The Potential for Scale and Sustainability in Weather Index Insurance

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THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE FOR AGRICULTURE AND RURAL LIVELIHOODS Box 3. Start-up and scaling up of weather index-based insurance Minimum conditions for start-up • An enabling environment, including the effective legal and regulatory system to enforce contracts and supervise insurance, and in which subsidized risk-management options do not crowd out market-driven products; • Adequate infrastructure (e.g. weather stations) to provide unbiased weather data and minimize basis risk; • Credible, cost-effective and commercially viable national insurers, whose payments are guaranteed by a credible authority, and intermediaries that market and package insurance with relevant inputs, technology, agronomic and weather information, and/or financial services; • Coverage of the ‘right’ risks (i.e. infrequent, but high-impact events that threaten livelihoods or cause traditional coping mechanisms to fail), using an index that captures that risk well, minimizing basis risk; • Availability of cost-effective products, for which clients find that the benefits of transferring risk are greater than the costs. Conditions for sustained scaling up • Payouts that are based on objective, transparent, verifiable and understandable criteria, and which reach clients soon after the insured event; • Trusted, credible intermediaries and insurers; • Tangible coverage. People need to be able to relate to the expected benefits (payouts in certain cases) of the contractual relationship; • Transparency and understanding. Farmers have a good understanding of their risk exposure, and the function and benefits of a risk transfer instrument; • Adequate and sustained demand for risk transfer products; • Affordable, high-value products, and new ones over time as conditions evolve and farmers develop their businesses; • Smart subsidies for disaster-relief insurance products, minimizing costs by adjusting the targeting to match changing circumstances (i.e. the number and types of people who remain vulnerable as the local economy develops). Any subsidies used to launch development index insurance products should be phased out over time; • Access to adequate reinsurance arrangements to prevent insurers from defaulting in years when large payouts are made. With development index insurance, products should catalyse access to credit and other financial services, technology or new markets, and they should help generate significant additional income. These value-added products, which complement existing risk-management strategies, can be attractive even without subsidies. The additional income created must be substantial, that is, it should be more than just enough to cover the insurance premium. Products must be affordable and cover the most relevant risks with minimal basis risk, and there must be opportunities to finance the premium (e.g. credit, savings or other contractual arrangements with input suppliers or agricultural producers in contract farming). 37
38 CHAPTER 3 KEY DRIVERS OF SUSTAINABILITY AND SCALABILITY OF WEATHER INDEX INSURANCE Ideally, all products should constitute part of a wider, income-enhancing package of services: India – PepsiCo. This index insurance programme was designed to cover potato crop losses due to late blight disease, which in turn is associated with weather events that can be indexed. The insurance comes with credit and a market contract, and it offers substantial income gains to participating farmers. The programme states the insurance premium and benefits clearly, and it integrates the premium payment into the overall package (Case Study 2). Malawi – tobacco. Among the 350,000 smallholders who grow tobacco, less than 15 per cent currently have access to formal credit, which is widely needed to buy key inputs for tobacco production. As weather-related risks are the main impediment to local bank lending, the World Bank’s Commodity Risk Management Group (CRMG) 9 joined with local banks, insurance companies and contract farming companies to provide index insurance that covers the value of the input loan, not the crop. If there is a drought, the insurance payout repays part of the loan costs. By buying the insurance, farmers can access credit, obtain modern inputs and receive production advice – and thus increase their production and incomes. India – IFFCO Tokyo General Insurance Company (ITGI). ITGI offered insurance through its parent company’s fertilizer programme (Indian Farmers Fertiliser Cooperative – IFFCO) and used its rural network for distribution. This unusual alliance leveraged cost-efficient delivery channels to cross-sell insurance with fertilizer and seed, two standard farm purchases. In this partnership, ITGI provides technical advice, product education, training and marketing skills to the secretaries and staff of member cooperatives to enable them to sell the insurance products (Case Study 5). Programmes that did not offer a wider range of services faced additional problems: India – BASIX. Working together, ICICI Lombard, the World Bank, International Finance Corporation (IFC) and BASIX were the first to successfully launch index insurance products in the country. Unlike the examples above, however, the BASIX insurance programme is not linked to credit, despite this being a key constraint on growth for many smallholders. The programme provides credible insurance against drought and excess rainfall, is reasonably priced and is delivered through an established banking network that reaches small farms. However, the number of contracts sold has remained disappointingly low, and the scheme may not be sustainable. BASIX may introduce credit-linked weather insurance in the future (Case Study 5). 9 Now the Agriculture Risk Management Team.
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Contacts IFAD Francesco Rispoli f.r
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The Potential for Scale and Sustainability in Weather Index Insurance

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