Tailoring Agricultural Insurance Products to Developing Countries Ramiro Iturrioz Senior Agriculture Insurance Specialist Insurance for the Poor The World Bank October, 2010 1
Agenda Risk and constraints in agriculture Context for agricultural insurance in developing countries Agricultural insurance products Other key issues for consideration Lessons learnt 2
Risk and Constraints in Agriculture Risk in agriculture Risks are uncertain events which cause loss Examples: weather, natural hazards, health, accident, strikes. Constraints in agriculture Constraints are predictable conditions that lead to low productivity and low income Examples: ineffective supply chains, access to finance and market, poor prices, lack of reliable input supply, low technology, rural roads, infrastructure,. Why is the distinction important? Risks may be insurable Constraints are not insurable but increase farmer vulnerability to losses Constraints are normally extremely high for agriculture in developing countries In the context of developing countries... requirement for appropriate insurance products and innovative distribution linkages insurance may supplement existing informal or formal risk coping mechanisms 3
Context for agricultural insurance in developing countries Agricultural insurers faces barriers Insurers lack rural networks, expertise, data Technically complex to insure crops and livestock Catastrophe risk exposures High transaction and loss assessment costs More profitable opportunities exist in commercial and urban areas Clients Small size, geographically spread Lack insurance awareness Lack capacity or willingness to pay premiums Lack incentives to insure if there is government disaster assistance Inadequate data and infrastructure Poor statistical base (crop production, risks, losses) Poor rural services including credit Difficult to establish distribution channels and linkages How to reach the farmers with a reliable and affordable agricultural insurance product in this context? 4
Agricultural insurance: product range Type of Product Payouts Availability A) Indemnity Based Agricultural Insurance (payouts based on the actual loss at farm level) Named Peril Percentage of Damage Widespread Multiple Peril Yield Loss Widespread b) Index based Agricultural Insurance (payouts based on an index measurement) Area-Yield Index based Area-yield Loss USA, India, and Brazil Weather Index based Weather Index payout scale India, México, Malawi,, USA NDVI Index based NDVI Index payout scale Mexico, Spain, Canada Livestock Mortality Index based Mortality index payout scale Mongolia Forestry Fire Index Insurance Ignition / burnt payout scale Canada, USA c) Crop Revenue Insurance (payouts based on yield measurement and crop prices) Crop Revenue Insurance (CRI) Yield and Price Loss Limited to USA The suitability of any product would depend on the type of agricultural activity, key peril exposures, data availability, farmer size, existence of delivery channels, and loss adjustment needs. 5
Traditional agricultural Insurance Products Indemnity based insurance products determine claim payments based on the actual loss incurred by the policy holder Two basic types of traditional agricultural insurance products: Named peril agricultural insurance products (Damage-based products) Multiple peril agricultural insurance products (yield-based products) Traditional agricultural insurance products provides ideal coverage to farmers Advantages Provides perfect coverage No basis risk problems. Suitable for idiosyncratic and/or systemic risks. Simple product/ easy to understand by the farmers. Disadvantages Moral hazard and Adverse selection problems High transaction and operational cost Requires expertise and trained personnel Difficult to tailor the product for different client levels Farmers affordability issues Preconditions Need information for premium rating purposes, including frequency and severity of covered perils and crop vulnerability curves, and information about yield history and farming practices at farm level for MPCI Traditional agricultural insurance products are difficult to implement in developing countries. 6
...can index based insurance fill the gap? An index insurance contract pays out based on the value of an index that is highly correlated with yields, and not on losses measured in the field. (e.g.:: rainfall, temperature, regional yield, NDVI,..) Index insurance has potential to reach lower income farmers compared to traditional agricultural insurance Index based insurance has advantages, BUT also disadvantages and preconditions its implementation. Advantages Overcomes moral hazard and Adverse selection problems Objective and transparent Provides timely payouts Low operational costs Allow to tailor the product for different client levels Disadvantages Provides imperfect coverage Potential mismatch between actual l losses at farm level and insurance payouts. High start up cost Requires local adaptation Not suitable idiosyncratic risks. Not suitable f or all types of crops Preconditions High correlation between losses and an the index Homogeneous cropping systems Availability and Accuracy of historical weather/yield data Requires special regulation Index based insurance offers certain advantages for its introduction in the context of developing countries, BUT the key is not only in the product... 7
...tailor agricultural insurance for different client levels. Micro level clients Meso level clients Macro level clients Index insurance retailed directly to farmers - intermediated through institutions with rural outreach Indexed portfolio insurance for rural financial institutions (incl. MFIs) that lend to poor farmers; or for processing companies which contract with farmers Insurance or indexed contingent credit line for governments or international organizations that provide safety nets for the poor. Assessment of risks and players in each supply chain can enable: Identification of entry points for product distribution and management Finding linkages which can allow bundling of insurance with other services 8
...explore efficient delivery channels. Micro-level insurance program Meso-level insurance program Insurer Insurer Data Policies, premiums, claims Policies, premiums, claims Input Distributor Policies, premiums, claims Policyholder is Aggregator (e.g. processor, bank) Data Policyholder is Farmer Farmers Aggregator sets the payout rules Aggregator/Distributor is a critical link 9
Insurance policy Premium and payouts...also need to explore organizational linkages. Example: a proposed structure for a pilot project for groundnuts in Senegal for rainfall index insurance Insurance supervisor Pilot committee Meteorological service CERAAS (drought research) Insurer(s) Technical support unit External TA CNCAS/credit organisations Premium and payouts Marketing, Promotion, Formation Asprodeb Centrale d Achat Producer organisations (OP). Farmers 10
Capacity building:...do not forget the capacity building. Underwriting and insurance management Claims management/internal systems Pricing Financial management and reinsurance Product design Loss adjustment Rural extension and education? Who can actually transfer know-how? Reinsurers Global insurance groups Consultants and practitioners Rural/micro-insurance/micro-finance associations/networks Identify missing links for capacity transfer: especially technical and rural development practitioners 11
Lessons learnt Agricultural insurance is not a panacea Can only enhance existing agricultural supply chains and businesses, not create them It can help support expansion in rural finance and agriculture It must go hand in hand with other investments such as extension services and infrastructure. No one-size-fits-all agricultural insurance product The suitability of any product will depend on the type of activity, key peril exposures, data availability, farmer size, existence of delivery channels, and loss adjustment needs. Sustainability and scalability will not be achieved unless operational hurdles can be overcome Robust product delivery channels to farmers, linkages to finance or supply chain with additional farmer products and services Local ownership through capacity building and technology transfer for all actors Strong local partners and incentives Just as important for scalability (if not more) than technical hurdles Investment in data and weather infrastructure Investment in training and capacity building for farmers and insurance companies. Synthesizing best practices for contract design, insurance and reinsurance Favourable regulatory framework 12
Thank you! Ramiro Iturrioz Senior Agricultural Insurance Specialist Insurance for the Poor Program GCMNB The World Bank riturrioz@worldbank.org 13