STEP 3: Developing Insurance Products at all Levels
Insurance against extreme weather events can be broadly distinguished between indemnity and index products. While indemnity products relate directly to damages and need claim verification, index or parametric products do not correlate with the losses: the payout is based on pre-defined triggers, either weather indexes (e.g. rainfall, wind speed, temperature) or area yield index (e.g. when realized county or province yield falls below a specified critical yield amount). Once the catastrophic event exceeds, for example, the defined wind speed, all insured persons receive a payout regardless of their losses.
Both product types have advantages and limitations, e.g.:
- Indemnity-based products compensate for all or parts of the damage or loss of the insured items as defined in the insurance policy. Claim verification after extreme weather events often takes a long time and can result in late payouts. While this may be acceptable for large commercial farmers and medium-scale enterprises, individual claim verification for smallholders and small businesses is administratively hardly feasible, extremely expensive and would result in un-affordable premiums.
- Index or Parametric products have the advantages of avoiding moral hazard, and expensive and time-consuming loss verification − especially when infrastructure is damaged after an extreme weather event − when it is challenged by the basis risk. This implies that insurance claims do not adequately reflect the losses incurred (explained below). However, for smallholders and small enterprises index products are the most feasible option because individual claim verification would not be manageable and affordable.
Key processes for product development at all levels, based on the demand study, contain the following:
- Developing and pre-testing a product ‘prototype’: A ‘prototype’ product needs to be developed with close cooperation between the insurance provider and potential customers, as well as delivery channels, and with the government (e.g. public meteorological institutes for access to national and international data, and MoA for harvest data when designing yield index).
- Refining the prototype and rolling out the final product under considerations of client value: due to the basis risk, the acceptance of index products can be enhanced by combining insurance with other services such as access to credit, suitable agricultural inputs (e.g. drought-resistant seeds, animal care packages and vaccines) and training/advisory services for enhanced agricultural practices along the value chain (information on market prices, early warning, or detailed weather forecasts).
- Selecting distribution channels: The demand or feasibility study identified suitable distribution channels, not only for inclusive insurance but also for indirect macro level products, as MoAs often lack the required institutional payout structures. If (the extremely) poor are beneficiaries, the social-safety-net structure of the ministry of social affairs could be used (assuming it works effectively). Voucher-based systems, as often used by social assistance programmes, could be further explored.
STEP 3: Developing Insurance Products at all Levels
Box 8: Product Options at all Levels
Micro level: Households and SMEs For households, examples of products include agricultural insurance to protect against drought or excessive rain (trigger: defined rainfall − for both products), products against typhoons (trigger: wind speed and precipitation).
Others include bundled products, in cooperation with agricultural input suppliers − whereby farmers receive insurance upfront in exchange for a percentage of the harvest at the end of the season. This product can be tied to access to credit.
EXAMPLE: PepsiCo India offers weather index insurance as part of its contract farming programme through the ICICI Lombard General Insurance Company. Farmers are insured against Late Blight Disease caused by high moisture resulting in severe losses of the potato crop. The premium for the index insurance is three to five per cent of the sum insured and the product is structured to ensure the coverage of losses of above 40 per cent of the total yield. Up to this point, farmers are enabled to cover losses through various DRM mechanisms. In addition, PepsiCo offers price incentives to the insured farmers e.g. on pesticides and fertilizers (MCII, 2016).
SMEs demand risk coverage, ranging from business interruption caused by late supply delivery or customer accidents to natural disasters, as well as suitable property and equipment products.
Meso level: Aggregators Index loan portfolio products reduce liquidity problems and enable MFIs to continue their lending business, which is particularly important after disasters when the credit demand increases significantly.
EXAMPLE: The for-profit company Agriculture and Climate Risk Enterprise Ltd. (ACRE) Africa is a service provider working with local insurers and other stakeholders in the agricultural insurance value chain. The Lending Institution Portfolio Cover insures the value of the entire financial institution's agricultural portfolio against non-repayment from weather-related events. It covers loans to farmers and operators like processors, agri-transporters and traders in the agricultural value chain. Key benefits for financial institutions include reduced losses due to default, reduced provisions for bad debts, increased lending and re-enforced risk management (MCII, 2016).
Index products for harvest portfolios of business associations (e.g. coffee boards), or mixing index products with indemnity-based payouts to members of business associations (minimizing the basis risk).
Macro level: Governments Sovereign index insurance reduces liquidity problems and enables governments to quickly start relief activities and promote resilient recovery (e.g. CCRIF, PCRAFI). If combined with contingency plans, the extreme poor will benefit from this indirect insurance (e.g. African Risk Capacity [ARC]).
Public or semi-public insurance providers can play an important role, such as the government-owned insurer Philippine Crop Insurance Corporation (PCIC) that operates with a market-based and social mandate to provide weather-related insurance coverage for various agricultural producers, including subsidized crop and livestock products for subsistence farmers and market-based agricultural SMEs.
Indemnity products for covering damaged public infrastructure and assets (buildings): though the example of the Indonesian Maipark (re)insurer is not related to agriculture, it illustrates how governments can support insurance coverage against extreme weather events in a way that could be expanded to other sectors such as agriculture.
EXAMPLE: The Indonesian Ministry of Finance in collaboration with the General Insurance Association of Indonesia established Maipark, the Indonesia Earthquake Reinsurance Pool, to provide affordable insurance products (e.g. by setting price benchmarks for the earthquake products of local insurers) for houses, offices, shops, factories, communication towers and schools against earthquakes, volcanic eruptions, tsunamis and business disturbances. Maipark catastrophe reinsurance provides obligatory reinsurance for all non-life insurers and offers voluntary catastrophe insurance to e.g. municipalities.
Reinsurance is crucial for extreme weather events causing high losses. It can reduce the costs of agricultural risk insurance products. Reinsurance provided through the government can encourage insurers to enter the market.
Guiding Questions and Tools
How can suitable insurance products that create client value be developed?
Is relevant historical and other socioeconomic and loss data available (e.g. weather data ideally of 20-30 years, yield data, information on farmers and agricultural private sector value chain)?
Does the strategy reflect the specific capacities and operations required for all-inclusive agricultural/climate risk insurance (e.g. participatory approaches, non-traditional delivery channels, dialogue with a broad range of actors)?
IFAD/WFP (2011): Weather Index-based Insurance in Agricultural Development – A Technical Guide
World Bank (2011): Weather Index Insurance for Agriculture: Guidance for Development Practitioners
IFAD (2017): Remote sensing for index insurance − Findings and lessons learned for smallholder agriculture
IAIS (2014): A Core Curriculum for Insurance Supervisors. Regulation and Supervision Supporting Inclusive Insurance Markets − Basic-Level Module
Munich Re’s agriculture and weather risk transfer solutions
Munich Re's NATHAN Risk Suite (Natural Hazards Assessment Network) e.g. enables precise pricing of products, enhances portfolio management and claims management
Does the selected insurance product or scheme address the most severe risks for farmers or other poor people, including the needs of women (e.g. low-frequency/high-severity events, or high-frequency/low-severity events)?
What is the target market for the insurance programme (e.g. in percentage of farmers/smallholder farmers, agricultural GDP, share of specific value chains)?
GIZ/IFC/a2ii, and others (2017): Mainstreaming Gender and Targeting Women in Inclusive Insurance: Perspectives and Emerging Lessons, A Compendium of Technical Notes and Case Studies
A2ii (2013): Country-level microinsurance development process: operationalizing the action plan
Public works-linked insurance (R4)
How sustainable is the business model of the insurance products?
What is the role of public insurance providers?
Munich Re, Swiss Re, insurance brokers (e.g. AON Benfield, Guy Carpenter, Milliman), DHI modelling agency.