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 per
Premiums (in Premiums in % capita (in USD)
USDmn) 2006 of GDP 2006 2006
North America $1,258,301 8.67% $3,804.0
Europe $1,484,881 8.27% $1,745.7
Asia $800,819 6.63% $205.0
Middle East and Central Asia $18,901 1.37% $62.5
Africa $49,667 4.77% $53.6
The Philippines $1,443 1.48% $17.2
World $3,723,412 7.52% $554.8
Industrialised countries $3,390,180 9.18% $3,362.2
Emerging markets $333,231 2.69% $59.8

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 Expand into 11 new countries
º Serve 25m people by 2012 – life, health, crop
 Powering Innovations in Microfinance

Current MIA Footprint

ASIA
AFRICA India
Zambia Philippines
AMERICA’S Malawi Indonesia
Mexico
Uganda
Columbia
Ghana
Honduras
Tanzania
Zimbabwe
Mozambique
 Powering Innovations in Microfinance

Making insurance work for the poor

Risk Carrier
Insurers – local
and multinational

Reinsurers – BPO
especially on crop

Front Office
MFI’s, SACCO’s, Susu, VSLA – Back Office
from most major networks Systems
TPA – claims mgmt
Aid Agencies – such as child sponsorship
Product Design
and disaster reduction Brokerage
Training
Retail – white label, mobile phone kiosks
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 Index-Based Weather

Insurance Insurance
y Use weather parameter
y High Administrative
as a proxy for damage
Costs
y Objective triggers and
y Moral Hazard structured rules for
y Adverse Selection payouts
y Improved correlation
between need and
provision
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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
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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
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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

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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
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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 =S

Wind speed factor =W
Distance payout factor =D
The payout for any typhoon = SxWxD

Payout is restricted to 100% of the sum assured over the

growing season.
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Typhoon wind speed factors

Using Saffir Simpson hurricane scale
Wind speed Wind speed Payment
(mph) 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)
ƒ Typhoon track data from JMA has – latitude, longitude
and wind speed
ƒ We can measure distance from farmer to the typhoon
using this information

Distance from farmer to Distance payment factor (D)

typhoon
<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 Reinsurance Company Reinsurance treaty
In-Country
Data 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
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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