180 Research Report Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Giriraj Amarnath, R. P. S. Malik and Avinandan Taron Research Reports The publications in this series cover a wide range of subjects—from computer modeling to experience with water user associations—and vary in content from directly applicable research to more basic studies, on which applied work ultimately depends. Some research reports are narrowly focused, analytical and detailed empirical studies; others are wide-ranging and synthetic overviews of generic problems. Although most of the reports are published by IWMI staff and their collaborators, we welcome contributions from others. Each report is reviewed internally by IWMI staff, and by external reviewers. The reports are published and distributed both in hard copy and electronically (www.iwmi.org) and where possible all data and analyses will be available as separate downloadable files. Reports may be copied freely and cited with due acknowledgment. About IWMI The International Water Management Institute (IWMI) is an international, research-for-development organization that works with governments, civil society and the private sector to solve water problems in developing countries and scale up solutions. Through partnership, IWMI combines research on the sustainable use of water and land resources, knowledge services and products with capacity strengthening, dialogue and policy analysis to support implementation of water management solutions for agriculture, ecosystems, climate change and inclusive economic growth. Headquartered in Colombo, Sri Lanka, IWMI is a CGIAR Research Center and leads the CGIAR Research Program on Water, Land and Ecosystems (WLE). www.iwmi.org IWMI Research Report 180 Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Giriraj Amarnath, R. P. S. Malik and Avinandan Taron International Water Management Institute (IWMI) P. O. Box 2075, Colombo, Sri Lanka The authors: Giriraj Amarnath is Principal Researcher – Disaster Risk Management and Climate Resilience and Research Group Leader - Water Risk to Development and Resilience at the International Water Management Institute (IWMI), Colombo, Sri Lanka; and R. P. S. Malik is Emeritus Scientist at IWMI, New Delhi, India; and Avinandan Taron is Researcher - Investment and Institutional Analyst for RRR Business Development at IWMI, Colombo, Sri Lanka. Amarnath, G.; Malik, R. P. S.; Taron, A. 2021. Scaling up Index-based Flood Insurance (IBFI) for agricultural resilience and flood-proofing livelihoods in developing countries. Colombo, Sri Lanka: International Water Management Institute (IWMI). 68p. (IWMI Research Report 180). doi: https://doi.org/10.5337/2021.213 / flooding / resilience / agricultural insurance / crop insurance / livelihoods / developing countries / scaling / disaster risk management / risk transfer / business models / product development / marketing / public-private partnerships / stakeholders / state intervention / financial institutions / microfinance / smallholders / farmers / awareness raising / climate change / satellite observation / rivers / rain / flood damage / crop losses / compensation / subsidies / legal aspects / economic aspects / social aspects / drought / case studies / India / Kenya / Rwanda / United Republic of Tanzania / Malawi / Ethiopia / Senegal / Zambia / Thailand / Brazil / Mexico / Mongolia / ISSN 1026-0862 ISBN 978-92-9090-919-4 Copyright © 2021, by IWMI. All rights reserved. IWMI encourages the use of its material provided that the organization is acknowledged and kept informed in all such instances. Please send inquiries and comments to IWMI-Publications@cgiar.org A free copy of this publication can be downloaded at www.iwmi.org/publications/iwmi-research-reports/ Acknowledgements The authors would like to thank members of the agricultural insurance industry in India and Alok Sikka (Country Representative - India, IWMI) for providing feedback on the development of business models for Index-based Flood Insurance (IBFI). The authors would also like to thank the respondents of the key informant interviews, which included representatives of ministries, departments and agencies of the Government of Bihar at the state level and officials of the Pradhan Mantri Fasal Bhima Yojana scheme, development implementers from nongovernmental organizations, managers and technical experts from the private sector, and farmers. The valuable feedback and comments received from Mark Smith (Director General, International Water Management Institute [IWMI]), Rachael Mcdonnell (Deputy Director General - Research for Development, IWMI) and Meredith Giordano (formerly IWMI) are greatly acknowledged. Project This study was conducted under the project titled Enhancing the benefits of remote sensing data and flood hazard modeling in Index-based Flood Insurance (IBFI) in South Asia. Donors This work was implemented as part of the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), which is carried out with support from CGIAR Trust Fund Donors and through bilateral funding agreements. For details, please visit https://ccafs.cgiar.org/donors. The views expressed in this document cannot be taken to reflect the official opinions of these organizations. RESEARCH This research was carried out as part of the CGIAR Research Program on PROGRAM ON Water, L and and Water, Land and Ecosystems (WLE) and supported by Funders contributing Ecosystem s to the CGIAR Trust Fund (https://www.cgiar.org/funders/) This research was carried out with funding support from the Indian Council of Agricultural Research (ICAR) (https://www.icar.org.in/). ICAR is an autonomous organization under the Department of Agricultural Research and Education (DARE), Ministry of Agriculture and Farmers Welfare, Government of India. The views expressed in this document cannot be taken to reflect the official opinions of these organizations. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - iii Contents Acronyms and Abbreviations vi Summary vii Introduction 1 Status of Flood Insurance for Agriculture 3 A Business Model for Flood Insurance: Objectives and Scope 4 Business Model Concept for Agricultural Insurance 4 Existing Business Models for Agricultural Insurance 5 A Business Model for Index-based Flood Insurance 9 Nature of the Business Model 9 Creating Value: Issues in Product Development 10 Capturing Value: Issues in Marketing Index-based Flood Insurance 18 Issues In Uptake And Scaling 25 Behavioral Factors 25 Financial Factors 25 Legal and Regulatory Factors 27 Facilitating Factors 27 Empirical Evidence: Impact of Different Factors in Determining Insurance Uptake 27 Conclusions and Way Forward 30 References 31 Appendix 1. Glossary 34 Appendix 2. Case Studies of Agricultural Insurance Programs 35 C1: PepsiCo’s Contract Farming Program for Potato Growers in India 37 C2: Harnessing Mobile Technology to Deliver Insurance in Kenya, Rwanda, and Tanzania 39 C3: Drought Weather Insurance to Safeguard Crops in Malawi (e.g., Groundnuts, Maize, and Tobacco) 42 C4: Insurance for Climate Shocks in Ethiopia, Malawi, Senegal, and Zambia 45 C5: Satellite and Weather Station-based Insurance in Rwanda 47 C6: Index-based Insurance for Rainfall in India 49 C7: Weather-based Insurance for Drought Management in Thailand 51 C8: Index-based Insurance in Brazil 55 C9: Index-based Insurance for Rainfall in Mexico 57 C10: Index-based Livestock Insurance in Mongolia 59 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - v Acronyms and Abbreviations ACRE Agriculture and Climate Risk Enterprise AICI Agriculture Insurance Company of India Limited BAAC Bank for Agriculture and Agricultural Cooperatives GIIF Global Index Insurance Facility GRM Grupo de Risco Municipalizado HARITA Horn of Africa Risk Transfer for Adaptation IBFI Index-based Flood Insurance IBLIP Index-based Livestock Insurance Project IFA Insurance for Assets IFW Insurance for Work INR Indian Rupee IWMI International Water Management Institute JBIC Japan Bank for International Cooperation KBSLAB Krishna Bhima Samruddhi Local Area Bank MFI Microfinance Institution MODIS Moderate Resolution Imaging Spectroradiometer MPCI Multi-peril Crop Insurance NAIS National Agricultural Insurance Scheme NASFAM National Smallholder Farmers’ Association of Malawi NGO Nongovernmental organization ORDA Organization for Rehabilitation and Development in Amhara PACC Programa de Atención a Contingencias Climatológicas PMFBY Pradhan Mantri Fasal Bhima Yojana PPP Public-private Partnership PRF Public Reinsurance Facility PROAGRO Programa de Garantia da Atividade Agropecuária PROCERGS Companhia de Processamento de Dados do Estado PTTS Programa Troca-Troca de Sementes R4 R4 Rural Resilience Initiative REST Relief Society of Tigray SAA Secretaria de Agricultura e Abastecimento THB Thai Bhat USD United States Dollar USGS United States Geological Survey WFP World Food Programme WIBCI Weather Index-based Crop Insurance WII Weather-indexed Insurance WRMS Weather Risk Management Services IWMI - vi Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Summary Protecting against floods and providing risk cover important. These two components of the business model against losses due to floods has long been a concern of must then provide continuous feedback on performance governments around the world. Although flood insurance to support improvements in product design and market has often been included in multi-peril crop insurance development. (MPCI) programs, it is not yet offered as a standalone insurance product for use within agriculture anywhere Based on a review of the literature and experience in the world. Weather index insurance is an innovative implementing agricultural insurance products around the approach to manage weather and climate risks where world, we envisage that a Public-private Partnership (PPP) payouts are made on the basis of a predetermined index is the most suitable approach for developing, marketing, such as rainfall or wind speed without the need for a and scaling up an IBFI product. A PPP could function damage assessment. Index insurance provides quick on both sides of the business model for creating value compensation and is easy to understand, transparent, (product development) and capturing value (product and scalable to any region in contrast to the traditional marketing). However, given the differing requirements damage assessment at an individual level, which is of each, we anticipate that two somewhat different an expensive and time-consuming process. In recent PPPs with differing sets of stakeholders and partnership years, index insurance has been used as a tool within arrangements would be needed to develop an effective comprehensive climate risk management and has been business model for IBFI. However, marginalized sectors recognized by policy-makers and practitioners around of society generally have a low ability to pay and suffer the world. frequent flood losses. Their dispersed nature makes cost- effectively marketing a suitable micro-insurance product Given recent successful experiences with designing and a challenge. Doing so requires the skills and expertise implementing index-based insurance products such of the public and private sectors to be harnessed and as Weather Index-based Crop Insurance (WIBCI), an harmonized. Index-based Flood Insurance (IBFI) product with similar features, would appear to be an appropriate approach For product development, collaboration is needed among for insuring crop losses due to floods. IBFI uses satellite various institutions and organizations in the public images and flood modeling tools that combine inputs and private sectors such as government departments on satellite rainfall estimates, river characteristics, and responsible for agricultural insurance, research institutes digital elevation models to generate flood depth and flood and scholars, weather information providers, disaster duration to develop predetermined thresholds based on management authorities, space research organizations, historical flood events and economic losses. insurance companies, reinsurers, and the farmers likely to be affected by floods. We envisage that the development Extending the concept of WIBCI to flood insurance is of the necessary partnerships and collaborations will be not straightforward and requires suitable adaptation stronger if supported by an organization that provides of the concept, consideration of the many challenging facilitation and a technical support unit. The International methodological complexities of product development, Water Management Institute (IWMI) is playing this role in an effective means of marketing this specialized product, the pilot development of IBFI in India. and carefully devised strategies to promote widespread adoption by those sectors of society for whom it is On the product marketing side, selling a crop insurance intended. product in large numbers to poor farmers spread across a wide geographic area will require a marketing strategy This report reviews evidence that can guide the with contributions from a variety of stakeholders. development of IBFI and assess experience from Collaborative arrangements or partnerships will be innovation and scaling of agricultural insurance products, needed among and between actors within the private and particularly those intended for smallholder farmers and public sectors. These include grassroots organizations marginalized groups. Following an analysis, we conclude such as rural cooperatives and self-help groups, financial with recommendations to support the development and organizations including Microfinance Institutions (MFIs), implementation of IBFI. and government agencies that can provide financial support and potentially oversee the implementation of an In this report, we present a framework for a business insurance program. model where insurance product development and marketing form two modules of the model. The product We suggest that a PPP involving insurance companies development side comprises activities, mechanisms, and government agencies with a mandate for agricultural and relationships for providing a good or service or insurance will be needed to efficiently and effectively creating value. The market development side comprises market an IBFI product. While the contributions of the activities, mechanisms, and relationships for selling both sectors will be vital, the superior efficiency of the that good or service or capturing value. For a business private sector makes it the best choice for steering the to succeed, creating and capturing value are equally partnership. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - vii Despite the benefits of risk coverage provided by an for fair business and govern their adherence by various agricultural insurance product, usually at a highly stakeholders; and (iv) facilitating factors, including subsidized cost to the farmer, adoption rates for product design and development, business models, agricultural insurance have been low. The reasons are, research and development, data availability, and however, little understood. A review of the literature awareness creation, which help ensure an efficient supply shows that little effort has gone into systematically of insurance services. The existing research suggests the investigating the factors that affect the demand for and following actions could encourage more people to adopt uptake of agricultural insurance by potential clients agricultural insurance: and the level of influence that each has. There is also little insight into whether a co-design process with • Better dissemination of information in targeted farmers was used. This lack of information accessible formats about insurance schemes means that a ‘magic formula’ for making agricultural and their benefits to farmers, strengthening insurance work at scale has yet to be found. However, public awareness programs, and development the presumption is that innovative business models and of an efficient communication strategy. proactive public policies have the potential to stimulate wider adoption. • Greater transparency in insurance contracts, with improvements to procedures The literature reveals that four broad groups of for estimating losses, calculating fair interrelated factors influence the uptake and scaling compensation, and making timely payouts. up of agricultural insurance. These are (i) behavioral factors that influence farmers’ enthusiasm to invest • Strengthening grievance redressal mechanisms. in insurance; (ii) financial factors that stipulate governments’ willingness to provide financial support; • Provision of financial support from governments, (iii) legal and regulatory factors, which set ground rules including subsidies to cover insurance premiums. IWMI - viii Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Giriraj Amarnath, R. P. S. Malik and Avinandan Taron Introduction Floods are a major source of risk for farmers. While heavy driven by tropical storms or cyclones arising from intense rain is the primary cause of flooding, river, flash, and low-pressure systems offshore (IPCC 2018). coastal floods pose a threat to agriculture. River flooding occurs when a river system cannot contain the flow of Floods can be characterized by the frequency with which water in the channel, prompting a breach that submerges they occur. The term ‘normal’ flood is applied to relatively surrounding low-lying land. Such floods are caused by minor events that happen almost every year, while a rainfall or snowmelt, which may sometimes take place far ‘medium’ flood is used to describe higher-impact events from the affected location. Flash floods arise from intense, occurring once in five years. ‘Severe’ is used to denote major localized rainfall and can happen practically anywhere. floods that generally occur on average once every 20 years. A growing body of evidence suggests that climate ‘Catastrophic’ floods or ‘100-year floods’ is a term used to change is increasing the intensity of rainstorms, thereby simplify the definition of a flood that statistically has a 1% exacerbating flash flooding. Coastal zones are subject chance of occurring in any given year. The magnitude of floods to flooding from storm surges, i.e., increased sea levels influences the level of economic damage they cause (Box 1). Box 1. Levels of Magnitude of Flooding. Normal floods (e.g., 1-year flood): Regular inundation of low-lying farmland is common in many countries. Such events occur almost every year, and farming practices, especially rice cultivation, are well adapted. Forecasts can be issued to give advice regarding cropping and sowing times to minimize losses. Medium floods (e.g., 5-year flood): These less frequent floods cause some economic losses, but are not extensive or serious. They affect farmers and people living in low-lying areas and by rivers. Loss of life is unlikely, as people are usually prepared for these regular events. Severe floods (e.g., 20-year flood): These floods occur when river levels continue to rise and affect large geographic areas. People living in urban areas, who are less accustomed to flooding, are often among the victims. Damage to the physical environment and losses to the economic sector are generally significant. Catastrophic floods (e.g., 100-year flood): These extreme floods inundate extensive areas. They are highly devastating, with multiple impacts on lives, infrastructure, and economies. Note: Floods may not occur at these exact intervals. Source: Adapted from ADPC 2005. Satellite remote sensing data (Moderate Resolution Imaging crop losses (e.g., the extent over time and space of an Spectroradiometer [MODIS] and Landsat) offer a bird’s eye inundation in the Ganges River Basin in India captured view of an event and can be used to determine the extent through the United States Geological Survey [USGS] Landsat of flooding and to estimate the impact on population and data processed between 2007 and 2016) (Figures 1 and 2). Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 1 Figure 1. Flood extent along the Ganges River in Bihar. Source: International Water Management Institute (IWMI). Note: The map shows large-scale crop damage taken from the USGS Landsat 7 on August 26, 2017. Figure 2. Flood frequency map generated using satellite data for South Asia. Source: IWMI. Note: Dark blue shows the severity of the floods. It is likely these areas have high population exposure and agricultural losses. IWMI - 2 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries While accurate data on the number of people affected widespread death and destruction (Table 1). Between 1980 by floods and the losses caused are often not available, and 2020, estimated damages due to floods in India were indicative data from South Asia show that floods cause in the order of USD 84 billion. Table 1. Flood events between 1950 and 2020 in South Asia. Country Flood events Total deaths Total affected Total damages population ('000 USD) Bangladesh 96 52,987 345,291,360 13,591,400 Bhutan 3 222 1,600 India 304 75,557 895,975,504 84,744,168 Nepal 51 7,700 5,713,801 1,320,232 Pakistan 106 18,105 80,944,904 22,581,178 Sri Lanka 74 2,013 17,102,826 2,573,564 Total 634 156,584 1,345,029,995 124,810,542 Source: EM-DAT 2021. Protecting citizens and property against floods and flood insurance is provided, it is common for the state providing risk coverage against losses due to such events to at least partially bear the cost of flood risk. State- is a major concern for governments globally. Historically, backed insurance is common in developed countries with authorities have invested in structural flood protection established private markets and is also available in some measures such as building dams and water storage facilities developing countries. Where insurance penetration is low, above and below the ground and constructing protective governments bear the cost of flood risk by providing aid barriers. Concurrently, governments have also invested in following a flood event. non-structural measures to enable people most at risk to prepare themselves and minimize the potential damage. These measures include developing flood forecasting Status of Flood Insurance for systems, undertaking capacity-building efforts, increasing Agriculture resilience, strengthening financial preparedness, and enhancing emergency response capabilities. Insuring against losses from floods, including ruined crops, has been a challenge for the insurance Over the years, insurance has emerged as a pillar in industry around the world. In the agriculture sector, any comprehensive strategy to provide protection from flood insurance is often included in Multi-peril Crop and assist with adaptation to natural hazards. Besides Insurance (MPCI). In such insurance products, the incentivizing farmers to engage with and invest in risk- combined impact of different perils is reflected mitigation measures, insurance reduces the pressure in reduced crop yields, which form the basis for placed on the public purse for compensatory relief. insurance payouts. Different countries have included Insurance can also help increase resilience against different perils in MPCI. In India, flood is an insured residual risks that cannot be prevented or mitigated. peril under the National Agricultural Insurance However, insuring against floods poses challenges to Scheme (NAIS), the subsequent modified NAIS and the insurance providers, with insurance markets struggling recently launched Pradhan Mantri Fasal Bima Yojana to provide affordable flood insurance in high-risk areas (PMFBY)1 scheme (Prime Minister’s Crop Insurance (Cummins and Mahul 2009; Skees et al. 2007). Even in Scheme). Flood insurance is not yet offered as a many developed markets, flooding remains an uninsurable standalone insurance product in the agriculture sector risk in coastal areas or on floodplains. High-expected anywhere in the world. losses impair the commercial viability of flood insurance products, and many households at risk therefore do not Given the large agricultural losses and the recurring have access to affordable insurance (White 2011). incidence of floods, there has been strong interest from both governments and the private sector to get involved According to Swiss Re (2012), “no other peril defies the in the development and promotion of specialized flood basic principles of insurability to the same degree.” When insurance products. 1 https://pmfby.gov.in/ (accessed on July 10, 2021). Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 3 Given the experience with designing and implementing flood-induced thresholds and crop losses is more complex index-based insurance products such as Weather and challenging. Of the various types of floods, the index Index-based Crop Insurance (WIBCI), an Index-based approach is more suitable for inundation flooding around Flood Insurance (IBFI) product appears to be the most a river delta spread over a large area. realistic method of insuring crop losses due to floods. Extending the concept of WIBCI to flood insurance is not Developing a workable flood insurance product and straightforward. It requires: then effectively marketing it to ensure that the intended audience adopts it is challenging. Some of the issues to • suitable adaptation of the concept and its design, be considered are modeling and quantifying the risk and • development of new methodologies, the impact of floods, defining losses caused by flooding, • availability and access to data, determining flood-risk zones for calculating premiums • advanced data-gathering technologies, and enrolling customers, operating the flood insurance • capabilities to design flood indices, and scheme including loss adjustment and underwriting, • determining trigger levels that would accurately and managing financial challenges related to risk predict crop losses with various degrees of transfer and reinsurance. In this report, we present inundation and timing of crop growth stages. a framework for a business model where insurance product development and marketing form two modules Unlike rainfall-related risks, flood events do not depend on of the model. Definitions of some of the terms used in a single parameter, and therefore defining and measuring this report are given in Appendix 1. A Business Model For Flood Insurance: Objectives And Scope This report seeks to identify opportunities for insurance), agricultural insurance differs from other forms improving the design and delivery of business models of cover such as health or life. It is not only the coverage for agricultural insurance to increase their adoption, of risk that is of concern but also the process by which the effectiveness, and efficiency. It aims to apply the protection against such risk is structured and delivered. experience and knowledge gained from implementing This calls for answers to important questions: agricultural insurance in different parts of the world to support the development of a new product for • What form of products and instruments will insuring crop losses due to floods. Achieving this provide coverage against the named risks, goal requires a clear understanding of the factors and who will develop such products? determining uptake and scaling up insurance products • Who will provide the insurance cover and exploration of the pricing levels, structures, and how will the insurance products be institutions, partnerships and local context required promoted, marketed, and scaled up? to achieve scale and sustainability. We have sought • How will the product be priced? to develop this model by studying existing business • Who will pay the insurance premiums? models to deliver multi-peril and named-peril • Who will assess the impact of the agricultural insurance products to smallholder and product and gather feedback? marginal farmers in developing countries. The report • What are the financial and social costs and describes the development of a business model for a benefits of providing agricultural insurance? generalized IBFI product. Its application at a specific location would then require suitable modifications to These components make up a business model. A business address underlying local conditions. We have used model consists of a specific combination of product, conditions prevailing in India to illustrate how context distribution, supply chain, financing, pricing, subsidizing, affects business model development. payment and sales, and is often far more important in determining the success of a product than the Business Model Concept for product itself (Kubzansky 2012). From an organization’s perspective, a business model describes the process of Agricultural Insurance how an organization creates, delivers, and captures value. The business model concept is thus linked to business Given the vast landscape across which agricultural activity strategy (the process of business model design) and extends (and which needs to be brought under insurance business operations (the implementation of a business cover) and the large numbers of poor farmers who cultivate model into organizational structures and systems (Vorley this diverse terrain (and who must be convinced to invest in et al. 2008). IWMI - 4 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries There are two main components to a business model, In what follows, we present a broad overview production and marketing. The production side comprises of the business models that have been used for the set of activities, mechanisms, and relationships for providing agricultural insurance, discuss the need providing a good or service or creating value. The market for innovations and modifications for developing development side comprises the activities, mechanisms, and marketing an IBFI, and explain how such and relationships for selling that product or service or modifications may be carried out. We then discuss capturing value (IIED 2010). opportunities and interventions, including policy changes, for scaling up the IBFI model. Osterwalder and Pigneur (2010) organized the constituent parts of a business model which create different costs and capture values within a generalized template Existing Business Models for (Figure 3). This template shows the importance of market Agricultural Insurance differentiation (building a value proposition) and cost management to the success of any business model. The Crop insurance has been an important part of risk components listed on the left side of the canvas are management in many parts of the world, including India. those that form the cost structure of the business, while Over the years, many products have been developed and those on the right side provide the revenue-generating marketed to provide cover for different individual and mechanism. Taken together, the nine elements reflect group perils. Specialized WIBCI products have successfully how an organization will create a business that matters to provided cover against specific weather-related perils. We customers. Each component represents a crucial building briefly review in Appendix 2 the salient features of some of block in constructing the model. these index-based insurance products used in developing country settings. The two components of the business model continuously provide feedback on performance, thereby generating While considerable experience exists in managing opportunities for improving product design and marketing the numerous challenges faced when developing and value-creation activities (Figure 4). The available and marketing crop-related insurance products, literature on business models for agricultural insurance often the business of agricultural insurance continues does not explicitly differentiate the creating and capturing to remain both complex and risky. Providing such value components or they are subsumed into each other. insurance is a challenge for state and privately Partner Customer network relationship Value Value Core configuration proposition Distribution Customer capabilities activities and Products channel segment resources and services Cost Success or Revenue structure failure stream Creating value Capturing value Figure 3. Canvas of a generic business model applied to the development of a flood insurance product. Source: Adapted from Osterwalder and Pigneur 2010. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 5 owned insurers, and for the governments whose (PPP) mode, and (iii) private insurance companies interest it is to protect vulnerable farmers from the (Figure 5). serious risks and large losses that can affect the agriculture sector. 1. Fully intervened systems or systems fully controlled by the government: In these Broadly speaking, there are three possible conduits systems, the state’s role is key as it has through which agricultural insurance can be provided full control over pricing, distribution, price (Iturrioz 2009; Čolović and Mrvić Petrović 2014): setting, and settling claims. These systems (i) insurance companies under state control, (ii) are characterized by intensive government insurance companies in a public-private partnership support of one unified insurance product. Components of a business model Product Feedback and product Product development improvement marketing Figure 4. Links between the two components of a business model. Normally high penetration (compulsory) Well diversified portfolios Social over technical criteria Monopoly. Issues with the service Government assumes full liability High fiscal cost Fully intervened High penetration system Well diversified portfolios Technical over commercial criteria Competition for service Public- Government adds stability to the system Private sector adds know-how private Reasonable fiscal cost partnership Low to moderate penetration Low risk diversification Pure Commercial over technical criteria market Competition for price No fiscal cost based Number of players and product diversification Figure 5. Existing business models of agricultural insurance. Source: Iturrioz 2009. IWMI - 6 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Level of government intervention The product is usually commercialized and behavioral barriers are other reasons PPPs through a state-owned insurance company are often preferred (Solana 2015). PPPs have holding a monopolistic position. These relatively higher penetration and a diversified systems have large market penetration, portfolio. Technical criteria dominate over often because farmers are required to buy commercial concerns, there is competition in insurance, but incur high public costs to the provision of services, and the state helps the government and frequently deliver poor underpin system stability. The private sector service caused by lack of competition. The provides knowledge and technology, all with government assumes full responsibility for reasonable financial benefits. PPPs can take compensating crop losses incurred by farmers. many forms, with governments designing a structure to suit their operational setup and 2. Public-private Partnerships (PPPs): An insurance- ability to work with the insurance sector, taking based PPP is essentially a contractual agreement into account the maturity and capacity of the between the public sector (represented by a local insurance industry and its aggregators. A ministry or local authority through a government typical PPP structure is presented in Figure 6. program) and the private sector (represented by the insurance industry and its service providers 3. Complete market systems: These are pure and distribution partners). This arrangement market-based systems with the private sector combines business objectives with public playing the lead role. These systems have low policy goals in a cost-efficient and effective to moderate penetration and a low level of risk way. PPPs are motivated by a need to improve diversification. Commercial criteria dominate financial control over public budgets and deliver over technical concerns, and prices are more efficient services to final beneficiaries. competitive without fiscal expenses (Manić 2012, Collaboration between the public and private cited in Čolović and Mrvić Petrović 2014). In this sectors can often reduce and manage risks model, insurers offer a range of products that ex-ante, as cover can be conditional on provide greater profitability rather than products adaptation. Market and government failures that cater to the needs of most farmers. Beneficiaries Aggregators Government Insurance and other companies stakeholders Reinsurers Figure 6. Illustration of a typical PPP structure for providing agricultural insurance. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 7 While the private sector is increasingly by the insurance provider (Figure 7). Agriculture recognizing an emerging business opportunity Insurance Company of India Limited (AICI) is such a in designing or modifying business models provider. for crop insurance, to date, this evolution has been patchy and ad hoc. Many innovative Partner-agent model: This is a variant of the PPP pilot initiatives have succeeded at a micro model. The partner, usually a mainstream insurer, level but failed to achieve success at scale. performs activities related to developing and pricing products and managing the risk exposure of the insurance portfolio and investment of There are two broad organizational models of agricultural reserves and annual premiums. The agents are insurance common in India. generally nongovernmental organizations (NGOs) or microfinance institutions (MFIs), which are Full-service public model: This is roughly equivalent responsible for marketing, promotion, initial sale of to the fully intervened system described above. products, and for collecting premiums and payment of All activities related to the provision of insurance, claims (Figure 8). Bundling certified seeds with crop including designing the product, marketing, collecting insurance in Kenya provides an excellent example of premiums, and paying claims, are performed in-house such a partnership (Bulte et al. 2020). Products Insurance and claims provider: Client NGO/MFI or mainstream insurer Premiums Figure 7. Full-service public model for providing agricultural insurance. Provide product Develop claim and product product education Mainstream NGOs/MFIs Potential insurance as micro- companies insurance insurance as partners agents clients Underwriting Premiums Provide product claim and product education Figure 8. Partner-agent model for providing agricultural insurance. IWMI - 8 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries A Business Model for Index-based Flood Insurance In this section, we develop a potential business model for examining the different ways governments support or IBFI to provide insurance cover against crop losses from do not support agricultural insurance. The results of the floods to vulnerable sectors of rural society. Given the survey showed that, while the period 1950–1990 saw a specialized nature of the flood risk this product seeks to major growth in public sector-led MPCI, particularly in cover, its use is limited to agricultural regions or zones Latin America and Asia, since the 1990s governments prone to floods. have favored promoting agricultural insurance through the commercial insurance sector, often through PPPs. Using the template of the typical business model in Figure 3 and the links between the two main components of As of 2008, private insurance providers operated the business model depicted in Figure 4, for a business in 54% of the surveyed countries, and PPPs were to succeed, product development (creating value) is as implemented in 37%. The size of the private agricultural important as product delivery to end-users (capturing insurance sector within a country increases with the value). Developing an insurance product specifically development level of that nation. Co-insurance pools, designed to provide cover to crop losses from floods is usually relying on PPPs, have been established mainly challenging both from the perspective of creating and in middle-income countries to strengthen the supply of capturing value. agricultural insurance. PPPs tend to improve the financial performance of government-sponsored agricultural Nature of the Business Model insurance programs. Loss ratios, a simple measure of the financial performance of an insurance program, seem to be lower when programs are managed by the Three categories of business models have frequently been private sector, sometimes with government support employed for providing agricultural insurance. While all through PPPs. This may be due to better implementation three models have their requirements, advantages, and of insurance principles such as sound underwriting disadvantages, a frequently asked question is: Which procedures and improved pricing of risk, lower model represents the most efficient and wide-reaching administrative costs, and the greater financial discipline way of organizing the business of agricultural insurance of private insurers (Mahul and Stutely 2010). for a given type of product in a particular setting or country? The results of other empirical assessments of agricultural insurance programs tend to agree with these findings. Unfortunately, there is no one answer to this question. While the private commercial insurance sector is most The appropriateness of different models varies depending successful at efficiently and effectively implementing on the context. Variables include the nature of the agricultural insurance, scaled-up agricultural insurance insurance product, the status of market development, programs typically require leadership and targeted the cost of insurance, client characteristics, institutional support from governments. Examples include weather arrangements for performing various activities, the and area yield-based crop insurance programs in India, financial resources available, the nature of government Mexico’s weather-based crop insurance scheme, and support, and the prevailing legal and regulatory the index-based livestock insurance scheme in Mongolia environment. (World Bank 2013). Some evidence suggests that sustainable, scaled-up agricultural insurance programs A study by the World Bank on agricultural insurance should be based on an equal partnership between the around the world reported that more than half of the public and private sectors. For example, evidence from 104 countries surveyed offer some form of agricultural some industrialized countries indicates that all successful insurance (Mahul and Stutley 2010). The research and sustainable agricultural insurance systems have been included a more detailed survey on agricultural insurance based on PPPs. Purely private or purely state-organized Provide product claim and product education programs in 65 of these countries, aimed at understanding systems have failed (World Bank 2013). By working the experience of providing public and private agricultural collaboratively, both the public and private sectors gain, insurance in developed and developing economies, and and so do the clients (Box 2). Figure 8. Partner-agent model for providing agricultural insurance. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 9 Box 2. Advantages of PPPs to Governments and the Insurance Industry. Advantages for governments • Micro-insurance can bring a client-centered approach to product development. Beneficiaries of public programs can experience reduced payout times and improved benefits. The private sector may be able to deliver benefits more effectively and efficiently. • Data on different risks can be developed over the long term to price and transfer risk in a more efficient way while contributing to greater public transparency. • PPPs can create better budget management as insurance premiums can introduce more certainty around catastrophic events that have a severe impact on public finances. • Insurance mechanisms can help incentivize governments to set up policies that reduce the exposure to risk of particular groups. Advantages for the insurance industry • Access to scaled-up programs can help reduce operational and premium costs. Efficiencies of scale can help to improve value for final beneficiaries. • Collaboration with the government provides opportunities for improved data collection, which can lead to better pricing and beneficial competition. • Insurance PPPs can increase the capacity of the industry to deal with more clients and premiums, while fostering national financial risk-transfer mechanisms. • Working collaboratively with a government can help to change a population’s exposure to risk, making insurance protection sustainable for both insurers and reinsurers. Source: Solana 2015. An insurance product for marginalized sectors of society Creating Value: Issues in Product that frequently suffer crop losses due to floods will need to be efficiently and cost-effectively marketed Development to overcome barriers resulting from the low ability of these groups to pay for insurance. Given the social and Developing insurance products for covering flood risk in economic relevance of such insurance, the expertise and both urban and rural areas has been a challenge for the comparative advantages of both the public and private insurance industry in both developing and developed sectors will be needed in developing and marketing the countries. While there have been longstanding efforts product and to obtain the necessary regulatory approvals. at developing flood insurance, this kind of insurance is currently not in commercial use anywhere in the world Based on lessons from successful PPP arrangements (World Bank 2009). Building on experiences of taking for agricultural insurance from around the world, we an index-based insurance approach to drought, the suggest a PPP is the most suitable model for developing, World Bank conducted research and concept-testing launching, marketing, and scaling up an IBFI product. activities to investigate the potential for expanding the India already has substantial experience with PPP models index approach from drought to floods (World Bank for agricultural insurance products. Based on this 2009). The main objective was to assess prerequisite experience, the Government of India developed its PMFBY conditions and identify practical and efficient methods scheme using a PPP model. Introduced in 2016, PMFBY for conceptualizing and potentially implementing index- aims to provide insurance cover against multiple perils based insurance for agricultural losses caused by floods. to farmers countrywide. Some of the main features of the The work also assessed how modern technologies such scheme are presented in Box 3. as flood modeling and remote sensing, which are widely used to support flood-risk mapping and flood warning, We suggest the PPP approach applies to both the creating detection, and control, could be harnessed to support the value (product development) and capturing value design of flood insurance programs for rural clients. (product marketing) components of the business model. Given the differing requirements of each, we envisage The World Bank (2009) findings drew on background different PPP designs with differing sets of stakeholders feasibility studies carried out during 2006–2008 in and different types of partnership arrangements for each three countries, Thailand (the Upper Pa Sak River Basin, component of a business model for IBFI. Phetchabun Province), Vietnam (the Mekong Delta), IWMI - 10 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Box 3. Salient Features of the Pradhan Mantri Fasal Bima Yojana (PMFBY) scheme. Coverage of farmers: All farmers, including sharecroppers and tenant farmers growing notified crops in notified areas, are eligible for coverage. Compulsory for all farmers taking out Seasonal Agricultural Operations loans from financial institutions (i.e., loanee farmers) for notified crops, and optional for non-loanee farmers. Coverage of crops: Food crops (cereals, millets, and pulses), oilseeds, annual commercial, and horticultural crops. Coverage of risks: For preventing sowing and planting risk and standing crops (sowing to harvesting), comprehensive risk insurance is provided to cover yield losses due to non-preventable risks, namely drought, dry spells, floods, inundation, pests and diseases, landslides, natural fire and lightning, storms, hailstorms, cyclones, typhoons, tempests, hurricanes and tornados, post-harvest losses, and localized calamities. Levels of indemnity: Three levels of indemnity, 70%, 80% and 90%, corresponding to high, moderate and low risk levels are available for all crops. Level of sum insured: Sum insured per hectare for both loanee and non-loanee farmers is the same and equal to the scale of finance decided by the District Level Technical Committee. Sum insured for irrigated and non-irrigated areas may be separate. Premium rates: The actuarial premium rate to be charged by the implementing agency. The rate of insurance charges payable by the farmer are capped by the government. Use of Area Approach: Scheme operates on the basis of the area approach, i.e., defined areas for each notified crop for widespread calamities. The insurance unit is the village or village panchayat (council) or any other equivalent unit for major crops. For other crops, it may be a unit above the village level. Intermediary commission: Bank and other financial institutions are paid service charges at 4% of the premium collected from farmers. Rural agents are engaged in providing insurance-related services to farmers and are paid an appropriate commission as decided by the insurance company, subject to a cap prescribed under the Insurance Regulatory and Development Authority of India regulations. Release of subsidy: Government to release 50% of the total estimated premium subsidy to impanelled insurance companies at the beginning of the crop season on the basis of business projections submitted by each insurance company. Reinsurance: Insurance company to take all necessary steps to obtain appropriate reinsurance cover for their portfolio. In cases where the premium-to-claims ratio exceeds 1:3.5, or the percentage of claims to sum insured exceeds 35% (whichever is higher) at the national level in a crop season, then the government will provide protection to implementing agencies. The losses exceeding the above-mentioned level in the crop season would be met by equal contributions from the central government and relevant state governments. The liability of payment of all claims shall be of the concerned implementing agencies only. In the case of non-fulfilment of the above- mentioned condition, insurers shall be responsible for settling admissible claims in states where losses exceed the above ceiling. Technology: Use of innovative technologies such as satellite imagery to rationalize crop cutting experiments. Source: https://pmfby.gov.in/ and Bangladesh (country-wide flood-risk mapping). under different types of flooding conditions such as river The studies were undertaken jointly with local research flooding inundation, flash floods, and coastal storm centers, agricultural banks, insurance companies, surge floods. The studies underline the feasibility and international experts, and centers of excellence in remote differences in approach and methodology that need to be sensing and flood modeling. The findings from the three developed regarding all the underlying parameters such case studies provide insights into the complexities, as risk zoning and flood mapping, premium calculations, opportunities, and challenges posed in developing IBFI index designing, farmer enrolment, and loss assessment. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 11 Table 2 summarizes the feasibility of index insurance at Requirements of Product Development macro and micro levels under different types of floods (Lotsch et al. 2010). The design of agricultural insurance products is often driven by insurers, even more often by reinsurers Attempts are being made to overcome the constraints and, in an increasing number of cases, by ad hoc and challenges and to develop an IBFI product capable of pilot projects driven by governments or donors. An speedily estimating crop losses due to floods that is easy important concern regarding product design has to implement and meets the expectations of stakeholders been that neither the insurance needs of the targeted (Amarnath et al. 2017). population nor that of actors within the agricultural Table 2. Feasibility of macro- and micro-level flood index insurance. River flood/inundation Flash flood Coastal storm surge flood Macro level An indexed product for risk transfer An index product is not feasible and Indexing a product for a coastal by the aggregator to reinsurers objective measurement is not feasible. flood is not considered feasible but based on river discharge data is However, the localized nature of flash objective flood measurement and a feasible. However, objective flood floods may make conventional field disaster payment system could be measurement and loss payments assessment more appropriate, workable by using remote sensing. based on remote sensing would supporting a disaster payment system If a flood is highly correlated with a require the risk aggregator to or conventional indemnity based cyclone, then some form of risk establish their own payout rules. flood insurance. transfer based on cyclone occurrence This approach could allow the is potentially foreseeable, although transfer of large-scale risk but the with high basis risk to areas actually need for the aggregator to flooded. Engineering principles are establish payout rules at the local applied to calculate the construction level may make this product more of coastal dikes at given return suited to a government periods. Practical extension of this compensation scheme or for the work to calibrate agricultural flood holder of aggregated risk such as risk using flood modeling has not yet an agricultural bank. been undertaken. Risk transfer at the macro level to reinsurers for cyclone- induced coastal flood for agriculture has not yet been tested. Micro level Micro-level flood index insurance An indexed product is not feasible. A pure index product for flooding is highly challenging. A pure index Objective measurement is not feasible cannot be developed at the micro product for flooding cannot be due to rapid onset and dispersal of level. Objective and independent loss developed at the micro level. floodwater. However, the localized measurement using remote sensing Objective and independent loss nature of flash floods may mean more and an agreed payout scale can bring measurement using remote sensing conventional field assessment the most important benefits of and an agreed payout scale can is practical, supporting a disaster indexing to flood insurance. However, bring the most important benefits payment system or by conventional there is no real basis for developing of an index to flood insurance. indemnity insurance. premium rates. Reinsurance of major risks could be carried out using a macro index based on river discharge, leaving some potential basis risk with the insurer. Source: Lotsch et al. 2010. IWMI - 12 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries value chain have been ascertained during the monitor ongoing work, and provide feedback and development process and have therefore not usually technical support. We recommend using a facilitator been central to the design. As a result, uptake of many with the necessary technical competence and of the existing agricultural insurance products has been administrative and infrastructure facilities to perform low (Bhushan et al. 2016). this critical function. Developing a dedicated flood insurance product is IWMI initiated the concept of IBFI and has a large pool of information intensive, methodologically challenging, technical expertise and administrative capabilities, and has and resource demanding. Extensive efforts are needed all the competencies required of a facilitator to lead and to collect large amounts of historical data on a number guide product development. At this early stage of developing of variables, along with real-time data on a daily basis the IBFI product for field application and to demonstrate how using advanced technological innovations. Information is a facilitation unit should work, IWMI has assumed the role of required on: facilitator and is housing a technical support unit. i. the nature, source, frequency, and magnitude An IWMI team has been facilitating the process of of floods; developing an IBFI for India (Amarnath et al. 2017). ii. delineating those areas most at risk from flooding; This involved gathering data from various agencies and iii. flood characteristics (facilitating the classification nurturing collaborative arrangements with government of flood-prone areas into homogenous flood agencies, private insurers, reinsurers, financial zones); institutions, research institutions and agricultural iv. timings, durations, and levels of inundation; universities, and farmers to develop an IBFI for pilot v. yield loss as a function of various flood testing. Once these collaborative arrangements are in characteristics; place and a prototype of the product developed and pilot- vi. weather parameters; and tested, operational guidelines for putting the product into vii. cropping patterns, chemical use, and crop yields. practice will be formulated. Product design will need to be adaptively managed to accommodate any concerns Once the data are in hand, skilled analysts are needed to arising during the operational phase. We describe below draw inferences to build a financial product such as IBFI. some important concerns that need consideration during the operational phase. Meeting the data requirements for a multifaceted insurance product requires collaboration supported The Role of the Government by facilitation. Collaborative working arrangements for data collection are needed among institutions and Government support is vital at all stages of product organizations in both the public and private sectors, such development (Figure 10). Government agencies need to: as government departments responsible for agricultural insurance, research institutes and scholars, weather i. invest in data collection and make information information providers, disaster management authorities, available for use by stakeholders; space research organizations, insurance companies and ii. promote and facilitate research; reinsurers, and those farmers likely to be affected by iii. create development and training activities; floods. Figure 9 summarizes the tasks to be undertaken iv. facilitate a conducive policy and and the nature of institutional collaboration needed to regulatory environment; develop a complicated product such as IBFI. v. create product awareness; vi. test, pilot, and approve products; The need for a facilitator vii. undertake crop cutting experiments The involvement of many institutions in product to estimate crop yields; development brings with it a new set of challenges. While viii. review and monitor implementation and it may be possible to demarcate the roles that public adjust premium rates accordingly; and and private sector actors can individually best perform, ix. benchmark products and evaluate performance, it is challenging to coordinate and harmonize. Figure 10 including that of the insurance companies. illustrates the possible roles that public and private sector actors can play. The sections that follow briefly describe The government also needs to encourage the adoption some of these roles. of advanced technological innovations such as the use of satellites and drones in gathering data and estimating While each institution and actor may have the expertise crop losses. Often, national or international donors and for undertaking the task assigned, an institutional experts may need to contribute to and complement these arrangement is needed to coordinate the activities, government efforts. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 13 IWMI - 14 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Product Development and Technical Support Unit (Illustration for the case of IBFI facilitation by IWMI) Socioeconomic- Government Insurance Flood modeling Crop yield modeling financial analysis services services Space Agricultural Economic and Data collection Public and research university statistical data and liaising private insurers agency Meteorology Soil scientist, Primary data Insurance Reinsurance agronomist collection regulation agencies Disaster Water Agricultural State Grassroots management management and rural governments organizations revelopment Government Agricultural agriculture finance Feedback department institutions Disaster management Monitoring and evaluation Figure 9. Collaborative partnership requirements for product development. Two government roles are fundamental to the Reinsurance Facility (PRF). This facility could function in development and success of an agricultural insurance an uncertainty-neutral fashion and suggest affordable product. These are i) gathering data and making it premiums. Thus, the facility could insure farmers against available to stakeholders, and ii) acting as a regulator the most catastrophic risks (e.g., at the left tail of the to gain the trust and confidence of insured parties. We yield distribution) where there is more uncertainty briefly elaborate on these roles. loading, while the private sector would insure a relatively moderate risk. This could help create a unique PPP that The role of the government in providing data would take into consideration the public good and the needs of private reinsurers to not provide below-cost The large amounts of data required for development and unsustainable pricing. implementation of an insurance product such as IBFI are generally unavailable or inaccessible, especially at the Role of the government as an insurance regulator geographic level most suited to this kind of product. The role of a regulator is important when introducing Product development requires detailed data on many a new micro-insurance product. The primary function variables for many past years along with almost of an insurance regulator is to ensure consumer continuous present-day data. This includes data on protection, not to drive innovation. Ensuring adequate meteorological conditions, land use, agricultural financial stability of insurance providers is a key aspect. production, and vulnerability and risk exposure indicators. Insurance regulation is rarely the driving force behind Often these data are not yet available and need to be built the development of agricultural insurance but rather up over time. For example, the lack of weather stations at a promoter of product diversity and risk pooling in the local level limits the availability of data on important the market. An accommodating and robust regulatory weather variables crucial for the development of IBFI. environment is widely considered essential for scaling Recent technological advances in the availability and use up agricultural insurance systems. However, in the of remote sensing data suitable for developing indices initial phase of product development and piloting, have a high potential to overcome the substantial data regulation is often less important. During this phase, constraints faced by most parametric insurance projects.2 regulators need to focus on understanding the product and related issues and preparing a framework for the Meanwhile, the increasing availability of reasonably scaling-up phase. priced, small, automated weather stations for continuously recording local weather and the emergence The Role of the Private Sector of innovations such as drones offer immense opportunities for data gathering. However, besides requiring trained The government and the private sector should contribute personnel, such data are expensive to collect, process, equally to product development. Insurers and reinsurers analyze, and store. Given the costs and related help package the technical, social, and commercial institutional and administrative needs in accessing such considerations into a viable financial product (Figure 10). data, government support is critical. Insurers need to allocate responsibility for underwriting, assessing crop losses, devising procedures for processing Access to data: Making insurance more affordable and accepting levels of risk, working out methods for quickly settling claims to the satisfaction of farmers, For agricultural insurance to be viable, contracts must providing feedback, and procuring reinsurance, often from have low failure rates, be affordable, and be appropriate international reinsurers. Insurers must also contribute to for scaling up. One reason for high insurance prices is creating product awareness and scaling up the product. the uncertainty loading often applied by reinsurance companies due to sparse data in most developing Insurers need to work with stakeholders. Stakeholders countries. Local insurance companies rely on reinsurance will vary according to the requirements of the insurance to price the product and carry a substantial amount of product being developed and may include research the risk (over 90%). Faced with gaps in data, reinsurance institutes specializing in flood modeling and forecasting, companies build in a weighting for uncertainty, which agronomists with expertise in modeling crop yields against elevates premiums. levels of inundation, social scientists and finance experts able to undertake socioeconomic profiling and economic While simple subsidies delivered by the public sector analysis to determine willingness to pay and affordability may be an appropriate policy response to the need for of insurance to the farmers and analyze factors that could lower premium costs for poor farmers, Carter (2013) promote uptake of the insurance and suggest ways to suggests a cost-effective alternative in the form of a Public improve cost efficiency. 2 The use of satellite data for retail products is not without challenges. Farmers do not understand this technology and they tend to trust data from this source less than data collected from on-site weather stations. The possible failure of the satellite or the inability to access relevant data must also be factored in. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 15 IWMI - 16 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Education New Product Data Data andtechnologies testing collection provisioning productfor data and pilotingawareness Functions the government can best perform Product Granting Conducting Monitoring Policy and benchmarking approvals CCEs implemen- regulatory and tation environment performance Product development public-private Socioeconomic Education Formulation Flood Crop yield and financial and of product modeling modeling concerns awareness package Functions the private sector can best perform Reinsurance Claims Building data Liaise with Customer assessment inventory government feedback Figure 10. Indicative functions public and private sectors can best perform in product development. Note: CCE - Crop cutting experiments. Operational Issues Requiring Consideration understand and fair basis for calculating crop losses can Before Product Launch be established, it will be difficult to convince farmers to buy an IBFI product. Remote sensing potentially offers the Variability in the incidence of floods in flood-prone most reliable basis for assessing floods and calculating areas losses. However, issues of the availability of remote sensing images at an appropriate resolution and the cost Agricultural losses from inundation, and therefore of acquiring such images need to be resolved. In addition, insurance payouts, are linked to specific incidences farmers would need to be educated on the advantages of floods. An important consideration in product and reliability of remote sensing technology. Unless clients development, therefore, is how to demarcate the flood- are convinced about the methodology used to estimate prone areas into homogenous risk zones. Demarcation losses and calculate payouts, it may be difficult to market should be based on criteria such as the magnitude, a technology-based product. incidence, frequency, and pattern of flooding across regions. The entire geographic area surrounding a river Determining trigger values basin cannot be treated as one homogenous unit for the purpose of flood insurance. Creating homogenous There are often no historical data available at an zones is also important for determining premium rates. appropriate scale that can shed light on the extent of Demarcation into zones based on flood homogeneity and losses due to past floods and climatic variability over determination of premium rates based on differential risk the years. Some data on meteorological parameters and exposure in each zone can, to a large extent, help deal river discharge are usually available, and estimations with adverse selection (i.e., the tendency for those most of crop losses therefore need to be made on the basis at risk to obtain insurance). of loss modeling. Collaborative efforts with regional agricultural universities or other experts can help identify Compulsory versus optional flood insurance crop damage threshold levels for paying compensation for different crops. In India, agricultural insurance is generally compulsory for farmers taking crop loans from institutional sources Establishing premium rates and optional for those outside the formal credit system. Making insurance compulsory helps reduce adverse Setting a premium price for IBFI is complicated and selection compared to optional selection. However, requires information on expected losses, risk margins, and given that most small and marginal farmers do not or administrative costs. The expected losses and risk margins cannot access institutional credit facilities, making flood would need to be estimated using flood-risk models and insurance optional carries the risk of excluding a large available historical data. The level of administrative costs number of vulnerable people. A related issue is farmers’ needed to run the business, such as those incurred in eligibility to enroll concurrently in other agricultural acquiring data, office expenses, loss adjustment and so insurance schemes, such as PMFBY in India or a specific on, would depend on how efficiently the whole business is WIBCI program. What criteria should be permissible? developed and run. Careful consideration of these issues in the absence of any data would need to be made when A concern in India is whether IBFI coverage should be setting premium rates. extended to rabi crops (winter). Since floods are a major concern only during kharif crops (summer), IBFI is likely Risk transfer: Reinsurance to be made available to provide risk cover for kharif crops only. What should happen regarding risk coverage A review of major global flood events highlights for rabi crops? Could farmers invest in IBFI during the the catastrophic nature of floods. Flood insurance kharif season and buy a different insurance cover for the will likely be characterized by years of no claims rabi season? And should those farmers who continue when weather is clement and years of multiple to buy the IBFI product year after year enjoy certain claims following a major event. An insurer operating advantages and benefits not available to those farmers nationally, especially during the initial phases of a who intermittently opt in and out of the scheme? new program, will have limited opportunity to spread risk, for example, between different regions of a Assessment of crop losses country or varying zones within a broad region. In contrast, an international reinsurer is well placed With existing crop insurance schemes, crop losses are to develop a suite of catastrophe schemes from generally determined on the basis of historical crop yields different countries and achieve a balanced portfolio. and current yields inferred from crop cutting experiments. Hence, developing a reinsurance program will be an With flood insurance, it is difficult to estimate losses important element of financial management for a using these methods. Unless a simple, reliable, easy-to- domestic insurer offering flood insurance. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 17 Capturing Value: Issues in Marketing The role of the government in providing financial Index-based Flood Insurance support Marketing the new product will be as important as When discussing the role of the government in an developing it. However, marketing an agricultural agricultural insurance PPP venture, the availability of insurance product is challenging. Given farmers’ limited financial support gets the highest attention. It is not exposure to insurance and low willingness and ability uncommon for government finances to be used to to pay, insurers find it difficult to market such products. subsidize upfront farmer premiums to make insurance Therefore, they often have to first raise awareness to more affordable, support program administration bring about behavior change and encourage farmers to and operations, contribute to payouts, and purchase embrace crop insurance. With high overhead costs and reinsurance. low margins, insurers face the difficult task of creating an insurance marketing landscape and selling the product A survey of 65 countries conducted by the World Bank in to potential clients in large numbers. Insurers frequently 2009 estimated the overall government cost of upfront find it useful to partner with other organizations with a premium subsidies to be 44% of original gross premiums presence at the grassroots level, such as self-help groups in 2007 (Mahul and Stutley 2010). Including administrative and farmer associations, even if these partners have and operating costs and claim subsidies, the total cost to no previous experience of selling insurance products. governments of providing agricultural insurance was as Governments can often provide a helping hand in forging high as 68% of the original gross premiums. The public these partnerships, creating awareness, nurturing a cost of agricultural insurance subsidies represented 50%– conducive policy and regulatory environment, and most 300% of the premiums paid by farmers in most countries important, providing financial support. The absence of surveyed. Public support for agricultural insurance in partners with the requisite experience and the high cost of many high-income countries (including Italy, Spain, and forming partnerships has led to impressive innovations in the USA) represented more than twice the premium marketing insurance products in rural areas. We discuss paid by farmers. In contrast, in most middle- and low- below some issues that influence marketing agricultural income countries surveyed, public support to agricultural insurance products in general and IBFI in particular. insurance represented 50%–150% of the premium paid. Given the complexity of selling crop insurance products Premium subsidies are the most common form of public in large numbers to poor farmers dispersed over a intervention in agricultural insurance. The majority of wide geographic area, developing an appropriate countries that provide agricultural insurance, despite marketing strategy requires contributions from many their development level, also provide insurance premium stakeholders. It requires collaborative arrangements or subsidies. Some countries provide fixed premium partnerships to be forged among grassroots organizations subsidies (as a percentage of the gross premium) while such as rural cooperatives and self-help groups, rural others provide variable premium subsidies. A few financial institutions including MFIs, and government countries, such as India, cap premiums. Premium subsidy agencies that can provide financial support and oversee programs are offered mainly for MPCI or area-yield implementation. We envisage that a PPP involving insurance. An exception is South Africa, which offers non- insurance companies in both the public and private subsidized MPCI to individual farmers. sectors and government agencies with a mandate for agricultural insurance will be needed to efficiently and Concerns have been raised about the efficacy of premium effectively market IBFI. We briefly describe the broad subsidies in boosting the uptake of insurance by farmers contours of such a relationship and the respective roles and increasing food production. It has often been that the government and the private sector would play in suggested that government costs in providing insurance marketing the product. subsidies could be reduced by restricting premium subsidies to the marginalized sectors of society. However, The Role of the Government significant challenges exist in targeting subsidies to those sectors of rural society that deserve it the most. Some The government makes an important contribution to researchers have argued in favor of swapping upfront product marketing. It will need to actively assist with premium subsidies for smart subsidies, where governments creating product awareness, building the capacity of spend money for the public good, such as by collecting and stakeholders, selecting the insurance agency to partner providing relevant datasets for wider use by stakeholders. with and provide contracting services for overseeing Nonetheless, upfront premium subsidies continue to be product marketing, resolve disputes, scale up adoption considered essential for encouraging vulnerable sectors levels, secure reinsurance, and evaluate product of rural societies to adopt micro-insurance. The common performance. The government must also provide financial model for disbursing agricultural insurance subsidies in support to help cover the cost of providing the insurance India is described in Figure 11. We recommend a similar and subsidizing insurance premiums. model for paying out subsidies under IBFI. IWMI - 18 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Ministry of Agriculture and Farmers Welfare State government (State Nodal Agency) Insurance companies Partners and agents Beneficiaries/ farmers Figure 11. Model of subsidy flow in Indian agricultural insurance. Other financial support provided by the government countries, agricultural reinsurance was provided by both public and private entities. Some countries rely only on Besides providing insurance premium subsidies, public reinsurance (e.g., Costa Rica, Iran, Japan, and governments often also provide financial support for other Kazakhstan). We suggest that insurance companies operations related to the agricultural insurance business. providing IBFI would procure reinsurance facilities from A World Bank survey (Mahul and Stutley 2010) showed private reinsurers, supplemented by government support. that governments provide support for public reinsurance in 32% of the surveyed countries, administrative and Role of the government in undertaking impact operational expenses in 16% of surveyed countries, and evaluation loss adjustment costs in 6% of surveyed countries. Public- sector support for reinsurance is higher in high-income With support from research institutions, the government economies than in middle-income economies. Support for can play a major role in collecting hard evidence to reinsurance ranges from establishing national reinsurance evaluate the performance of a new insurance product, companies to the formation of agreements under which assess any factors constraining its scaling up, explore governments act as excess-of-loss reinsurers. In such avenues for improving efficiency and reducing premiums, cases, the government charges no reinsurance premium. and change product design and marketing. Such product evaluations help support agricultural insurance, including In PPP arrangements, agricultural reinsurance is highlighting the positive effects of agricultural insurance purchased mainly from private reinsurers. It is critical on production and productivity, so the economic for domestic agricultural insurers to secure enough risk justification for supporting agricultural insurance does capital to cope with a major disaster causing catastrophic not remain theoretical. This is important in determining insurance losses. In two-thirds of the countries surveyed where agricultural insurance truly makes a contribution to in the World Bank (2009) study, agricultural reinsurance food security and retaining high-level support for was provided by private reinsurers. In 22% of the surveyed the sector. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 19 The Role of the Private Sector the fast-growing agricultural insurance segment. They can also be key to encouraging the insurer’s business to grow, In a PPP endeavor, both the government and the private financially sustaining it, and achieving scale. Insurance sector have to collaborate at all stages and contribute to companies are partnering with banks, MFIs, cooperatives, the success of the venture. We see a major role for the supermarkets, retailers, farmers’ groups, and agricultural private sector in raising product awareness, marketing, input suppliers to increase sales. Concurrent with distribution, settling claims, and ensuring clients are using traditional channels for marketing, they are satisfied with the product. increasingly using more sophisticated technology-based approaches, such as social networking, telemarketing, Distribution of IBFI and Internet sales to contact potential clients and market their products.3, 4 The exact nature, form, and Distribution is one of the most important aspects of mix of distribution channels is likely to be shaped by running an insurance business, and the same stipulation underlying factors such as the development status of applies equally to the successful rollout of IBFI. To be private insurance markets, demographics, literacy levels, cost-effective, an insurer should be able to sell the plus cultural, infrastructural, and regulatory setups. product and provide support across the entire value Irrespective of the distribution channel chosen, face-to- chain, including for product promotion and educating face advice delivered by independent producers remains potential subscribers about the product, enrolment, a vital component in the distribution mix, especially premium collection, claims reporting, assessment and when it comes to meeting complex consumer needs with payment, and dispute resolution (Figure 12). increasingly sophisticated products (DTTL 2010). Handling the complexities and costs of product Insurers in the micro-insurance business have thus been distribution alongside the administrative operation working with a broad range of partner organizations in of agricultural insurance is a challenge for insurers. contact with low-income people and finding new ways to They generally find it more efficient and cost-effective work with those organizations across the entire life of an to partner with one or more grassroots organizations insurance product, from design to paying claims. They are for product distribution and other activities. Often, a learning how to deliver value to those organizations and single partner may not possess sufficient capabilities embed themselves in their core business. Nonetheless, to undertake all the activities required to market an the basic principle driving these innovations remains the insurance product effectively. In such cases, distribution same, a distribution partnership must deliver value to the partners can be combined in creative ways to leverage insurer, to the distribution channel, and to the clients. their infrastructures, core strengths, and capabilities. While deciding on an appropriate distribution channel, Distribution costs are and will continue to be a significant the insurer needs to assess the strengths and weaknesses proportion of the cost of an insurance business. However, of each option in terms of: successful distribution of the insurance product is critical to the revenue stream of the insurer. Insurers must adopt · Client understanding: the ability to give advice and a mindset that views distribution not as a cost burden but improve client understanding as a profit generator and a cornerstone of success. Efforts to develop innovative ways to distribute its products Product diversity: the willingness to offer a wider efficiently and cost-effectively must continue (DTTL 2010). range of products The available evidence suggests that in developed · Scale: the capacity to reach many potential clients insurance markets, within high-income and upper- middle-income countries, insurance is traditionally · Brand and trust: the popularity of the channel and marketed through agents employed by insurance trust of the people it commands companies or brokers. In low-income countries with underdeveloped insurance markets, agricultural · Costs: the cost to the insurer insurance is mainly provided through cooperatives, MFIs, rural banks, agricultural input supply companies, · Partnership risks: the stability of the partnership and farmer groups in partnership with an existing and the partners’ willingness to engage in a long-term development program. The comparative benefits and relationship challenges of involving such institutions in distribution are given in Table 3. While almost 80% of agricultural Developing partnerships and innovative distribution insurance programs are offered voluntarily, agricultural channels can also capture untapped opportunities within insurance is often compulsory for borrowers of 3 In drought-prone Gujarat State in India, more than 50,000 farmers enrolled in PMFBY for the 2016–2017 kharif season via the state portal on crop insurance. Taking a cue from Gujarat, the Karnataka government prepared its state portal for PMFBY. 4 Some researchers think that because agricultural insurance is service-intensive, it is questionable whether alternative distribution approaches such as using the Internet and mobile phone networks will be successful (Herbold 2014). IWMI - 20 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries agricultural loans in lower-middle and low-income that farmers may have other, non-insurance means to countries (Mahul and Stutley 2010). manage their risks. Bundling can potentially lead to customer protection issues if buyers are not aware that they are purchasing insurance or if they do not fully Role of Microfinance Institutions understand the product. India has set up an elaborate financial infrastructure for To protect themselves from the risk of default on their dispensing agricultural credit at concessional rates of agricultural portfolio, MFIs can buy index-based insurance interest to farmers. However, a large proportion of farmers or portfolio insurance. Although this has not yet been either do not have access to this formal institutional tested on a large scale, it has been piloted in several arrangement or they have access but are not able to countries. Portfolio insurance has the potential to benefit borrow (e.g., because they defaulted on an earlier loan). farmers both ex-post (via restructuring loans, loan Those in the latter group have to depend on private money write-offs, and the offer of emergency loans) and ex-ante lenders or other informal sources. MFIs have emerged as through a larger supply of agriculture credit and reduced an increasingly important source of lending and recipient agricultural lending interest rates (Meyer et al. 2017). for savings in rural areas in many low-income countries. They have often been unable to expand their agricultural MFIs offer good opportunities for insuring farmers who lending portfolio significantly because agricultural-sector are uninsured. However, continued efforts must be made lending is seen as risky and prone to natural disasters and to identify those opportunities to improve microfinance other calamities. Farmers living in areas frequented by business models to achieve greater effectiveness, such mishaps suffer significant losses that render them efficiency, and scale. incapable of paying back their loans. This can lead to the destruction of risk capital, reduced access to liquidity, Which Channel to Choose for Distributing decreased lending, and sometimes insolvency of the MFI IBFI? concerned. Distribution is crucial to marketing micro-insurance To diversify spatially, expand their credit portfolios, products. Over the years, the challenge of distributing and reduce the default risk on their agricultural lending insurance to low-income clients in far-flung areas has portfolios, MFIs have tested offering weather index-based given rise to a range of innovative channels. However, agricultural insurance products to their customers. An choosing the right distribution channel or a mix of MFI’s involvement might simply be a delivery channel distribution partners for a given product can be a difficult to clients for the index-based insurance product, or decision. sometimes the MFIs themselves become direct customers of insurance. In India, the MFI BASIX is both retailing a The maturity of the target market is an important weather index-based rainfall insurance product and using consideration when choosing distribution channels. In an aggregate rainfall risk-transfer product to protect markets where low-income people are not familiar with against default risk. insurance, mandatory insurance for groups is usually most successful. Insurers look for a distribution channel, Farmers taking crop loans from institutional sources in such as a financial institution, which already has a large India have to buy crop insurance. By bundling credit with client base and can facilitate mandatory enrolment. insurance, MFIs can opt to sell index-based insurance Clients will often require a greater level of interaction in to their customers on a mandatory or voluntary basis. such immature markets to understand and make use of Packaging credit with insurance has several advantages. the product. As markets progress, insurers can switch Initially, a compulsory insurance may sometimes be to voluntary products but will need to sell them to large the only viable way to sell agricultural micro-insurance established groups. At this stage, with the insurance because it helps generate the volumes needed to reduce culture still relatively weak, channels with an active sales the insurance premiums, reduce the cost of sales, and approach are more likely to succeed in selling voluntary manage adverse selection, thereby ensuring that not products. When clients are familiar with and value only high-risk customers take the insurance product. insurance, insurers can move on to the third, scaling- Credit-bundling also offers a holistic solution to mitigate up stage, which is characterized by selling voluntary agriculture risks. Insurance products can be bundled insurance to individuals. With a stronger insurance with credit, agricultural advisory services, weather data, culture, more passive sales approaches may be possible, and access to quality inputs. By offering insurance as such as selling products off the shelf in a shop. part of a broader risk-management framework, MFIs can significantly increase the value of insurance for farmers. There is no one-size-fits-all distribution model. Tailored Bundling insurance with credit can enable MFIs to charge models are required for disseminating different lower interest rates to farmers by transferring the loan types of insurance products and for distributing a default risk to the insurance margins. A downside is that specific insurance product in varied settings. Often, a compulsory bundles do not accommodate the possibility multipronged approach that caters to the varied contexts Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 21 of different regions works better than a uniform approach. An illustration of the relationship between public and It is always helpful for insurers to work with an established private sectors in marketing an IBFI product is depicted in organization with good existing networks because it will Figure 12, with the roles these sectors perform within the help accelerate growth. suggested PPP scenario depicted in Figure 13. Table 3. Distribution channels for agricultural insurance: benefits and challenges. Distribution model Benefits Challenges Limited role of cooperatives, unions, • Client trust is high due to the • The insurer may not be well MFIs, and banks pre-existing relationship positioned to get potential clients to • When queries, concerns and claims see the need for coverage or are raised directly with the insurer prioritize its purchase such as through a local office, • Incentives may be critical for provision of quality information is distribution channel sales agents to more assured spend time positioning the product • The role of a financial institution and prioritizing sales as distribution channel facilitates • The insurer may incur high sales the provision of pre-financing or costs, particularly if they must co-payment, making the product invest in a local presence, such as more affordable before harvest opening an office season • In some schemes, insurers and • In some schemes, operational brokers often face an information costs are effectively shared blackout and have little information between all stakeholders on sales numbers until they receive • Outreach the final figures, particularly when the distribution channel does not have a robust information technology system Comprehensive role of cooperatives, • Client trust is high due to the • Limited time to commit to unions, MFIs, and banks pre-existing relationship micro-insurance (education and • Additional cost of distribution is sales) activities, leading to low if using local staff sporadic, unsustained efforts • Costs are reduced where members • If the institution does not have local take on some roles, such as agents and is not cross-selling, inspection costs of reaching villages will be • Umbrella organizations, such as high and the commission level may federations and leagues, offer an not be sufficient opportunity for these channels to • Significant training needed to raise more cost-effectively build low understanding of weather- awareness and undertake based insurance educational activities • Outreach Local development program staff • Client trust is high due to the • Limited time to commit to micro- pre-existing relationship insurance education and sales • Additional cost of distribution is activities low as staff are already in place • Low understanding of weather- based insurance • Quantifying costs and benefits is challenging, as micro-insurance work is overlaid with other field staff activities Source: GAN 2017. IWMI - 22 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 23 Alternative models for marketing IBFI Fully controlled by the Public-private Complete market government and/or partnership system its agencies Insurance Governments - Central and state companies Disaster management authorities Insurance regulators Public sector insurance companies Partners and agents: Agribusinesses / banks / MFIs / cooperatives / NGOs / self-help groups / Mobile service providers / community-based organizations / retail chains / agriculture input suppliers / post offices / utility companies, etc. Farmers Figure 12. Marketing channels for IBFI under different partnership arrangements. IWMI - 24 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Carry primary Manage risk Investment of Select risk exposure of reserves and partners portfolio premiums Functions the private sector Claim Policy Direct insurers can best perform payment document- sales ation Reinsurance Liase with government Client Enrollment Product Education Branding interface promotion and trust Product marketing Functions the private Sale of Value aded Advance Premium Product Public-private Partnership sector partners and policies services premium collection delivery agents can best perform Claim Claim Dispute Disburse Customer assess- settlement resolution compen- feedback ment sation Product Financial Contracting Regulatory Legal approval support process functions processes Functions the public sector/government can Investor Data Monitoring Oversee best perform education provision and impelemen- evaluation tation Dispute Scaling up resolution Figure 13. Functions best performed by different actors in a PPP marketing arrangement for IBFI. Issues in Uptake and Scaling The goal of scaling up is to reach as many people as · the type of farmer and crops grown; possible. Given the level of risk cover provided by an agricultural insurance product, usually at a highly · the nature of risks encountered in the past and subsidized cost to the farmer, the reasons for observed foreseen for the future; low penetration rates of agricultural insurance have always been unclear. Innovative business models and · awareness about the availability of insurance and proactive public policies have the potential to stimulate understanding of the associated conditions governing greater adoption and contribute to scaling up. insurance; How to devise appropriate insurance strategies for risk · the farmer’s perception of the likelihood and management in agriculture has long been debated by frequency of the peril that the insurance product policy-makers, practitioners, and researchers around the covers; world. Only limited systematic efforts have been made to understand the role different factors play in influencing · perceptions about the utility of the insurance and the the uptake of agricultural insurance by potential clients. nature and level of coverage provided; A clear understanding of what influences demand for agricultural insurance is vital for designing and developing · affordability, willingness, and ability of the farmer to appropriate insurance products, enhancing their pay the premium; effectiveness, increasing participation rates, and framing public policies relating to the provision of financial · the availability of government subsidies on the subsidies. The lack of historical data on relevant variables premium and the ease with which these monies can along with the complex interplay of influencing factors has be accessed; frequently hampered empirical analysis and prevented researchers from finding a prescription for making · myopic thinking (the desire for immediate returns on agricultural insurance work at scale. insurance); Based on the literature, we can categorize the factors · the fairness of the trigger level at which payouts are influencing uptake and scaling up of agricultural insurance activated; into four groups: · the process, ease, and speed with which claims are · Behavioral factors that influence farmers’ enthusiasm settled, and the fairness of the settlement process; to invest in insurance. · ease of buying an insurance policy; · Financial factors that stipulate governments’ willingness to provide financial support. · any requirement by law to compulsorily buy an insurance policy; · Legal and regulatory factors which set ground rules for fair business and govern their adherence by · buying insurance as a precondition for obtaining various stakeholders. institutional credit for crop production; · Facilitating factors including product design and · the presence of an effective dispute-resolution development, business models, research and mechanism; development, data availability and awareness creation, which help ensure an efficient supply of · the availability of government compensation to cover insurance services. post-disaster losses; and Figure 14 provides a generalized overview of the interactions · access to other avenues for risk coverage such as between these groups. We elaborate briefly on each. personal savings. Behavioral Factors Financial Factors The farmer’s decision to buy insurance is influenced by Increasing losses from disasters and the associated multiple interacting behavioral factors. These include: burden on government budgets to provide relief to Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 25 Legal and regulatory factors Facilitating Financial factors Behavioral factors (government factors (business subsidies, etc.) models, etc.) Figure 14. Factors influencing uptake and scaling of crop insurance. those affected has been the clear driver of insurance · If so, what level of subsidy should be provided, and against natural disasters in most countries. Government does the level of premium subsidies affect insurance compensation to farmers for crop loss is provided either uptake? after the event as a lump-sum payment or in advance through facilitating the purchase of crop insurance. Based · What is the price elasticity of demand for insurance, on the assumption that without financial support farmers and how much premium subsidy is required to may not buy insurance, many governments that offer it achieve a certain level of coverage? also provide extensive financial support. This includes subsidies on insurance premiums, contributions towards · How does the demand for insurance change with the administrative and operational costs incurred by the level of coverage provided and the nature of the private companies in delivering the insurance program, insurance products? and the government’s share of underwriting gains and losses. An important but unanswered question posed There is a fundamental dilemma regarding subsidies for from a policy-maker’s perspective is: Are public subsidies crop insurance: there is no objective rationale for the necessary to incentivize farmers to buy agricultural current matrix of premium subsidy rates on offer, either insurance? Despite rising subsidy budgets, insurance in total or by product and coverage level. Rather, the adoption rates have remained low, especially in matrix of subsidy rates is a political equilibrium based developing countries. This raises many questions. on what society will pay. The lack of an objective basis for setting rates is not an issue until a program becomes · What impact does the availability of subsidies have? problematic. Failure to satisfactorily address the issue of objective measurement can lead to cuts and the potential · What difference can it make in scaling up the elimination of a program (Zulauf 2016). adoption of agricultural insurance? A related financial issue that has also remained unresolved · Should governments continue to provide insurance and that critically influences insurance uptake is: should subsidies year after year? the government provide ex-ante subsidies in the form of IWMI - 26 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries premium subsidies or provide ex-post reimbursements to · the availability of efficient business models for sales compensate for the loss due to damage? Which is more and delivery of insurance products, efficient and more effective, and what are the trade-offs? · fair and timely settlement of claims and a channel for Legal and Regulatory Factors conflict resolution, and · a wide network of coordinated partners to ensure the Legal and regulatory factors define the rules of the game, availability of insurance products and services across ensure that implementation is impartial, and safeguard the a wide area. interests of stakeholders. Some factors that influence the uptake of insurance are direct, while others are less so. The Careful consideration of the influences of groups of factors, direct factors include: both in isolation and combined include: · the compulsory purchase of agricultural insurance by · acknowledging that insurance is a complex financial all farmers, undertaking, · a targeted group of farmers such as those in a · understanding the demand for insurance, specific zone or agro-climatic region, · developing appropriate insurance products, · the compulsory purchase of insurance for multiple perils or a named peril such as weather and floods, · understanding impact pathways and methods for increasing product penetration, · the availability of dispute-resolution mechanisms, · evaluating the soundness and profitability of · the speedy and impartial delivery of justice, insurance programs, and · the financial soundness of the insurance companies · securing public support. and other institutions involved in the selling process, and The use of analytical tools and incorporating notable features of different groups of factors within a · arrangements for underwriting financial losses cohesive modeling framework provide a basis for through a link-up with a reinsurance company. understanding the interplay between these factors and drawing more meaningful inferences about Indirect factors include an obligation to purchase insurance demand and uptake. Excluding such metrics from as a pre-condition to access certain facilities, such as modeling frameworks may introduce non-trivial concessional crop loans from institutional sources. impacts and result in program-wide demand elasticity being underestimated. Facilitating Factors To date, little systematic research has been undertaken to incorporate interacting sets of factors in a Facilitating factors ensure the smooth conduct of the comprehensive analytical framework, possibly because insurance business, promoting wider adoption and growth. of the complexity involved and the lack of long- These factors include: time-series data. Limited context-specific empirical information is available in the literature on how some · appropriate and differentiated product development of the these factors affect insurance uptake but mostly aligned to the needs of farmers; analyzed in isolation. Recognizing that it is not wise to generalize on the basis of such results, we present a · research and development support to facilitate the summary of evidence from the literature on the impacts creation of such products; and of certain important factors influencing demand and uptake of agricultural insurance. · access to historical data on various aspects of product development, including local weather data or satellite imagery and access to time-series data on Empirical Evidence: Impact of Different agricultural variables such as crop yields. Factors in Determining Insurance Uptake Facilitating factors include: Lack of empirical data on the uptake of insurance · creating awareness of the salient features of the by farmers under varying underlying conditions has insurance products through an appropriately hampered a systematic analysis of factors that accelerate designed communication strategy, or constrain uptake of insurance. Most of the literature Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 27 has focussed on a single underlying factor on which some with access to agricultural insurance in the Philippines information could be obtained to draw conclusions about reported that although grievance-redressal mechanisms its significance in influencing uptake. In reality, several were present, the outcomes from using these mechanisms factors in isolation and in various combinations influence were mixed. Most rated them as unsatisfactory. insurance uptake. In what follows, we give a brief summary of results obtained from some of the exercises Role of Social and Economic Factors undertaken to explain uptake. The empirical evidence on the impact of social and Awareness about the Insurance Product and economic factors suggests that they can have a significant Clarity on the Conditions of an Insurance impact on insurance uptake and scaling up. Kumar et al. Contract (2011) reported that variables such as the gross cropped area, income from sources other than agriculture, the Lack of awareness about the range of risk-mitigation presence of risk in farming, the number of workers in interventions and products available and those that best the farm family, plus affordability and satisfaction with match farmers’ needs constrains adoption levels. Based the premium rate significantly and positively influence on a survey of 600 farmers in the Indian state of Tamil the adoption of insurance. In one of the best systematic Nadu, Kumar et al. (2011) showed that, while almost 65% attempts to measure the determinants of crop insurance of the farmers knew about government agricultural risk- purchases undertaken in France and Italy, Enjolras et al. mitigation measures, only around half were aware of crop (2012) showed that purely agricultural indicators such as insurance schemes and products. farm size and diversification were key factors for insurance purchase decisions in both countries. Failure of agricultural insurance markets to scale up can be caused on both supply and demand sides. On the A recent study by Farrin et al. (2016) set out to understand supply side, the most studied issues are asymmetric the role that factors relating to money and time played in and incomplete information with the resulting problems influencing the insurance purchases of different groups of adverse selection, moral hazard, and systemic risk. of farmers in the USA. The authors found that relatively (Chambers 1989; Miranda 1991; Mahul 1999; Just et al. wealthier farmers spent less on insurance, choosing 1999; Bourgeon and Chambers 2003), On the demand instead to self-insure through savings, while limited- side, the inability of farmers to precisely assess the resource farmers with low farm incomes used savings to benefits they might derive from agricultural insurance is increase insurance coverage. The longer the time a farmer often cited as a reason for limited demand. factored into the decision-making process when comparing insurance versus savings for risk management, for example, Insurers or agents are sometimes unable to clearly considering many crop seasons rather than deciding on just communicate the terms and conditions of the policy to one, the less important insurance became. the client or, in a bid to sell an insurance product, may deliberately exaggerate the potential benefits. This can Another explanation for the limited interest in insurance, lead to a mismatch between farmers’ expectations and particularly MPCI, is that the organizational structure of any payout received in the event of a claim. This has a farming means farmers can use other private instruments negative impact on farmers’ trust and they are less likely to manage risk, including product diversification, credit, to buy an insurance product. The Prabhakar et al. (2013) and financial markets. Therefore, the potential demand for study on the effectiveness of agricultural insurance crop insurance could be lower than commonly believed in the Philippines, Vietnam, and Malaysia identified a (Wright and Hewitt 1994). mismatch between compensation, insurance payouts, and farmers’ expectations. Most farmers were not sure Premiums and Financial Subsidies about the damage-assessment procedures adopted by the insurance companies and were overwhelmed Many factors influence a potential buyer’s decision to by the claim procedures. These findings highlight the purchase an insurance product. While premium prices need to strengthen public awareness programs before do influence purchase rates, their strength in swaying enrolling farmers in insurance schemes. In another study, investment is often limited. Lower premium rates per se Garrido and Zilberman (2008) reported that although may not necessarily increase the purchase rate, although insurance did help farmers recover in areas where they affordability issues may have some influence. Some had insurance, the claimants felt the payouts did not studies show that individuals employ intuitive thinking completely compensate for their losses. rather than systematic consideration of cost versus future claims when choosing to forego insurance. They are Concurrent with the lack of clear understanding of the guided by: terms and conditions governing insurance contracts, farmers sometimes find they either have nowhere to go · simplistic decision-making rules, such as to resolve disputes or that available dispute-resolution the likelihood of a disaster being lower channels are unsatisfactory. For example, farmers than their threshold of concern, IWMI - 28 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries · a desire for immediate returns on insurance, and program. Coble and Barnett (2012) examined how subsidies and participation have changed over time in the · viewing insurance as an investment USA. They found that while both have increased, it was rather than a protective measure. not possible to attribute the increase in acres5 insured solely to higher subsidy percentages. Nevertheless, It is difficult to convince individuals that the best return it seemed clear that higher premium subsidies had on investing in protection is no return at all. Generally, contributed greatly to increased participation. Enjolras et people voluntarily purchase insurance after a disaster al. (2012) reviewed the available literature on the subject event rather than before and often cancel their policy and showed the consistent failure of private markets to several years later if they have not suffered losses. operate comprehensive, multi-peril agricultural insurance sustainably in the absence of public intervention. Even In a European study, Enjolras et al. (2012) concluded that with strong public support, insurance demand was not if the potential benefits delivered by insurance overcame often as high as might be expected. the cost of buying the policy, an insured farmer remained insured, even if the cover was costly. In contrast, in a survey of 65 countries based on agricultural insurance practices and their performance, A preliminary assessment of farmers’ willingness to pay Mahul and Stutley (2010) concluded that subsidies were for drought insurance in China, Turvey and Kong (2010) not always a precondition for high adoption. High levels of showed that while there is a significant demand for agricultural insurance uptake could be found, not only for insurance, price can be an issue. The results indicated programs carrying high premium subsidy levels such as that many farm households would transition from a no- MPCI in Canada, India, and the USA, but also in countries demand state to a demand state as the price of insurance with strong traditions of agricultural insurance through fell. This suggests that widespread adoption of insurance unsubsidized named-peril crop insurance and livestock may require government intervention. insurance such as Argentina, Australia, and Germany. These survey results did not support the argument that To understand the impact of subsidized insurance premium subsidies are a precondition for farmers and premiums and how much subsidy is required to attain a herders to purchase agricultural insurance. particular level of participation, geographic coverage, or total premium volume, subsidy providers need Similarly, a recent report commissioned from the United sound estimates of insurance demand elasticities that States Government Accountability Office based on appropriately model subsidies and related effects. Despite elasticity estimates in the literature strongly concluded the extensive literature on insurance demand, recent that subsidization in the Federal Crop Insurance Program direct evaluations of aggregate demand responses to could be cut substantially without significantly affecting subsidization in crop insurance are surprisingly scarce. program participation (GAO 2014). Three sets of empirical studies exist querying the impact of subsidies on the uptake of insurance. The first set In reviewing the impact of subsidies on insurance shows that the availability of subsidies has a positive uptake, Woodard (2015) showed that the majority impact on insurance uptake, a second set draws the of studies have historically found inelastic demand opposite conclusions, and a third set presents a mixed responses or inelastic responses to expenditure picture. on services related to the same under insurance (Goodwin 1993; Goodwin et al. 2004; Coble et al. 1996; In a study on the effectiveness of agricultural insurance in O’Donoghue 2014; Shaik et al. 2008). Realization of the the Philippines, Vietnam, and Malaysia (Prabhakar et al. bulk of econometric results regarding high program 2013), it was reported that the cost of insurance appeared uptake despite findings of inelastic demand have to be the single most important determinant of buying a continued to puzzle researchers and policy-makers. policy. Most respondents, whether currently participating Such conclusions can be counterintuitive on casual in insurance or not, preferred fully subsidized insurance. inspection of some programs when evaluating uptake in In Vietnam, a high proportion of enrolled beneficiaries response to an increase in subsidization. Nevertheless, preferred full subsidization of insurance compared to non- findings of inelastic demand at first glance may beneficiaries. suggest that such programs for subsidizing insurance accomplish little (Woodard 2015). In developing In crop insurance programs, policies are deliberately countries, however, where farmers have little ability to priced below the actuarially fair value. Glauber (2004) pay insurance premiums, some of the evidence shows found that introducing heavily subsidized crop insurance that subsidized insurance, in the short to medium term, policies significantly increases participation in the does provide a stimulus for uptake of crop insurance. 5 1 acre = 0.40 hectares. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 29 Conclusions and Way Forward Weather index insurance, of which IBFI is a type, is an needs, the availability of better data and information, and important risk-transfer innovation that can minimize the methods for keeping the product simple for consumers. long-term impacts of floods faced by smallholder farmers in flood-prone areas. This report offers a framework to 5. Engaging the private sector understand the challenges of a business model for IBFI, with a focus on insurance product development and market Even when farmers can afford an IBFI product, insurers development. The product development side focuses on are not always prepared to offer them. For nearly all the set of activities, mechanisms, and relationships for the cases examined, private insurers were not the first to offer development and provision of the product to create value. index-based insurance. The public sector, multilateral The market development aspect focuses on the activities, agencies, and NGOs appear to have taken the lead. This mechanisms, and relationships that enable effective uptake is perhaps because private insurers are constrained by of a product to capture its value. With a focus on these the ‘first mover’ problem.6 A key highlight of this study two aspects of IBFI, the report makes use of case studies is that a strong PPP is needed to manage and scale up to analyze and examine the challenges in the provision and an IBFI product among farmers. Therefore, engaging the uptake of IBFI among small-scale and marginal farmers. private sector from the beginning plays an important role in scaling up any product. While the potential benefits of IBFI are great, uptake and its implementation are challenging. The following 6. Facilitating the insurance scheme recommendations are offered for the development and dissemination of IBFI products. The many hurdles indicate that a facilitating role played by NGOs, donors, and others is required to make index 1. Improve data quality and availability insurance accessible. For scaling up, governments and donors will need to intervene more actively as enablers Accurate and timely weather data are key to successful and facilitators to support sector development. index insurance products. The relatively high cost of private weather data services constrains the potential 7. Promote an enabling legal and regulatory for scaling up insurance purchases. Infrastructure and framework multiple services for data must be provided. There are many hurdles in establishing index-based 2. Increase client awareness on index insurance insurance programs that make spontaneous, market- driven development difficult. In nearly all cases, the Smallholder and marginal farmers often do not initial challenges of missing public goods and resources understand the benefits of insurance, and even when and inadequate insurance laws and regulations pose a they do often cannot afford it. Therefore, index-based problem. Having local stakeholders in the lead is critical, insurance programs should include awareness raising, especially to overcome the initial challenges and build initial training, and an overall, continuous approach to client capacity. capacity development. When farmers understand the use of index-based insurance as a risk-reducing investment, 8. Operational challenges of reaching the end-users they are better positioned to know when and how to make a claim and have more realistic expectations. One important innovation in scaling up IBFI is bundling it with other products and services to reduce costs and align 3. Capacity development incentives. When insurance is tied to credit or farm inputs, the credibility of the supply system affects the perception It is crucial to support technical assistance initiatives and build of the entire package. Therefore, it is important to involve capacity among regulators, insurers, farmer’s associations, private actors to scale up adoption effectively. financial service providers, and clients. This training and awareness-building should start early in the pilot stage and 9. Access to risk-transfer markets continue throughout product launch and evaluation. Reinsurance support is critical for many meaningful 4. Monitor and evaluate the products to promote index-based insurance developments, and it is a crucial condition for scaling up. It can be a business driver as Thorough monitoring and evaluation exercises need to reinsurers are ready to take on a significant amount of be undertaken regularly to ensure effective learning risk. This practice will allow insurers to earn commissions and adaption. All products require ongoing review and without tying up capital, unlike in typical insurance where development to continuously adapt to new risks posed reinsurers require a retention level of at least 15% of the by climate change, advances in technology, consumer risk to avoid moral hazard. 6 Firms who are the first to enter a market with a new product (i.e., first-movers) can gain substantial market share due to lack of competition, sometimes their efforts fail. IWMI - 30 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries References ADPC (Asian Disaster Preparedness Center). 2005. Integrated flood risk management in Asia: A primer. Bangkok, Thailand: Asian Disaster Preparedness Centre (ADPC). Amarnath, G.; Vairavamoorthy, K.; Agarwal, A. 2017. Satellite imagery+crop insurance=smallholder farmers’ gain. Geospatial World 7(3): 58–61. 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Promoting access to agricultural insurance in developing countries: Agricultural Insurance Development Program (AIDP) strategy paper – 2013-2015. Washington, DC: World Bank Group. Wright, B.D.; Hewitt, J.A. 1994. All-risk crop insurance: Lessons from theory and experience. In: Hueth, D.L.; Furtan, W.H. (eds.) Economics of agricultural crop insurance: Theory and evidence. Dordrecht, Netherlands: Springer. pp.73–112. (Natural Resource Management and Policy Series Volume 4). https://doi.org/10.1007/978-94-011-1386-1_4 Zulauf, C. 2016. Why crop insurance has become an issue. farmdoc daily 6(76). 6p. Available at https://farmdocdaily. illinois.edu/2016/04/why-crop-insurance-has-become-an-issue.html (accessed on July 13, 2021). Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 33 Appendix 1. Glossary. Actuarial premium rate: An estimate of the expected value of future losses, generally based on historical loss data. Adaptation: Adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts. It refers to changes in processes, practices, and structures to moderate potential damage or to benefit from opportunities associated with climate change. Crop cutting experiments: An assessment method employed by governments and agricultural bodies to estimate the yield of a crop or region during a cultivation cycle for randomly selected plots of land. Index insurance: Payout benefits are triggered by a predetermined index (like rainfall) for agricultural production losses due to weather and catastrophic events. Possible indices include rainfall, yields, or vegetation levels measured by satellites. Micro-insurance: Micro-insurance products offer coverage to low-income households and individuals with little savings. It is tailored specifically for lower valued assets and compensation for losses. Microfinance institutions: Microfinance institutions provide loans to low-income clients, including micro-companies and the self-employed, who traditionally lack access to mainstream sources of finance from banking institutions. Multi-peril crop insurance: Protects against crop yield losses by allowing participating producers to insure a certain percentage of historical crop production. A single policy protects crops against all natural perils including adverse weather, fire, insects, disease, wildlife, earthquake, volcanic eruption, and failure of irrigation water. Premium: The cost of an insurance policy. Reinsurance: Insurance taken out by an insurer who is unwilling or unable to carry all the risk. Risk transfer: Shifting the burden of financial loss to another party through insurance, reinsurance, legislation, or other means. IWMI - 34 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Appendix 2. Case Studies of Agricultural Insurance Programs. In this Appendix, we present a brief review of experiences with some existing index-based insurance products applied in different parts of the world, notably in developing country settings. The choice of these case studies was in part influenced by the inherent nature of the underlying business model. Broadly speaking, the ten case studies reviewed can be classified according to the type of the business model considered. Micro-model studies that directly cater to farmers and where farmers directly obtain insurance through any channel which might be based on credit from the bank or any input from the suppliers. The bank, NGO, and MFI input suppliers make no insurance contract on behalf of the farmer. Meso-model studies where intermediaries are required to help pool the risk of a group of farmers. Intermediaries like banks, NGOs, and MFIs obtain an insurance contract from the insurance provider. Macro-model studies where risk pooling occurs at a much larger scale and is usually taken up through government interventions. Table A2.1 lists the ten case studies reviewed classified according to the nature of the business model considered. Of the ten case studies, four are based on micro models, three on meso models and three on macro models. The case studies are drawn from Asia, Africa, and Latin America. Table A2.1. Case studies reviewed. Study Case study and country Type Selection criteria number C1 PepsiCo’s contract farming program Micro model This case was reviewed since there is involvement of for potato growers in India private parties in the micro-model setting. C2 Harnessing mobile technology to Micro model This variant of the micro model includes the use of deliver insurance in Kenya, Rwanda, mobile technology for insurance delivery, which is and Tanzania particularly useful for farmers not dependent on institutional credit and can be linked to insurance through the purchases of inputs such as fertilizers. C3 Drought weather insurance to Micro model This micro model is another variant of directly safeguard crops in Malawi linking farmers to insurance through the purchase of (e.g., groundnuts, maize, and inputs such as high-quality seeds. The operationality tobacco) of the model requires intermediaries such as Farmers’ Clubs. C4 Insurance for climate shocks in Micro model Another innovative variant of the micro model where Ethiopia, Malawi, Senegal, and farmers can pay for insurance through an insurance Zambia for assets (IFA) scheme that engages them in risk reduction activities. IFA schemes are built into government safety net programs or World Food Programme (WFP) Food Assistance for Assets initiatives. C5 Satellite and weather station-based Meso model This model includes the use of both satellite data insurance in Rwanda and weather station data for developing indexed insurance. The model was reviewed since IBFI includes integrating satellite data with meteorological data for developing index-based insurance. C6 Index-based insurance for rainfall Meso model This is a successful indexed insurance scheme in in India India through a private insurance company and an NGO. Continued Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 35 Table A2.1. Case studies reviewed. (Continued) Study Case study and country Type Selection criteria number C7 Weather-based insurance for Meso model This case study involves a meso model where banks drought management in Thailand provide loans to farmers and loanee farmers get access to loans. The bank makes the insurance contract on behalf of the farmers. C8 Index-based insurance in Brazil Macro model This model covers all extreme weather events for a specific crop (maize). C9 Index-based insurance for rainfall Macro model This is a more complex model covering all extreme in Mexico weather events for different crops. C10 Index-based livestock insurance in Macro model This case study was reviewed to understand the Mongolia workings of the model and how the government can pool risk and provide insurance for allied agricultural activities (livestock rearing) in Mongolia. IWMI - 36 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C1: PepsiCo’s Contract Farming Program for Potato Growers in India. To secure a supply of potatoes for potato chips, PepsiCo started a contract farming program in India in 1995. By 2008, it was contracting approximately 10,000 potato farmers in Punjab, Uttar Pradesh, Bihar, West Bengal, Himachal Pradesh, Maharashtra, Tamil Nadu, and Karnataka. The volume of potatoes sourced from this program increased to account for 60% of PepsiCo’s total demand. Under its contract farming arrangement, PepsiCo requires contracted potato farmers to use a specific variety of high- quality potato seed but offers an extensive package of services. It distributes fertilizer, provides access to pesticides, and sells the seed to farmers at cost. It also gives farmers technical advice on production practices through a network of agronomists, extension workers, and local facilitators. As part of wider efforts to establish long-term relationships with farmers, PepsiCo added index-based insurance to its contract farming package. This was aimed at limiting the risk to farmers and reducing the risk in its supply chain posed by late blight disease. Index-based insurance was appealing to the company because the national area-yield insurance was not considered sufficiently transparent, and its record in India had been poor. PepsiCo worked in partnership with Weather Risk Management Services (WRMS) and ICICI Lombard General Insurance Company to develop the product. It was designed to cover severe potato crop losses caused by late blight disease. Minor losses could be avoided through better farming practices. Late blight disease can spread easily under conditions of high moisture levels from rain, dew, irrigation, or humidity greater than 85%, coupled with moderate temperatures (night temperatures of 10-15 °C and day temperatures of 15-21 °C). Consequently, the insurance program is based on a disease index, incorporating both humidity and temperature levels. Roughly 95% of the contracted farmers who elected to purchase insurance in 2008 were driven by price and the requirement to be loanee farmers to buy insurance. Approximately 50% of those insured by the program were smallholders owning less than five acres of land. In Punjab, where relatively few farmers need to take out loans for production costs and have no requirement to purchase insurance, about 75% of farmers still chose to buy. In Maharashtra, where index-based insurance is compulsory for loanee farmers, 1,500 farmers purchased it. Of the 1,500 PepsiCo farmers in Karnataka, about 75% chose to purchase insurance. Operational setup As an integral part of the PepsiCo contract farming program, WRMS installed weather stations to gather data and manage the insurance aspect of the program. It charges PepsiCo a commission of 5% of the premiums. The locations of the weather stations were carefully chosen to minimize basis risk. WRMS bore the costs of installing the new infrastructure, recovering this investment through the revenue generated by the insurance program and the sale of services to other companies and commercial farmers. WRMS has so far installed 250 weather stations in India and is planning to add more. The premium for index insurance in the PepsiCo program is INR 1,500/acre (USD 30/acre), approximately 3%–5% of the sum insured (INR 25,000–30,000/acre or USD 500–600/acre). The product is structured to cover losses above 40% of yield, with farmers covering losses up to this point through various risk-coping mechanisms. The maximum payout is equal to the cost of production plus a little extra to include family farm wages and opportunity costs. Payouts for late blight disease are triggered if crops experience consecutive days of average relative humidity greater than 90% and an average temperature of 10–20 °C. A frost index was subsequently added, which triggers payouts when the temperature falls below 1–2 °C. The program has been effective in settling claims quickly, lowering the settlement time from an average of six to eight months to a maximum of two months from the end of the covered period. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 37 Business model: PepsiCo’s contract farming scheme in India. Partners Activities Value Customer Customer propositions relationships segments • PepsiCo • Setting up weather • PepsiCo offers farmers • Personal • Farmers • ICICI Lombard stations a base buy-back price assistance General • Data generation and additional price Insurance through the weather on insurance Company stations purchases • Weather Risk • Designing the index (INR 0.15/kg) Management through proxy • Higher yields of Services weather parameters 11–14 tons/acre • Marketing through improved • Buy-back incentive inputs from PepsiCo • Sustainable supply of potatoes for PepsiCo • Revenue generation to WRMS (5% on premium) and data services sold to newspapers, Reuters news service, and television channels Resources Channels • Generation of • Direct sales meteorological data • Human resources • Documentation of farmers Cost structure Revenue streams • Premium cost to a farmer is USD 30/acre • Buy-back incentive • Establishing and maintaining weather stations • Generation of weather data • Training and educating farmers by PepsiCo • Maintenance of supply chains for PepsiCo • Underwriting costs Social costs Social benefits • Basis risk calculations need to be more specific, otherwise • Sustainable livelihoods insurance companies will have a high loss ratio • Use of good agricultural practices IWMI - 38 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C2: Harnessing Mobile Technology to Deliver Insurance in Kenya, Rwanda, and Tanzania. In Kenya and Rwanda, over 96% of agricultural land is rainfed and vulnerable to erratic rain and drought. Mitigating weather-related risks for small farmers is, therefore, an important tool for unlocking credit. Kilimo Salama, meaning Safe Agriculture, was the first agricultural insurance program worldwide to reach smallholders using mobile technologies. It was launched in 2009 in Kenya, Rwanda, and Tanzania, through a partnership between Syngenta Foundation for Sustainable Agriculture, Switzerland, and telecoms operator Safaricom, Kenya. By 2013, 187,467 farmers were covered under the insurance program (67,607 in Kenya, 115,550 in Rwanda, and 4,310 in Tanzania). The total insurance portfolio stood at USD 2.3 million, with insurance payments of USD 370,405. In 2014, the Syngenta Foundation established the Agriculture and Climate Risk Enterprise (ACRE), a for-profit company that evolved from Kilimo Salama. Working with local insurers and other stakeholders in the agricultural insurance value chain, the aim was that ACRE would advise on protection for African smallholders and continue to reduce the burden of weather and other risks for them. Operational setup As a for-profit company, ACRE acts to link farmers to insurance products so they can confidently invest in their farms (Figure A2.1). Using its actuarial and product development expertise, it helps local insurance companies add index- based products to their portfolios. These products are tailored to suit specific markets through collaboration with local agricultural organizations. ACRE’s main insurance products are based on weather, area yield, and satellite indices. Crops insured include maize, sorghum, coffee, sunflowers, wheat, and potatoes, with coverage provided against drought, excess rain, and storms. Farmers can trial insurance by insuring as little as one bag of seed. Insuring one acre of maize against drought costs a farmer USD 37 or 10% of the harvest value. Any payout is transferred to the farmer’s mobile phone wallet at the end of the season. The program has increased access to finance and resulted in higher investments by farmers. A 2012 impact study reported that insured farmers invested 19% more and earned 16% more than their neighboring uninsured counterparts. The study noted that 97% of the farmers insured by ACRE received loans linked to their insurance; 177,782 farmers received USD 8.4 million in financing due to the agricultural insurance. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 39 (a) (b) Figure A2.1. ACRE links between farmers and insurance products. Sources: (a) ACRE, Africa; and (b) Syngenta Foundation for Sustainable Agriculture, Switzerland. IWMI - 40 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Business model: Insuring farmers against weather risks in Kenya, Rwanda and Tanzania. Partners Activities Value propositions Customer Customer relationships segments • Syngenta • Data generated from • Low average cost of • Personal • Farmers Foundation for weather stations insurance; 5–25% of Sustainable • Satellite-based value of insured inputs Agriculture meteorological data or harvest • Global Index • More investments by Insurance Facility Resources farmers in agricultural Channels (GIIF) • Generation of and allied activities • Indirect through meteorological data and (increased by 19%) input purchases Insurers: its procurement by the • Increase in income for by the farmers • UAP Insurance insurance company farmers (about 16%) • Contracting (Kenya), APA • Human resources • Increase in opportunities • Lending Insurance (Kenya), • Communication channels for access to credit institutions and SORAS Insurance through which farmers • Reduced risk to credit (Rwanda), Century can be educated microfinance agencies cooperatives UAP (Tanzania) • Documentation and lenders of agricultural credit Reinsurers: Swiss Re, Africa Channel partners: Seed distribution linked to a mobile network operator's location service; agribusinesses with out-growers or contracted farmers; lending institutions and savings and credit cooperatives providing input loans, and medium-scale professional farmers Cost structure Revenue streams • Cost incurred for maintaining the database on the • Premiums paid through the purchase of inputs weather contracts • Commission costs put forward to the agro-dealers • Costs incurred due to payouts Social costs Social benefits • Farmers who do not purchase inputs from authorized • For farmers, better access to credit, better access to agents are not included in the insurance program inputs, and better livelihoods • For agro-dealers, market expansion • For insurance companies, increased market share in the rural economy • The government has had to invest less in establishing a safety net for its vulnerable populations Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 41 C3: Drought Weather Insurance to Safeguard Crops in Malawi (e.g., Groundnuts, Maize, and Tobacco). In 2004, the National Smallholder Farmers’ Association of Malawi (NASFAM) wanted to expand its operations and develop Malawi’s groundnut market domestically and for export. It was perceived that farmers would achieve a higher-value output by using costlier but good-quality groundnut seeds. To realize these potential benefits, farmers needed financing and a way to reduce crop risk from drought. However, financial institutions were not ready to provide loans because of the high risk to their businesses posed by drought. A major drought in 2004 and 2005 meant lenders could recover only 50–70% of loans, and one major bank lost USD 110,000 to smallholder farmers. Two other MFIs stopped lending to agriculture because of the losses they incurred. The Commodity Risk Management Group of the World Bank, in close collaboration with NASFAM, developed an index- based crop insurance plan to increase access to credit facilities and protect both farmers and loan providers from weather risks. In 2005, the insurance was offered to farmers as a pilot program in Kasungu, Lilongwe North, and Chitedze. The insurance was initiated for groundnut and later extended to include maize. From 2007 onwards, the focus shifted to insuring cash crops such as tobacco (Table A2.2). In 2012, 1,100 farmers were insured. The highest loss ratio (the proportionate relationship of incurred losses to earned premiums expressed as a percentage) so far has been 14%. However, in the event of a catastrophe, the loss ratio is anticipated to go up. Table A2.2. Expansion of Malawi’s drought-linked weather insurance. 2005–2006 2006–2007 2007–2008 2008–2009 2009–2010 Insured crops Groundnuts Groundnuts and maize Tobacco Tobacco Tobacco Number of weather stations 4 5 2 3 2 Number of insured farmers 892 1,716 605 2,606 706 Sum insured (USD) 40,000 110,000 308,000 2,543,345 712,521 Premium rates 5–7% 5–14% 5% 5% 5% (Maize high) Operational setup The insurance program was based on data collected over 30 years from 21 weather stations operated by Malawi Meteorological Office. It was assumed that all farmers within a 20–30 km radius would be similarly affected. The insurance contract was bundled with a loan to farmers that covered the cost of high-quality seeds. The sum insured is the loan amount and the interest payable. Payouts are automatically made to the bank at the end of the contract if the index hits the specified drought threshold (Figure A2.2). IWMI - 42 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Step 7: Meteorological data distributed Insurance Association of Malawi Meteorological Office Step 8: Step 3: Payout Insurance from purchased insurance on behalf of to banks the clubs Step 6: Money paid for seeds MRFC / OIBM NASFAM Step 10: NASFAM pays off loan Step 11: Step 9: Step 2: Payment of Club enters into Step 4: Step 5: Farmers additional Seed sell contract with Farmers authorize revenue bank for the bank to pay distribution to output to from crop insurance & NASFAM for the club NASFAM sale loan the seed CLUB Step 1: Club and NASFAM enter into sales agreement Figure A2.2. Operational setup of Malawi’s drought-linked weather insurance. Notes: MRFC – Malawi Rural Finance Company; OIBM – Opportunity International Bank of Malawi; NASFAM – National Smallholder Farmers’ Association of Malawi. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 43 Business model: Drought-linked weather insurance in Malawi. Partners Activities Value propositions Customer Customer relationships segments • Commodity Risk • Data generated from • In the case of drought, • Personal • Farmer groups Management the meteorological farmers receive loan • Members of the Group of World office in the relief clubs Bank production area • Reduced risk to farmers • Insurance • Banks provide loans to through investments in Association of pay for insurance high-value crops Malawi • Calculation of the sum • Insurance Association • Malawi Rural insured linked to three of Malawi receives the Finance Company crop growth periods cost of the insurance (MRFC) from the loan proceeds • Opportunity • Risk of default on bank International Bank loans reduced of Malawi (OIBM) Resources Channels • National • Generation of • Direct Smallholder meteorological data Farmers’ • Human resources Association of • Communication Malawi channels with farmers • Department of • Marketing channels for Climate Change produce and Meteorological Services Cost structure Revenue streams • Administrative costs, operational costs • Revenue generation of the intermediaries (MRFC/OIBM) • Payouts during failures through commissions received from insurers • Revenue of the insurer through the sale of insurance and collection of premiums Social costs Social benefits • Increase in transaction costs for farmers in the • For farmers, better access to credit and inputs short-term • For banks, secured lending and expansion of their portfolios IWMI - 44 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C4: Insurance for Climate Shocks in Ethiopia, Malawi, Senegal, and Zambia. Research suggests that 1.3 billion people live on less than a dollar a day, depending on agriculture for their livelihoods. Vulnerability to climate-related shocks is a constant threat to their food security and well-being. As climate change increases the frequency and intensity of shocks, the challenges faced by food-insecure farmers also rise. In 2009, Oxfam America, Relief Society of Tigray (REST), Swiss Re Group, and partners developed a holistic risk- management framework to enable poor farmers in Ethiopia’s drought-prone northern state of Tigray to strengthen their food and income security through community climate-resilience projects. A pilot project was initiated as the Horn of Africa Risk Transfer for Adaptation (HARITA) project. In 2011, WFP and Oxfam America launched the R4 Rural Resilience Initiative (R4), building on the initial success of HARITA. The aim was to transfer lessons learned in Ethiopia to other countries. The program grew from 200 Ethiopian farmers in the original 2009 HARITA pilot to over 24,000 participants in Ethiopia and 2,000 in Senegal in R4 in 2014. Implementation of R4 in Malawi and Zambia started in 2015. Across these countries, it now reaches over 32,000 vulnerable farmers and their families (Table A2.3). Operational setup R4 is provided as a bundled risk-management product where index-based insurance is used to transfer risk. Other components include the development of individual or group reserve savings, the creation of climate-resilient assets, and the creation of credit channels to boost livelihoods. The risk transfer component of R4 enables the poorest farmers to purchase agricultural insurance. It has been one of the most successful efforts to scale up weather index-based insurance based on a rainfall index highly correlated to local yields. Satellite rainfall indices are used to calculate losses from extreme weather for crops including teff, beans, maize, wheat, barley, sorghum, and millet. Payouts are triggered when limits defined in the index are breached rather than based on actual yields, thereby eliminating the need for assessments on the ground. Receiving compensation for weather-related losses means farmers can avoid selling productive assets and recover faster from droughts. Having a predictable income reduces the use of negative coping strategies and encourages rural households to invest in activities and technologies with higher rates of return. The insurance also serves as collateral to obtain credit at better rates. Table A2.3. Expansion of the HARITA/R4 Rural Resilience Initiative, 2009–2016. Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 Payouts 17,000 320,000 24,000 38,000 445,000 74,000 1.5 million Value of 2,500 27,000 215,000 275,000 283,000 306,000 370,000 781,000 1.1 premiums million Total sum 10,200 73,000 940,000 1.3 1.2 1.5 2.2 5.1 6.6 insured million million million million million million Farmers 200 1,300 13,000 18,000 20,000 26,000 32,000 42,000 57,000 insured Country Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia Ethiopia Senegal Senegal Senegal Senegal Senegal Senegal Malawi Malawi Malawi Zambia Zambia Zambia Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 45 The R4 Initiative attributes its success in part to the strength of its institutional partnerships. The project directly engaged organizations at all stages of the process, including farmer groups, governments, banks, MFIs, local insurers, research institutions, and international reinsurers. R4 targets poor smallholder farmers who were previously considered uninsurable due to poverty, lack of education, data limitations, and remoteness. To overcome the liquidity constraint, poor farmers have the option of paying premiums in cash or through insurance for work (IFW) programs. In Ethiopia, the IFW scheme is built into the government’s Productive Safety Net Programme. In other countries, it is built into the WFP Food Assistance for Assets initiatives. Business model: R4 Rural Resilience Initiative in Ethiopia, Malawi, Senegal, and Zambia. Partners Activities Value propositions Customer Customer relationships segments • Oxfam America • Strong networking of • Asset creation (risk • Personal • Farmers • Swiss Re MFIs, farmer reduction) assistance • World Food organizations, and • Insurance (risk Programme credit cooperatives transfer) • Local partners in • Training and education • Livelihoods each country diversification and (includes MFIs, microcredit (prudent farmer risk-taking) organizations • Savings (risk reserves) such as REST and Organization for Resources Channels Rehabilitation • Generation of • Direct sales and Development meteorological data in Amhara and procurement by [ORDA], credit the insurance company cooperatives, • Human resources ministries of • Farmer groups, agriculture, microfinance meteorological organizations at departments, grassroots level insurance • Maintaining records of companies, and labor for insurance regulators) Cost structure Revenue streams • High transaction costs in maintaining the network • Income generation through premiums paid of institutions • Administrative and operational costs Social costs Social benefits • Increase in transaction costs for farmers in the • Along with insurance benefits, there is a bundled approach short term toward access to credit and resilience (with extra savings) • Safeguarding and generation of livelihoods and incomes • Creation of social assets which increase environmental resilience IWMI - 46 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C5: Satellite and Weather Station-based Insurance in Rwanda. Agriculture is the main economic activity in Rwanda, with 90% of the labor force engaged in the sector. The sector meets 90% of national food needs and generates over 70% of the country’s export revenues. However, much of the agricultural land is rainfed, with little or no irrigation available. Over 68% of Rwandan land is on hillsides with a slope greater than 16%. Most agricultural activities are by non-commercial smallholders. These farmers are subject to crop damage from a variety of adverse weather conditions and, as a result, are largely excluded from access to finance. With minimal investment possible, they suffer from reduced yields and ongoing food insecurity. In November 2010, the International Finance Corporation’s Global Index Insurance Facility (GIIF) provided a grant to MicroEnsure to incentivize it to design new and affordable indexed-based insurance products, develop an effective distribution network to extend outreach to low-income farmers, and scale up agricultural index-based insurance into a commercially viable and sustainable product. MicroEnsure launched its operations in Rwanda in 2010. The total number of clients served as of 2013 amounted to 35,134, with an insurance portfolio worth USD 1.4 million and insurance payments of USD 15,396. MicroEnsure designed insurance products to cover Irish potatoes, maize, rice, and cotton crops against dry spells and excess rainfall. Some products were designed to provide coverage against flooding by indexing drainage basins. It designed satellite-based and weather station-based insurance products. In Rwanda, MicroEnsure operates two main weather index-based insurance products, a weather station-based product and a satellite-based product. Both insure against dry spells and excess rain. Operational setup With the weather-station based product, cumulative rainfall is measured daily over a predetermined period (typically between 30 and 45 days) to insure against the effects of dry spells. If the cumulative rainfall is below a set threshold for the period, a payout is made. Rainfall is measured daily for the insured period. If the cumulative rainfall for a set period (typically three days) is below the predetermined threshold, a payout is made. With the satellite-based product, cumulative rainfall is measured over several consecutive decades (typically three for dry spells and one for excess rainfall). If rainfall is below or above the normal level for the period, a payout is made. The weather station-based products measure rainfall at a single location, and farmers are eligible to be insured provided their farms are within a set radius of that location. Satellite-based products estimate rainfall within a given area, which typically gives a better average than weather station-based products. For both weather and satellite products, payouts increase according to the severity of the weather event, typically providing an additional percentage payout of the sum insured for every percentage point of rainfall below or above the threshold. The weather index insurance scheme enabled the Kenya Commercial Bank to increase its agricultural portfolio in Rwanda from 1,600 farmers in 2012 to 6,400 in 2013, with the lending amount increasing from USD 108,000 to USD 233,000. Kenya Commercial Bank has made weather-indexed insurance (WII) a compulsory requirement for all agricultural lending. WII has also encouraged a change in investment behavior whereby investment in Irish potatoes by insured farmers generally provides returns higher than maize and rice. The sum insured for this crop increased from USD 16,000 in 2012 to USD 254,000 in 2013. MicroEnsure extended the scheme to Zambia in 2013. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 47 Business model: MicroEnsure’s WII scheme in Rwanda and Zambia. Partners Activities Value propositions Customer Customer relationships segments • MicroEnsure • Generating data from • Increased agricultural • Personal • Farmers Insurers weather stations bank portfolios assistance • SORAS Assurances • Generating satellite-based • Increased investment and Generales Ltd. estimates of rainfall changed investment (Rwanda), • Deriving the index for the behavior SONARWA insurance • Focus Insurance • Maintaining a strong (Zambia) network with rural banks and MFIs for the delivery Re-insurers channel • Swiss Re, Prima Re, Zam Re Resources Channels Delivery Channels • Historical data for • Direct sales • Banks, MFIs, index design agribusinesses • Existing delivery channels such as Kenya maintained through rural Commercial Bank banks and MFIs • Farmer Federations • Introduction of and Urwego satellite-based products Opportunity Bank Ministries • Rwandan Ministry of Agriculture and Animal Resources • Rwandan Meteorology Agency Cost structure Revenue streams • Average cost is 9%–14% of the sum insured • Higher value crops such as Irish potatoes and coffee have • Operation costs for the agency the potential to increase the total sum insured per farmer • Farmers take out larger loans and more insurance, improving the profitability threshold for creating a sustainable market Social costs Social benefits • Higher transaction costs for organizations • Commercial banks and MFIs are using weather indexed • Generation of meteorological data insurance as a tool to reduce their portfolio risk when lending to smallholders. This enables rural investment to increase, which provides higher agricultural outputs leading to higher incomes • Weather indexed insurance provides a safety net against the effects of adverse weather IWMI - 48 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C6: Index-based Insurance for Rainfall in India. Indian company Bhartiya Samruddhi Investments and Consulting Services Ltd. (BASIX) provides financial and knowledge services. Between 1999 and 2001, BASIX carried out research and undertook small pilot projects to test an in-house crop insurance scheme. It had identified that risk management, particularly for rainfed agriculture, was an important ‘credit- plus’ service it could offer its customers. Operational Setup Krishna Bhima Samruddhi Local Area Bank (KBSLAB), a bank set up by BASIX, partnered with ICICI Lombard General Insurance Company in 2003 to pilot the sale of rainfall-indexed insurance contracts to smallholder farmers in Andhra Pradesh, India. The Commodity Risk Management Group of the World Bank provided technical support, and the project became the first weather insurance initiative in India and the first farmer-level weather index-based insurance in the developing world. The first pilot of the rainfall insurance was carried out in 2003 in the district of Mahabubnagar. It covered 140 farmers cultivating 115 acres of land, with crops including groundnuts and castor. The following year the scheme was extended to two more districts in the same state. In contrast to the first year, where data from only one weather station was available to design the index, the second year included data from five weather stations. In the third and fourth years, the number of weather stations increased to 36 and 50, and the scheme was extended to seven states. Generic weather insurance products were launched, and the customer base expanded from 6,689 to 11,716. In 2008, three other state governments, Rajasthan, Chhattisgarh, and Madhya Pradesh, permitted the launch of crop-specific weather insurance covering paddy, gram, wheat, and soya bean crops. By 2009, 34,186 clients were covered, and USD 136,555 had been collected in premiums. Some 5,046 (15%) claims had been settled, with payouts totalling USD 88,826. Figure A2.3 shows the product value chain and operational setup of BASIX insurance. Product value chain Product Underwriting Policy issuance Claims Marketing Sales Investment development and facilitation and asset administration and claim management remittance BASIX AND INSURER BASIX INSURER Swiss Re Distribute Offer products products ICICI Lombard BASIX Farmers Feedback on Inputs for products product development Facilitators . World Bank - CRMG . Indian Meteorological Department . ICRISAT, ILRI . State Agricultural Department Figure A2.3. BASIX insurance product value chain and operational setup. Notes: CRMG – Commodity Risk Management Group; ICRISAT – International Crops Research Institute for the Semi-Arid Tropics; ILRI – International Livestock Research Institute. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 49 Business model: Index-based rainfall insurance in India. Partners Activities Value propositions Customer Customer relationships segments • Krishna Bhima • Rainfall data from India • In case of low rainfall, • Personal • Farmers Samruddhi Local Meteorological farmers are given loan Area Bank Department maintained relief (KBSLAB-BASIX) by ICICI Lombard General • Farmers’ risk reduced • ICICI Lombard Insurance Company • ICICI Lombard General General Insurance • Training and capacity Insurance Company Company building for farmers receives its cost of • Swiss Re by BASIX insurance from the • Commodity Risk • KBSLAB-BASIX provides loan proceeds Management Group loans to farmers to cover • Reduced risk of default • World Bank the premiums on bank loans to MFIs • Calculation of the sum insured linked to three growing periods Resources Channels • Meteorological data • Indirect through • Human resources BASIX • Communication channels through which farmers can be educated • Documentation Cost structure Revenue streams • Cost incurred by ICICI Lombard General • Maximum 15% income stream for the MFI Insurance Company in maintaining the • Loss ratio of ICICI Lombard General Insurance Company is meteorological data reported to be 37% • Major cost of ICICI Lombard General Insurance Company is in underwriting weather contracts • Cost incurred by BASIX for the marketing and distribution channels Social costs Social benefits • Increase in transaction costs for farmers in • For farmers, better access to credit, better access to the short term inputs and better livelihoods • Marketing channels • For banks, secured lending and expansion of their portfolios • For insurance companies, market share in the rural economy • For BASIX, an MFI helped it to bundle the weather insurance with other insurance schemes such as for livestock • The government has had to invest less in establishing a safety net for its vulnerable populations IWMI - 50 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C7: Weather-based Insurance for Drought Management in Thailand. Rice paddy covers 48.7% of the total cultivable land in Thailand. However, yields are low compared with other countries due to natural disasters. Over the years, Thailand has had several crop insurance programs. Between 1978 and 1990, an MPCI program was implemented, covering cotton, maize and soybean, but was closed due to high administrative costs and loss adjustments. Subsequently, efforts were made by the government and public and private organizations to establish crop insurance for farmers facing risks from floods, heavy rains, droughts, storms, typhoons, cold weather, frost, hailstorms, and fires. A weather index-based insurance pilot was first initiated with support from the World Bank in 2006. In 2008, Thailand’s Bank for Agriculture and Agricultural Cooperatives (BAAC) signed an agreement with the Japan Bank for International Cooperation (JBIC) to develop weather indexed insurance products. The main objectives were to reduce the impacts of natural disasters on farmers and generate income by securing farms and farm products. In 2009, the scheme was pilot tested by Sompo Japan Nipponkoa in the drought-prone northeastern region. It was expanded further in 2010, with both organizations agreeing to develop the program for rice using rainfall deficits as payment thresholds. Presently, the insurance program is working in 17 provinces of Thailand, covering farmers against early drought, drought, and severe drought (Table 2.4). Farmers who take a loan from BAAC receive the insurance. The premium is based on the amount of the loan. Farmers pay THB 1,200–12,000 of their loan for the insurance premium. Table A2.4. Expansion of Thailand’s Weather Indexed Insurance Scheme between 2009 and 2014. Insurer Sompo Japan Insurance (Thailand) Company Ltd. Year 2009 (pilot) 2010 2011 2012 2013 2014 Premium rate 4.64% of the insured premium Indemnity rate 40% of insured amount in case 5% for early drought (July 1–31) and 40% of severe drought and 15% in case for drought and severe drought (August of drought 1–September 30) Operation areas 5 districts in All 25 Expanded to Expanded to 9 provinces Expanded to Khon Kaen districts of additional 4 additional 4 additional 8 Province Khon Kaen provinces provinces provinces for a total of 17 provinces Number of weather 5 34 140 235 235 388 stations Insured 276 1,158 6,173 849 2,863 4,320 Sum insured (USD) 287,158 466,320 2,074,950 291,450 955,550 1,640,820 Area insured (ha) 917.28 1,286.4 5,724 840 2,636 4,526.4 Premium (USD) -- 21,637.25 96,277.68 13,523.28 44,337.52 76,134.05 Indemnity (USD) Pilot test, 3,436.50 4,089.00 Early Early Early no payment drought drought drought 12,412.00 6,003.00 49,445.00 359 farmers 206 farmers 1,322 farmers Drought Drought Drought 7,395.00 3,958.50 12,963.00 168 farmers 91 farmers 192 farmers Continued Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 51 Table A2.4. Expansion of Thailand’s Weather Indexed Insurance Scheme between 2009 and 2014.(Continued) Insurer Sompo Japan Insurance (Thailand) Company Ltd. Year 2009 (pilot) 2010 2011 2012 2013 2014 Severe Severe drought drought 26,100.00 14,369.50 207 farmers 125 farmers Total indemnity (USD) 45,907.00 9,961.50 76,777.50 734 farmers 297 farmers 1,369 farmers Loss ratio 15.88% 4.24% 339.47% 22.47% 100.85% Source: Sinha and Tripathi 2016. Operational setup BAAC acts as a bridge between farmers and insurers. As soon as a farmer takes a loan from BAAC, a contract is issued providing insurance based on the amount of the loan. Weather-indexed insurance makes an insurance payout equivalent to 15–40% of the financing to which the insurance is subject should accumulated precipitation fall below a predetermined value for the period from July to September. The predetermined value is measured against the Thai Meteorological Department accumulated rainfall index. Sompo Japan Nipponkoa pays indemnities to BAAC, which in turn pays the requisite amount to the farmers (Figure A2.4). IWMI - 52 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries Japan Bank for International Conclude cooperative business Cooperation (JBIC) Appropriate premium Premium Bank for Sompo Japan Agriculture Sompo Japan Insurance (Thailand) and Agricultural Loan Farmers contract Cooperatives contract (BAAC) Sompo Japan Group Insurance payment Appropriate insurance payment Insurance payment based on precipitation in July alone When the accumulated precipitation in July alone meets the criteria for the payments of insurance, this insurance Insurance payment based on contract will be accumulated precipitation in terminated August and September Offering period of Determination of Measurement of weather-indexed precipitation in July alone accumulated precipitation in Insurance August and September April/May July August/September Figure A2.4. Weather-indexed insurance organization structure. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 53 Cooperation Business model: Rice weather index insurance scheme in Thailand. Partners Activities Value propositions Customer Customer relationships segments Policyholder • Deriving the loan contract • Farmers can hedge the • Personal • Farmers • Bank for Agriculture and the premium risk of drought conditions assistance and Agricultural • Deriving the index for the • Better access to loans in Cooperatives (BAAC) insurance subsequent years • Generation of Insurer meteorological data • Sompo Japan • Premium payout if a Nipponkoa trigger is activated (Thailand) Co., Ltd. Resources Channels Thai Meteorological • Historical meteorological • Direct sales Department data Japan Bank for International Cooperation Cost structure Revenue streams • Premium: 4.64% of the insured premium (ranges from • Revenue stream for the insurer with a lower loss ratio THB 1,200 –12,000) • Cost of procuring meteorological data Social costs Social benefits • Expansion in weather data collection • Attaining a better yield to target food security • Marketing channels IWMI - 54 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C8: Index-based Insurance in Brazil. The State of Rio Grande do Sul in southern Brazil borders Argentina and Uruguay. It is the fourth largest state in Brazil in both area and Gross Domestic Product. However, Rio Grande do Sul suffers from weather risks, such as drought, flooding, and hail, which are exacerbated by the El Niño and its sister effect, La Niña. In South America, El Niño’s high volume and intensity of precipitation cause flooding. La Niña causes insufficient rainfall resulting in extensive dry spells and drought. Both events can prompt loss of soil moisture and erosion. Farming is vulnerable to these risks, especially as almost one- fifth of Brazil’s population lives in rural areas. Since 1973, smallholders have been participating in the national subsidized Programa de Garantia da Atividade Agropecuária (PROAGRO) or Programme to Guarantee Agricultural Activities. Offered by Banco do Brasil and administered by Central Bank of Brazil, it is a compulsory all-risk subsidized insurance plan that exclusively covers payments for loans taken out by farmers. Besides federal agricultural programs, poor rural smallholders can take advantage of state-funded insurance. Since 1989, the state government has implemented Programa Troca-Troca de Sementes (PTTS), a risk-management seed- swapping program. It is aimed at smallholder, low-income family farms of below 80 ha that derive at least 70% of total family income from agriculture. The program supplies farmers with certified seeds for maize, the main crop in the state. Payment for seed is collected at the end of the harvest, with a minimum guaranteed price set by the federal government at the beginning of the season. Extreme weather events threatened the continuation of the PTTS, and this led the state government to implement an area-yield-indexed insurance that would protect its investment in the program. The Grupo de Risco Municipalizado (GRM) or Municipalized Risk Group was developed for Rio Grande do Sul in 2001. GRM is an index-based area-yield insurance product that protects the insured farmer against drought, flooding or hail causing a drop in the average municipal yield, in comparison to the historical crop yield of the area. The insurance is exclusive to PTTS farmers whose families subsist by raising poultry, swine, and cattle on maize from the PTTS program. It was launched by the state government in collaboration with AgroBrasil Seguros. AgroBrasil is a private risk-management agency supporting insurance and reinsurance markets to develop and implement agro-rural risk-management solutions in Brazil. Between 2001 and 2008, 194,100 maize-growing families were insured (27.8% of PTTS families). More than INR 18.2 million (USD 9.1 million) in indemnities were paid to 57,778 families or 1.1% of the state’s total value of maize production. The average insured area represented 4.1% of the sowed maize area, with a high point of 6.8% in 2005–2006. The total area insured was 390,095 ha. The number of families insured grew after a year with heavy claims. During these seven years of operation, GRM covered an average of 27,728 farmers per year (16.3% of the PTTS families) on an average of 55,727 ha per year. Operational setup A partnership was formed with the state’s Secretaria de Agricultura e Abastecimento (SAA) or Department of Agriculture and Supply, the State Bank of Rio Grande do Sul (Banrisul), and Companhia de Processamento de Dados do Estado (PROCERGS), the state data-processing company. The primary objective was to design a product within the scope of PROAGRO that would protect family growers in southern Brazil. AgroBrasil used the established PTTS distribution channels to disseminate its insurance product to farmers. The insurance and reinsurance partners were selected each year based on three criteria of simplicity, comprehensiveness, and low cost. To improve sales, AgroBrasil and SAA developed the AgroNet software program. Installed at all seed distribution points, the application cross-checked information on farmers’ seed requests against insurance data for the municipality, such as the sum insured and the area-yield index of that municipality. Through the AgroNet system, AgroBrasil exchanges information with SAA at the time of purchase. SAA then centralizes information on each municipality and submits a validated electronic report to AgroBrasil. This report is issued daily and made available on the Internet. It is accessed by technical partners, such as the ground sales team and insurers and reinsurers, who use the report to issue policies and provide financial guarantees to reinsure the risk. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 55 Business model: Index-based area yield insurance in Brazil. Partners Activities Value propositions Customer Customer relationships segments • Secretaria de • Uses AgroNet software • Risk management • Personal • Farmers Agricultura e to update and validate of smallholders in terms assistance Abastecimento farmers’ requests for of extreme weather (SAA) payments conditions with a low • Companhia de • Deriving the area yield premium Processamento de index • Lower risk to the Dados do Estado government of having to (PROCERGS) Resources provide aid in case of Channels • State Bank of Rio • Generation of yield data extreme weather • Direct sales Grande do Sul at municipal level and its conditions, the cost of (Banrisul) procurement by the which is much higher than • AgroBrasil Seguros insurance company the 90% subsidy towards • Brazilian Institute • Development of the each premium of Geography and AgroNet software program • Merging with the PTTS Statistics • Human resources lowered the marketing • Insurer: private • Documentation of farmers and sales costs of actors AgroBrasil • Re-insurers: private actors • PROAGRO Cost structure Revenue streams • Premium cost to a farmer is 11–17% of the sum insured • Mainly for the farmers to insure their maize yield • Marketing and sales cost of the insurance • Costs for generating the yield data Social costs Social benefits • This private insurance can be achieved only if a 90% • Private insurers can offer coverage to low-income farmers subsidy is provided by the government. This level of financial support can be difficult to sustain IWMI - 56 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C9: Index-based Insurance for Rainfall in Mexico. Mexico is highly vulnerable to catastrophic weather events causing excess rainfall and drought. These are further aggravated by the El Niño phenomenon and cyclones. Over the last 30 years, there have been over 119 natural disasters in Latin America and the Caribbean and the trend is upwards. The agriculture sector accounts for 21% of the workforce. Traditionally, smallholder farmers have relied on informal mechanisms such as crop diversification and rotation or emergency borrowing from friends and family to manage their risks. This trapped them in a vicious cycle of poverty and limited sustainable growth. Before 2003, the majority of the poor rural population had no access to agricultural insurance. If a natural disaster occurred, they received funds from the Ministry of Agriculture’s Programa de Atención a Contingencias Climatológicas (PACC), i.e., the Climate Contingencies Programme, a subsidiary of the National Disaster Fund. A small-scale pilot project was carried out in 2002 which insured 75,000 ha of maize and sorghum against drought in regions of Guanajuato State. Based on a rainfall index drawing data from five weather stations, the insurance was designed and implemented by the government-owned national insurance institution AGROASEMEX. Later, some regions from Puebla State were also incorporated, and coverage was extended to barley. The insured area, the number of weather stations, and the sum insured increased. By 2008, approximately 800,000 low-income farmers were benefitting from the program. AGROASEMEX still manages the program by marketing the insurance and transferring risk to the international reinsurance market. The weather index-based insurance now covers risks from drought and excess rainfall to a wider range of crops, including corn, beans, sorghum, and barley. Trigger levels differ according to the crop, region, and crop-growth stage (sowing, flowering, and harvesting). Operational setup This example is a macro-level model, where the entire value chain of the weather index-based insurance is regulated by government agencies. The product was developed using data from the National Water Commission (CONAGUA). This public entity manages the country’s weather stations and granted access to its historical weather database and produces a weekly electronic report with rain value updates. The federal and state governments purchase the insurance product through the PACC program. The premium depends on the degree of marginalization of the municipalities included in the portfolio. It is reported that 57% of the farmers have a monthly income of less than USD 74 and the rest earn between USD 75 and USD 222. The federal government subsidizes 90% of the premiums for highly marginalized municipalities and 70% for those with a low- to-medium level of marginalization. The remaining percentage of both is funded by the relevant state government. Before any indemnities are paid, CONAGUA is required to certify the weather data, which are sent to the international reinsurers. PACC operational guidelines state that the minimum payout is USD 82/ha and the maximum is USD 455. Payouts are allocated according to the type of crop grown. In the case of an extreme weather event, compensation is given for up to 5 ha of land per farmer. This results in a maximum potential payout of USD 410 for smallholder farmers growing annual and perennial crops and USD 2,275 for those growing high-value crops such as fruits, coffee, and nopal (prickly pear cactus). Payouts are fixed at this rate, and the government retains any extra indemnities received. The state governments have a list of low-income farmers eligible to receive a payout from PACC and they distribute the indemnities directly to farmers. These governments aim to deliver compensation within three months. On average, farmers reinvest 70% of payouts they receive on restarting production by purchasing agricultural supplies or enhancing their outputs through improving their facilities. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 57 Business model: AGROASEMEX in Mexico. Partners Activities Value propositions Customer Customer relationships segments • AGROASEMEX • Data generated from • In the case of low or • Personal • Farmers National insurance meteorological excess rainfall, farmers assistance institution for the department required by are given indemnities for Federal the re-insurer and which they pay low Government of AGROASEMEX premiums Mexico • Determination of • Reduced risk for farmers • National Water premiums under PACC • Opportunities to reinvest Commission program and payouts indemnities in agriculture (CONAGUA) • Purchase of insurance in the case of a disaster weather data products by the provider government • National Insurance • Listing of smallholder Commission (CNSF) farmers by the state regulating body governments • Federal and state governments in Key resources Channels Mexico • Generation of • Indirect through meteorological data and state governments its procurement by the insurance company • Human resources • Documentation of farmers Cost structure Revenue streams • Premium cost to farmers is 10–30% of the premium • Revenue streams for farmers from higher farm income or depending on marginalization level through the realization of payouts from insurance • Cost incurred by CONAGUA in maintaining the • Viable for the government to buy insurance (through meteorological data subsidies) and transfer risk, rather than provide disaster • Major cost of state governments in drawing up a list of assistance smallholders • Subsidies provided by the federal and state governments • Average operational costs are in the range of 1.3% of the sum insured Social costs Social benefits • Higher investments in weather stations to be made such • Financial viability is high. It has been cheaper for that basis risk is reduced. This needs to be borne by the governments to purchase and operate insurance than to state-owned insurance agency pay disaster assistance funds directly to farmers IWMI - 58 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries C10: Index-based Livestock Insurance in Mongolia. Mongolian pastoralists have been affected by several challenges in recent decades, including the country’s transition from communism in 1990 to a free market economy. The collapse of communism created a complex dynamic between politics, culture, resource access, risk management, and institutional change, which has resulted in rapidly increasing inequality among pastoralists. The number of livestock roughly doubled between 1979 and 1999, with herds becoming increasingly privatized. The withdrawal of state-sponsored insurance and pastoral support services transferred the risk from the government to individual pastoralists. Urban unemployment is on the rise. The most important climate-related shock affecting Mongolian pastoralists is the dzud, extreme winter weather conditions that result in high livestock mortality. This hazard occurs once every 5–8 years. Those most affected are pastoralists with herds of 100–500 animals (about 57%) and smallholder herders with less than 100 animals (28%). These herders often lack the financial resources to migrate, leaving them much more vulnerable to weather risk. They try to compensate for financial losses by working as hired laborers for wealthier herders, a strategy that usually fails. The possibility of a dzud winter appears to be a barrier to farmers investing in their herds and improving animal quality. Between 1999 to 2002, there were three consecutive dzud years, which led to the loss of 11 million animals from over 10,000 households, representing a financial loss of USD 200 million. It raised poverty levels from 30% in 2000 to over 40% in 2004 and imposed budgetary pressure on the Mongolian government. The losses from these extreme weather events were so severe that the small agricultural indemnity insurance industry went bankrupt trying to compensate farmers and herders. The private insurance system also collapsed, destroying the risk-management systems in place. The nomadic nature of many farmers meant that high administrative costs were involved, and it was difficult to monitor individual behavior. The Mongolian Index-based Livestock Insurance Project (IBLIP) was developed by the Government of Mongolia in 2005 with support from the World Bank. An index-based mortality livestock insurance product, it is available in every Mongolian province. The aim of IBLIP is to protect Mongolian herder households from significant livestock loss by providing financial security while also encouraging them to adopt practices that increase their resilience to extreme weather events. The number of herders insured increased from fewer than 5,000 in 2006 to around 20,000 in 2013, after which there was a decline to 10,000 in 2015. The drop in sales was mainly because of awareness when the program was scaled up in other provinces and the long travel distances required for agents to sell insurance. Operational setup The index used in IBLIP is the livestock mortality rate at the local level. The coverage period is from January to May when over 80% of livestock losses occur. The sales season is from April to June in the preceding year. Each June, the National Statistical Office conducts a mid-year survey and compares its findings with the previous end-of-the-year census conducted in December to determine the livestock mortality rate of adult animals. The livestock mortality rate was considered suitable for use as an index for IBLIP because farmers are incentivized to report accurate numbers through local belief systems and peer review. IBLIP is unique in its formal layering approach. When livestock mortality is less than 6%, farmers are encouraged to self-insure, although support is provided through livelihood enhancement schemes. When livestock mortality is 6–30%, herders receive a payout from the Livestock Risk Insurance, formally known as the Base Insurance Product, supported by the Livestock Insurance Indemnity Pool. Livestock Risk Insurance is sold to farmers at actuarial premium rates. Usually, herders insure about 30% of the value of their herd. Reserves within the Livestock Insurance Indemnity Pool, from premiums and an insurer participation fee, are used to pay herders. Livestock losses that exceed 30% are covered by the Government of Mongolia’s Catastrophic Coverage, previously known as the Disaster Response Product. Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI - 59 Business model: Mongolia’s Index-based Livestock Insurance Project. Partners Activities Value propositions Customer Customer relationships segments • Government of • Data generated from • Increase in the herd size • Personal • Mongolian herder Mongolia livestock census to of an individual herder households • World Bank determine livestock who has insured • National Statistical mortality • Appropriate mix of Office • Insuring herders species in the herd • Strong monitoring and (goats and sheep are evaluation less vulnerable than cattle and horses) • Farmers invest in their Resources herds if they have Channels • Generation of sufficient insurance cover • Direct livestock census • Insured households more each year likely to purchase • Human resources productive breeds, • Communication increasing household channels through revenue from livestock which herders can be rearing educated • Better income increases • Documentation access to loans • Maintenance of Livestock Insurance Indemnity Pool & Government of Mongolia’s Catastrophic Coverage Cost structure Revenue streams • Average cost of insurance was 30% of the herd value • Mainly for the farmers to reduce the livestock losses from along with an insurer participation fee extreme weather events • Cost incurred by the Government of Mongolia for • Revenue of the insurer through the sale of insurance and maintaining the livestock census each year collection of premiums Social costs Social benefits • Middle-income and wealthy herd owners are likely to • For farmers, better access to credit, better access to purchase insurance and hence increase inequality productive breeds, and better livelihoods • Where strong links exist between the local government and herder organizations, insurance coverage will likely be wider IWMI - 60 Research Report 180 - Scaling Up Index-based Flood Insurance (IBFI) for Agricultural Resilience and Flood-proofing Livelihoods in Developing Countries IWMI RESEARCH REPORT SERIES 180 Scaling Up Index-based 179 Examining Social Accountability 178 Solar Photovoltaic Flood Insurance for Agricultural Tools in the Water Sector: A Case Technology for Small-scale Resilience and Flood-proofing Study from Nepal Irrigation in Ghana: Suitability Livelihoods in Developing Countries https://doi.org/10.5337/2021.211 Mapping and Business Models https://doi.org/10.5337/2021.213 https://doi.org/10.5337/2021.209 177 Environmental Risks from 176 Underground Transfer of Floods 175 Exclosures for Landscape Pesticide Use: The Case of for Irrigation (UTFI): Exploring Restoration in Ethiopia: Business Commercial Banana Farming Potential at the Global Scale Model Scenarios and Suitability in Northern Lao PDR https://doi.org/10.5337/2020.204 https://doi.org/10.5337/2020.201 https://doi.org/10.5337/2021.207 For access to all IWMI publications, visit www.iwmi.org/publications/ Headquarters 127 Sunil Mawatha Pelawatta Battaramulla Sri Lanka Mailing address P. O. Box 2075 Colombo Sri Lanka Telephone +94 11 2880000 Fax +94 11 2786854 Email iwmi@cgiar.org Website www.iwmi.org ISSN 1026-0862 IWMI is a CGIAR Research Center ISBN 978-92-9090-919-4