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 effort to educate clients on the importance and relevance of index insurance was one of the factors that contributed to the very limited achievements of the pilot programme (Case Study 8). Graft onto existing, efficient delivery channels, engaging the private sector from the beginning While it is technically feasible to develop index insurance products, the operational challenges of reaching end-users can be enormous. Insurers rarely have their own rural distribution networks, but successful pilots have used existing channels that already reach the target group. Through farmers’ organizations and other aggregators, it is possible to reach large numbers of clients more cost-effectively than reaching out to them individually. Of course, to integrate index insurance into a supply chain successfully, the chain itself must be working, efficient, and must involve strong commercial partners. Insurers also rarely have their own rural agents; they must typically rely on intermediaries to sell and manage the insurance with farmers. These intermediaries need to be efficient providers, trusted institutions, and available and responsive to farmers’ needs. Typically, farmers lack both the capital to pay premiums and an incentive to spend scarce resources on forward-looking risk-management tools. One way around this problem is to bundle access to index insurance with other products and services, which may help reduce costs and align incentives. When insurance is tied to credit or farm inputs, the credibility of the supply system affects the perception of the entire package. Partners should be selected carefully – with confirmation that they have the commitment and capacity to follow through on their agreements. It is also important to involve private-sector players from the beginning to contribute to product research and design, build local ownership and enhance sustainability. Finding a local insurer motivated to open a new line of business in agriculture is essential to the success and sustainability of index insurance. Peru – area-based yield insurance. In 2008, La Positiva joined with Caja Señor de Luren (Caja) to develop an area-yield index-based insurance programme for cotton farmers in the Pisco Valley. Caja had the leading agricultural microfinance credit portfolio in the region, and, through this partnership, La Positiva gained access to well-established distribution channels. Caja also benefited from the arrangement, as those who signed onto the index insurance programme became more lucrative customers. Caja was able to increase its credit portfolio and offer loans to more cotton growers. Malawi – AllianceOne Tobacco. AllianceOne is a leaf tobacco merchant with a wellfunctioning supply chain. It leverages this chain to offer index insurance to its farmers. AllianceOne provides a wealth of products and client services, including training, short-term cash advances, quality control, arranging financing and guaranteeing loans; and it helps small-scale farmers break into the tobacco value chain. In order to participate, smallholders must open individual bank accounts 43
44 CHAPTER 3 KEY DRIVERS OF SUSTAINABILITY AND SCALABILITY OF WEATHER INDEX INSURANCE with Opportunity International Bank of Malawi (OIBM). In the AllianceOne weather insurance pilot, 425 hectares were insured, with payout at the end to OIBM. Ethiopia. NISCO works with two of the main farmer unions that together reach approximately 60,000 clients. The unions provide farmers with inputs and pay the farmers’ premiums up front. The union can sell the produce, deduct the premium and input costs from the revenue, and then pay farmers the balance. Though this sounds like a straightforward approach that could be appealing to farmers, only about 10 per cent of union members sell through the union (Case Study 3). Other examples. One groundbreaking initiative in India was possible because BASIX, the microfinance and livelihood support institution, was already a trusted partner of farmers’ groups. In another Indian example, Tokyo Marine, a Japanese insurer, took the unusual step of establishing a joint venture with IFFCO to gain access to farmers. In Brazil, two input suppliers, Syngenta and Monsanto, and the Brazilian AgroBrasil programme cross-sell inputs and index insurance coverage. Many other examples – including the Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand, INISER in Nicaragua, AIC in India and NASFAM in Malawi – link, or at least cross-sell, insurance with credit, and hence distribute their insurance through existing networks (Case Studies 5 and 9). Programmes that do not utilize existing delivery channels face an uphill battle: Malawi – NASFAM. An index insurance programme was initiated by CRMG to cover groundnut producers in 2005, and then maize growers in 2006. Though the weather insurance product provided protection against weather risk, side-selling, done in part to avoid loan repayment, was a problem, exacerbated by gaps and inefficiencies within the supply chain. Although the insurance scheme offered effective risk management and increased farmers’ access to formal credit, the inefficient delivery channel eventually stalled the programme. Access international risk-transfer markets Reinsurance support is critical for any meaningful index insurance development, and it is a crucial condition for scaling up. Eighteen of the 36 total index insurance programmes reviewed have been reinsured, representing 2.5 million cumulative policies, whereas products without reinsurance have sold a mere 9,500 cumulative policies. Reinsurance itself can be a business driver, because reinsurers are ready to take on a significant amount of the risk. This practice allows insurers to earn commissions without tying up capital – unlike in typical insurance where reinsurers require retention levels of at least 15 per cent of the risk to avoid moral hazard. The objective, third-party nature of weather index insurance makes very high levels of reinsurance possible.
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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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