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
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