricultural credit
Evaluating value proposition ...
Bundling agriculture index insurance
with financial and non financial services
38
Presenter:
Michael R. Carter
Professor a...
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Webinar on Bundling agriculture index insurance with financial and non financial services

The WBG's Global Index Insurance Facility, the USAID and BASIS/I4-sponsored Global Action Network (GAN) and the ILO's Impact Insurance Facility organised a webinar to look into the question "How can index insurance be bundled with other financial and non financial services". This webinar featured speakers from global organizations who shared experiences and discussed which services and activities in the agriculture value chain are most aligned for bundling. It explored mechanisms and issues in bundling, and also looked into the possible impact of bundling on pricing & off-take of index insurance and measures of tracking it.

Speakers: François-Xavier Albouy (Vice President PlaNet Guarantee), Michael R. Carter (Professor and Director BASIS Research Program, University of California, Davis), Shadreck Mapfumo (Senior Financial Specialist World Bank Group) and David Muigai (Actuarial Officer ACRE).

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Webinar on Bundling agriculture index insurance with financial and non financial services

  1. 1. Bundling agriculture index insurance with financial and non financial services
  2. 2. Interfacing with the webinar system 2 Tell us what you think. Type your questions/ comments here even while the presentation is going on. Our presenters are shown here This shows all current participants Polls will also be opened during the webinar – participate by clicking on your answers
  3. 3. How can index insurance be bundled with other financial and non financial services 3 Presenter: Michael R. Carter Professor and Director BASIS Research Program University of California, Davis Presenter: François-Xavier Albouy Vice President PlaNet Guarantee Presenter: David Muigai Actuarial Officer ACRE Presenter: Shadreck Mapfumo Senior Financial Specialist World Bank Group Moderator: Pranav Prashad Impact Insurance Facility 3
  4. 4. YES NO Poll: Do you as practitioners bundle insurance with other services 4
  5. 5. 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
  6. 6. Bundling Insurance with Credit to Crowd-in Farmer Investment 6 Michael Carter I4 Index Insurance Innovation Initiative University of California, Davis, USA
  7. 7. Logic of bundling 7 By itself, agricultural insurance offers reduction in income variability 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 is some probability that the contract will fail One solution to this trade-off is to link insurance with the expansion of economic opportunity See in a moment that an interlinked credit-insurance contract in Mali led to a reduction in income variability AND a 25% increase in area planted & investment in cotton
  8. 8. How & Where Bundling Can Work 8 A “bundled” contract with credit can be treated as one in which the creditor has first claim on insurance pay-outs to cover farmers’ debt obligations Such bundling makes most sense in environments where loans are under-collateralized When loans are under-collateralized, lender bears drought and other risk Often the case in value chain finance where a standing crop partially collateralizes the loan
  9. 9. How & Where bundling Can Work 9 In low collateral environments, standalone insurance contracts will have minimal 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 the lender reduces interest rates on interlinked loans Note also that even interlinked insurance will have zero impacts in certain risk environments
  10. 10. Positive Impact! 10 For the 2011-12 crop year, a dual trigger area yield interlinked contract (with very low failure probability) was offered to Village-based cotton cooperatives Farmers enjoyed ready access to credit via monopsonistic value chain (CMDT) They also faced substantial risk, which they traditionally managed by restricting area planted in cotton Results of a randomized controlled trial revealed that insured farmers expanded borrowing, input purchase and expected output and income by about one third!
  11. 11. Impact Results (LATE Estimates) from Mali 11 Area Planted (hectares) Cotton Production (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
  12. 12. It Can Work, but … 12 These ex-ante behavioural impacts require that farmers know they are insured and will receive some protection A danger of mandatory insurance is that these conditions will not be met Same problem with pure portfolio insurance for the lender Need to think hard about our development objectives as we design contacts A similar, but earlier contract with small-scale cotton farmers in Peru met with more modest uptake
  13. 13. NAIS and WBCIS mandatory schemes bundled with agriculture loans from banks for listed crops Helped in scaling index insurance to over 25 million farmers Private sector initiative “mainstreamed” with govt. support Other credit linked examples: India growth story 13
  14. 14. Bundling Index Insurance With Other Financial and Non-Financial Services 14 David Muigai Actuarial Officer ACRE
  15. 15. 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.
  16. 16. How it works 16 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
  17. 17. How it works 17 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
  18. 18. Mobile Phone Aide 18 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-Pesa Farmer can replant and harvest the same season SMS unique code to short code Opens bag on planting, finds card inside → → → ↓ ←←
  19. 19. Growth stats 2009-2014 19 2014 11,650,523 233,795 2014: Scaled the mobile-enabled replanting guarantee
  20. 20. Mandatory Voluntary Poll: Bundling can be an effective mechanism for scaling up when it is 20
  21. 21. PlaNet Guarantee: Bundled products 21 François-Xavier Albouy Vice President PlaNet Guarantee
  22. 22. Bundled products – PlaNet Guarantee 22 In OECD countries, insurance bundled products are designed to: ‒ Minimize distribution costs ‒ Increase customer retention ‒ Optimize distribution channels In emerging countries bundled products have different aims: ‒ Protect income of vulnerable populations ‒ Optimize contact with clients
  23. 23. Bundled products – PlaNet Guarantee 23 Income of rural populations are sensitive to: ‒ Climate conditions: • Yield • Crop prices ‒ Exchange Rates ‒ Health situation of the households and in the community Bundled Index insurance may cope with all these issues: Index crop insurance is already protecting rural housholds against climatic related events Derivative products should in the future protect rural population against global climatic events Purchasing power in healthcare is sensitive to income
  24. 24. Global climate index 24 Price of production may vary rapidly due to climate conditions in other regions: ‒ Price of rice ‒ Price of maize ‒ Price of coffee Often the medium term trend is positive (coffee, cocoa…) even if yearly volatility is high A matrix of covariance might provide a modelization of variations in price Financial products should be designed to protect households Already future prices and derivative products effectively protect the agro-industry operators
  25. 25. High volatility in prices 25 *source: de Nicola, Francesca et al. « Co-Movement of Major Commodity Price Returns » Finance and Private Sector Development Unit, The World Bank
  26. 26. Health and climate 26 In practice, healthcare expenses are linked with income in crop Protecting health insurance schemes with basic index products might be feasible
  27. 27. Orange Money Epargne or ‘’SINI TÔNO’’ bundles a saving contract with a death and disability insurance + health insurance focused on severe pregnancy risks. SINI TÔNO: “Profits tomorrow!” 27
  28. 28. Healthcare insurance designed to vulnerable population, especially in rural areas: ‒ A network of healthcare providers from the GP’s to hospitalization has been contracted. ‒ Selling period is linked with the harvest period i.e. fits with the new rhythm of underwriting cycle of crop index insurance by PG in Western Africa… ‒ 80% of what people are effectively paying (capped at XOF 1,000,000) ‒ outpatients, medical imaging, surgery, hospitalisations, drugs, ambulance costs… Premium: XOF 60,000/ y (2 adults+ 2 children) Healthcare in rural areas: 28
  29. 29. Planet Guarantee creates products for aggregators to increase their 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 fidelization OLAM (cattle, health and crop insurance in Ivory Coast) Aggregator approach 29
  30. 30. SANASA insurance Co. in Sri Lanka offers Weather Based index insurance bundles Personal accident and hospitalisation covers Helped customers’ understanding of insurance India & Zambia: Weather forecasts and agriculture advisory services provided to insured farmers Bundling multiple insurance covers and other services 30
  31. 31. Bundling Index Insurance With Other Services 31 Shadreck Mapfumo Senior Financial Specialist World Bank Group
  32. 32. 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
  33. 33. 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
  34. 34. Practical Considerations 34 Premium level –Index Insurance premiums much higher than traditional Cost of bundling Source of premium financing Pitching to the client : Health balance between qualitative and quantitative content. ₋ Client Risk Tolerance = Maximum NPL =4% ₋ 10 year Historical NPL data for 8 geographical areas ₋ 10 year historical payouts for 8 geographical areas.
  35. 35. Sample Risk Metrics for client engagement 35
  36. 36. 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
  37. 37. Pricing is key, especially when insurance bundled with already expensive agricultural credit Evaluating value proposition for each key stakeholder in the bundling process is critical for a long term sustainable bundling process Affordability is a critical element when designing bundled products Delivering index insurance as a bundled product to farmers is one of the key strategies to scale up Concluding thoughts 37
  38. 38. Bundling agriculture index insurance with financial and non financial services 38 Presenter: Michael R. Carter Professor and Director BASIS Research Program University of California Presenter: François-Xavier Albouy Vice President PlaNet Guarantee Presenter: David Muigai Actuarial Officer ACRE Presenter: Shadreck Mapfumo Senior Financial Specialist World Bank Group Moderator: Pranav Prashad Impact Insurance Facility 38

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