Richard Leftley - Risk Mitigation-revised
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Powering Innovations in Microfinance
Exploring Risk Mitigation Instruments in Agriculture Lending
Richard Leftley President & CEO Micro Insurance Agency
Powering Innovations in Microfinance
The poor do not buy insurance Premiums (in USDmn) 2006
Premiums in % of GDP 2006
Premiums per capita (in USD) 2006
North America
$1,258,301
8.67%
$3,804.0
Europe
$1,484,881
8.27%
$1,745.7
$800,819
6.63%
$205.0
Middle East and Central Asia
$18,901
1.37%
$62.5
Africa
$49,667
4.77%
$53.6
$1,443
1.48%
$17.2
World
$3,723,412
7.52%
$554.8
Industrialised countries
$3,390,180
9.18%
$3,362.2
$333,231
2.69%
$59.8
Asia
The Philippines
Emerging markets
Source: Swiss Re, Economic Research & Consulting, sigma No. 4/2007
Powering Innovations in Microfinance
Client Demand: Chutes & Ladders The poor face huge risk They seek to mitigate risk often informally Informal mechanisms are poor value and insecure Insurance is safety net 24% of people who are admitted to hospital in India leave destitute
Powering Innovations in Microfinance
Supply from insurers is available • Commercial insurance companies are interested in this market • They need some help accessing it • Life insurance is especially available • Crop and health harder to secure in each market: need global reinsurers
Powering Innovations in Microfinance
So what’s missing? • Seems there is strong demand and supply • Insurers cannot close the ‘last-mile’ alone • Clients need help understanding insurance • Requirement for guidance on product development; especially in health and crop • Market needs an intermediary to help with distribution and client education
Powering Innovations in Microfinance
So what’s missing? • Seems there is strong demand and supply • Insurers cannot close the ‘last-mile’ alone • Clients need help understanding insurance • Requirement for guidance on product development; especially in health and crop • Market needs an intermediary to help with distribution and client education
Powering Innovations in Microfinance
Micro Insurance Agency • Micro Insurance Agency established in 2005 but project started 2002 via Opportunity • Currently serving 3,500,000 lives globally with life, health, asset and crop index • Gates Foundation grant; $25m over 5 years º º
Expand into 11 new countries Serve 25m people by 2012 – life, health, crop
Powering Innovations in Microfinance
Current MIA Footprint
ASIA AFRICA AMERICA’S Mexico Columbia Honduras
Zambia Malawi Uganda Ghana Tanzania Zimbabwe Mozambique
India Philippines Indonesia
Powering Innovations in Microfinance
Making insurance work for the poor Risk Carrier
Insurers – local and multinational Reinsurers – especially on crop
BPO
Front Office MFI’s, SACCO’s, Susu, VSLA –
Back Office
from most major networks
Systems
Aid Agencies – such as child sponsorship and disaster reduction Retail – white label, mobile phone kiosks
TPA – claims mgmt
Brokerage
Product Design Training Education
Powering Innovations in Microfinance
Malawi Weather Index Insurance • Joint World Bank / MIA project • Zero credit available in 2004 to farmers • Developed ground nut, maize, tobacco etc • Loans for as little as $100 per acre increase yields by more than 100% • Today over $7m in credit available
Powering Innovations in Microfinance
Traditional vs weather index Multi-peril Crop Insurance y High Administrative Costs y Moral Hazard y Adverse Selection
Index-Based Weather Insurance y Use weather parameter as a proxy for damage y Objective triggers and structured rules for payouts y Improved correlation between need and provision
Powering Innovations in Microfinance
Risks faced by farmers Weather Related: Non Weather Related: y Drought y Displacement y Typhoon y Civil Strife y Flood y Economic Decline y Frost y Price Collapse y Hail y Pests Insurance only covers causes captured by index
Powering Innovations in Microfinance
Drought Index Products • Use historic rainfall at a weather station to develop index • All farmers growing rice within 20km radius can be included • Each weather station and crop has a different price based on history & crop water requirement
Powering Innovations in Microfinance
Drought product design Period for crop’s growth is divided into three phases. For each phase, the crop’s water requirement for growth is identified. Farmers will be paid a calculated amount for each millimeter deficit in the crop’s water requirement. Crop growth phase
Length of growth
Water requirement (mm) (Approximate Values)
Vegetative phase
40 days
250
Reproductive phase
40 days
250
Ripening phase
40 days
130
Powering Innovations in Microfinance
Drought index – claim example • As an example, a farmer with $1000 covered for drought • If the calculated amount for each mm in deficit is $5 • Example rainfall during the three phases are of the drought insurance cover are, y Phase One:
210mm
y Phase Two:
248mm
y Phase Three:
129mm
• Payout is (250-210x5)+(250-248x5)+(130-129x5) = $415
Powering Innovations in Microfinance
Typhoon product design • The amount of insurance payout is based on the: y Wind speed of the typhoon y The distance from the farmer’s field to the typhoon eye
• Wind speed and location of typhoon provided by the Japanese Meteorological Authority (JMA) • The location of the farmer is calculated by using GPS technology and is added to the insurance policy document
Powering Innovations in Microfinance
Typhoon payouts The payout to the farmer is based on: y wind speed of the typhoon and y distance from the farmer’s field to the typhoon track
A farmer with sum assured Wind speed factor Distance payout factor The payout for any typhoon =
=S =W =D SxWxD
Payout is restricted to 100% of the sum assured over the growing season.
Powering Innovations in Microfinance
Typhoon wind speed factors Using Saffir Simpson hurricane scale Wind speed (mph)
Wind speed Payment factor (estimates) (W)
74 to 95
25%
96 to 110
55%
110 to 130
75%
131 to 155
100%
> 156
100%
Target premiums approx 5% in most regions for given percentages – (will adjust for final product)
Powering Innovations in Microfinance
Typhoon distance factor •
Farmer’s location is calculated by GPS location measurement (using latitude and longitude) Typhoon track data from JMA has – latitude, longitude and wind speed We can measure distance from farmer to the typhoon using this information Distance from farmer to typhoon
Distance payment factor (D)
<100km
100%
100km<150km
((150-Distance)/50)%
>150km
0%
Powering Innovations in Microfinance
Typhoon claim payout • •
Farmer’s location: GPS= Lat:16.571, Long:122.532 Farmer’s sum assured = $1000
•
The farmer is 70km from the typhoon track and the storm is a category 2 storm (99 mph)
•
In this case; D=100%, W=55% Payout = SxWxD = $1000x55%x100% = $550
•
Powering Innovations in Microfinance
Product Implementation Data
International In-Country
Data
Reinsurance Company
Reinsurance treaty
Insurance Company/Association Bulk weather insurance contract
Met Office
Data
Product Retailer: Bank/MFI/Cooperative/Input Supplier (Bundled) weather insurance contract Data
Farmer/Farmer Groups
Powering Innovations in Microfinance
International Partners Supporting Philippine Operations Swiss Re Paris Re Deloite & Touche LLP Bill & Melinda Gates Foundation Levi Strauss Foundation
Powering Innovations in Microfinance
Weather insurance is not a panacea y It can enhance existing agricultural supply chains and businesses, not create them y It can help support expansion in rural finance y There are issues with basis risk y Regulatory issues currently exist
Powering Innovations in Microfinance
Thank you! Richard Leftley, President & CEO Micro Insurance Agency richard.leftley @microinsuranceagency.com www.microinsuranceagency.com
Exploring Risk Mitigation Instruments in Agriculture Lending
Richard Leftley President & CEO Micro Insurance Agency
Powering Innovations in Microfinance
The poor do not buy insurance Premiums (in USDmn) 2006
Premiums in % of GDP 2006
Premiums per capita (in USD) 2006
North America
$1,258,301
8.67%
$3,804.0
Europe
$1,484,881
8.27%
$1,745.7
$800,819
6.63%
$205.0
Middle East and Central Asia
$18,901
1.37%
$62.5
Africa
$49,667
4.77%
$53.6
$1,443
1.48%
$17.2
World
$3,723,412
7.52%
$554.8
Industrialised countries
$3,390,180
9.18%
$3,362.2
$333,231
2.69%
$59.8
Asia
The Philippines
Emerging markets
Source: Swiss Re, Economic Research & Consulting, sigma No. 4/2007
Powering Innovations in Microfinance
Client Demand: Chutes & Ladders The poor face huge risk They seek to mitigate risk often informally Informal mechanisms are poor value and insecure Insurance is safety net 24% of people who are admitted to hospital in India leave destitute
Powering Innovations in Microfinance
Supply from insurers is available • Commercial insurance companies are interested in this market • They need some help accessing it • Life insurance is especially available • Crop and health harder to secure in each market: need global reinsurers
Powering Innovations in Microfinance
So what’s missing? • Seems there is strong demand and supply • Insurers cannot close the ‘last-mile’ alone • Clients need help understanding insurance • Requirement for guidance on product development; especially in health and crop • Market needs an intermediary to help with distribution and client education
Powering Innovations in Microfinance
So what’s missing? • Seems there is strong demand and supply • Insurers cannot close the ‘last-mile’ alone • Clients need help understanding insurance • Requirement for guidance on product development; especially in health and crop • Market needs an intermediary to help with distribution and client education
Powering Innovations in Microfinance
Micro Insurance Agency • Micro Insurance Agency established in 2005 but project started 2002 via Opportunity • Currently serving 3,500,000 lives globally with life, health, asset and crop index • Gates Foundation grant; $25m over 5 years º º
Expand into 11 new countries Serve 25m people by 2012 – life, health, crop
Powering Innovations in Microfinance
Current MIA Footprint
ASIA AFRICA AMERICA’S Mexico Columbia Honduras
Zambia Malawi Uganda Ghana Tanzania Zimbabwe Mozambique
India Philippines Indonesia
Powering Innovations in Microfinance
Making insurance work for the poor Risk Carrier
Insurers – local and multinational Reinsurers – especially on crop
BPO
Front Office MFI’s, SACCO’s, Susu, VSLA –
Back Office
from most major networks
Systems
Aid Agencies – such as child sponsorship and disaster reduction Retail – white label, mobile phone kiosks
TPA – claims mgmt
Brokerage
Product Design Training Education
Powering Innovations in Microfinance
Malawi Weather Index Insurance • Joint World Bank / MIA project • Zero credit available in 2004 to farmers • Developed ground nut, maize, tobacco etc • Loans for as little as $100 per acre increase yields by more than 100% • Today over $7m in credit available
Powering Innovations in Microfinance
Traditional vs weather index Multi-peril Crop Insurance y High Administrative Costs y Moral Hazard y Adverse Selection
Index-Based Weather Insurance y Use weather parameter as a proxy for damage y Objective triggers and structured rules for payouts y Improved correlation between need and provision
Powering Innovations in Microfinance
Risks faced by farmers Weather Related: Non Weather Related: y Drought y Displacement y Typhoon y Civil Strife y Flood y Economic Decline y Frost y Price Collapse y Hail y Pests Insurance only covers causes captured by index
Powering Innovations in Microfinance
Drought Index Products • Use historic rainfall at a weather station to develop index • All farmers growing rice within 20km radius can be included • Each weather station and crop has a different price based on history & crop water requirement
Powering Innovations in Microfinance
Drought product design Period for crop’s growth is divided into three phases. For each phase, the crop’s water requirement for growth is identified. Farmers will be paid a calculated amount for each millimeter deficit in the crop’s water requirement. Crop growth phase
Length of growth
Water requirement (mm) (Approximate Values)
Vegetative phase
40 days
250
Reproductive phase
40 days
250
Ripening phase
40 days
130
Powering Innovations in Microfinance
Drought index – claim example • As an example, a farmer with $1000 covered for drought • If the calculated amount for each mm in deficit is $5 • Example rainfall during the three phases are of the drought insurance cover are, y Phase One:
210mm
y Phase Two:
248mm
y Phase Three:
129mm
• Payout is (250-210x5)+(250-248x5)+(130-129x5) = $415
Powering Innovations in Microfinance
Typhoon product design • The amount of insurance payout is based on the: y Wind speed of the typhoon y The distance from the farmer’s field to the typhoon eye
• Wind speed and location of typhoon provided by the Japanese Meteorological Authority (JMA) • The location of the farmer is calculated by using GPS technology and is added to the insurance policy document
Powering Innovations in Microfinance
Typhoon payouts The payout to the farmer is based on: y wind speed of the typhoon and y distance from the farmer’s field to the typhoon track
A farmer with sum assured Wind speed factor Distance payout factor The payout for any typhoon =
=S =W =D SxWxD
Payout is restricted to 100% of the sum assured over the growing season.
Powering Innovations in Microfinance
Typhoon wind speed factors Using Saffir Simpson hurricane scale Wind speed (mph)
Wind speed Payment factor (estimates) (W)
74 to 95
25%
96 to 110
55%
110 to 130
75%
131 to 155
100%
> 156
100%
Target premiums approx 5% in most regions for given percentages – (will adjust for final product)
Powering Innovations in Microfinance
Typhoon distance factor •
Farmer’s location is calculated by GPS location measurement (using latitude and longitude) Typhoon track data from JMA has – latitude, longitude and wind speed We can measure distance from farmer to the typhoon using this information Distance from farmer to typhoon
Distance payment factor (D)
<100km
100%
100km<150km
((150-Distance)/50)%
>150km
0%
Powering Innovations in Microfinance
Typhoon claim payout • •
Farmer’s location: GPS= Lat:16.571, Long:122.532 Farmer’s sum assured = $1000
•
The farmer is 70km from the typhoon track and the storm is a category 2 storm (99 mph)
•
In this case; D=100%, W=55% Payout = SxWxD = $1000x55%x100% = $550
•
Powering Innovations in Microfinance
Product Implementation Data
International In-Country
Data
Reinsurance Company
Reinsurance treaty
Insurance Company/Association Bulk weather insurance contract
Met Office
Data
Product Retailer: Bank/MFI/Cooperative/Input Supplier (Bundled) weather insurance contract Data
Farmer/Farmer Groups
Powering Innovations in Microfinance
International Partners Supporting Philippine Operations Swiss Re Paris Re Deloite & Touche LLP Bill & Melinda Gates Foundation Levi Strauss Foundation
Powering Innovations in Microfinance
Weather insurance is not a panacea y It can enhance existing agricultural supply chains and businesses, not create them y It can help support expansion in rural finance y There are issues with basis risk y Regulatory issues currently exist
Powering Innovations in Microfinance
Thank you! Richard Leftley, President & CEO Micro Insurance Agency richard.leftley @microinsuranceagency.com www.microinsuranceagency.com
