Annette Houtekamer and Carlos Boelsterli discuss the role of small inclusive insurers in rolling out agricultural protection to low-income groups
Globally, 31% of adults – 1.7 billion people – struggle to get by without basic financial services. Insurance exclusion is highest among low-income groups and in developing countries, including rural households that account for more than 70% of global poverty. Agriculture is the most common income generator among these groups, and agricultural insurance is key to helping them manage irregular cashflow, invest in opportunities, strengthen resilience and work their way out of poverty. Still, agricultural insurance is out of reach for at least 500 million farmers.
And matters are about to get worse. Recent evidence from the study ‘Tropical Cyclones and Climate Change Assessment’ (bit.ly/2RbRsKP and bit.ly/2PUztb3) shows that global tropical cyclone storm intensity is expected to increase by 5%, and rain intensity by 15%. There is an upward trend for both economic and insured losses resulting from weather-related catastrophes.
“Small insurers are developers and early adopters, have short decision processes, and can adapt quickly to changing customer needs”
How can insurance help?
In this context, insurers have an opportunity to generate positive societal and economic impacts. In the capital markets, investors have already started seizing opportunities to invest in catastrophe risk via alternative risk transfers, such as catastrophe bonds. Part of the reason insurance has lagged behind is that the administrative costs of obtaining the necessary farm-level information, and conducting farm-level loss adjustment, make this type of insurance prohibitively expensive for insurance companies to offer – and for smallholder farmers to buy.
To counter this, some governments provide subsidies for agricultural insurance. India and its states subsidise 95% of premiums for its main crop insurance scheme. However, such subsidies are expensive and so tend to have limited scope – in India, the subsidy is only available for specific crops, and excludes inter-cropping practices and vegetables. This means a market-based, long-term and economically sustainable solution is required.
Weather index insurance avoids many of these difficulties, and has been used in the agricultural context for two decades. It can protect low-income farmers (micro-level), their banks’ loan portfolios (meso-level), and the governments of low-income countries that currently act as the only safety net (macro-level). However, it is not yet widely available from insurers, or widely taken up by low-income farmers.
The price of insurance can be expressed as: Price = Cost of the risk + Risk loading + Administrative and acquisition costs + Risk assessment costs + Costs of ready access to capital.
Large, robust insurance companies may be able to reduce fixed costs through economies of scale – in the same way that for large container ships carrying thousands of steel boxes, the incremental cost of carrying one more box is small. However, in the uncertain, not yet well-charted waters of inclusive insurance, large insurers can lack the agility needed to experiment and adapt to changing conditions.
As explained in Abhijit Banerjee and Esther Duflo’s book Poor Economics, farmers already have to make complex and balanced decisions about livestock, tools and equipment, fertilisers, types of crops and Weather index insurance avoids many of these difficulties, and has been used in the agricultural context for two decades. It can protect low-income farmers (micro-level), their banks’ loan portfolios (meso-level), seeds, savings and loans, as well as the human capital of their families – education, vaccinations and so on. Insurance can fall to the bottom of the list, often regarded as too expensive or not providing value for money.
While microinsurance products can be designed to maximise customer value, such value often remains intangible until disaster strikes. At the start of COVID-19, one of our retail banking distribution partners in El Salvador decided to stop granting new credit loans and placing insurance products. When Storm Amanda hit in June 2020, the number of insureds had gone down to 30% of what it had been a few months earlier. The storm was devastating, and MiCRO’s microinsurance product triggered significant pay-outs in affected areas. The bank reversed its decision and increased insurance placements to the previous levels.
Unlike larger counterparts, small inclusive insurance players are able to manoeuvre in an agile way. They are developers and early adopters of new practices and technologies, have short decision processes, and can adapt quickly to changing customer needs. They pilot and test technology-enabled solutions, create minimum viable products and expand the boundaries of traditional insurance, while keeping costs at an absolute minimum.
IBISA and MiCRO are examples of such ‘towboats’. Each company was established to minimise basis risks and enhance the insurability and affordability of parametric insurance. They use end-to-end technology to lower the costs of distribution, risk analysis, loss assessments and claim handling; with these cost reductions, the difference between pure risk premiums and gross premiums to be paid by the end customer can be kept small.
Still, the key to economic sustainability of the smaller microinsurance players is scale. A common way to achieve scale is through innovative product distribution.
Distribution strategies include embedded insurance (premium paid by distribution channel), bundled insurance (distribution channel adds insurance to their product portfolio), and standalone insurance (sold via insurance agents, call centres and so on). Another strategy is tactical bundling with existing activities such as smart agriculture, input sales (for example seed, feed and fertiliser), and savings and loans products. Average premiums from our products can be as low as US$15-60 a year – hardly enough to compensate traditional distribution channels. By bundling with partners that already bring a product or service to the target segment, the cost of microinsurance distribution can be reduced to the time it takes the agent to explain the insurance product, plus any incentive they may receive.
Many well-established organisations already have large customer bases (more than 500,000 farmers) and provide several services. Having direct links to farmers, but lacking parametric insurance products or tools to manage them, they make obvious allies for microinsurers. An example would be a partnership with a local co-operative – the insurance product repays farmers’ loans on the co-operative’s loan portfolio in case of a triggered event.
IBISA provides the technology that enables insurers, food manufacturers and farm suppliers to provide transparent and objective risk assessment, risk prevention and protection. It offers a digital end-to-end platform that enables index design, policy management and automated remote loss assessment based on earth observation satellite data.
MiCRO is a speciality reinsurer that is active in Latin America, founded to offer risk transfer solutions against natural disasters, protecting the vulnerable population who do not have access to insurance. Its proprietary calculation platform uses satellite information, weather stations and locally produced Shake Maps for earthquakes in order to detect the occurrence and severity of covered events. Claim payments are made based on these calculations.
Lessons so far
MiCRO’s journey towards economic sustainability in 2024 has so far offered some valuable lessons:
- Superior products are the result of iterative improvements to the initial minimum viable product
- Refined partner selection processes helped to find local partners that share its double bottom line objectives and eagerness to change the status quo
- Increasing credibility among local regulators, leading to shorter and easier regulatory processes with each new positive reference case, has supported its ambition to expand into a new Latin American country each year.
Until full sustainability is achieved, the funding gap will be supported by consultancies and agencies that share MiCRO’s vision for strengthening the resilience of the most vulnerable. The hope is that once the business case for inclusive agricultural insurance has been proved, and the risk of failure becomes more manageable, big players will follow.
Annette Houtekamer is co-founder of IBISA
Carlos Boelsterli is CEO of MiCRO