The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”

Although Africa has 17 percent of the world’s pastures and arable land, the value of premiums for agricultural insurance in Africa represents less than 0.7 percent of the world’s total. This remarkably low figure is deplorable when one considers that about 60 percent of the active population in Africa is working in the agricultural sector and that with the advent of climate change the risks in agricultural activities are becoming even more frequent and severe. The agriculture insurance sector in Africa is also unevenly distributed, with sector development in West Africa restricted to a handful of countries such as Nigeria, Benin, Senegal, Burkina Faso, Mali, and Ghana. Should governments intervene to support the development of the agricultural insurance sector in Africa?

For smallholder farmers, agriculture insurance offsets risks associated with weather fluctuations. This risk reduction can make it more likely that a farmer will qualify for credit and thus invest in the tools and resources (e.g. seed, fertilizer, labor) needed prior to harvest that would potentially increase crop yields. Furthermore, it also provides farmers with the peace of mind required to invest savings into businesses and increases their confidence to engage in contracts with buyers and processors.

According to Ismaïla Diakité, President of COPROCUMA, a farmer cooperative in Mali, and spokesperson for a network of 500 cooperatives representing over 500,000 Malian farmers, “Microinsurance is an avenue for the people of Mali to develop our country.” Ismaïla recalls that a few years back, COPROCUMA had taken out a loan to sow 10,000 hectares of sesame seed. However due to bad weather the crop failed, and the cooperative and farmers ended up in debt. It was then that they realized the value of insurance. While very lucky (the lending institution cancelled their debt), the farmers embarked on an agriculture insurance scheme, which today is compulsory for all members of their cooperative. Ismaïla says, “Our main objective is to ensure the survival of our farmers, their life and their livelihood.” To this end, he believes that insurance is an essential part of the benefits that the cooperative needs to offer the farmers. When asked whether all farmers are happy with the compulsory insurance scheme he says, “A farmer cannot see the importance of microinsurance until he can see the bigger picture. In the sector I work in there will never be unanimous agreement on anything. However a few years into the insurance scheme, 80 percent of farmers in Mali are now convinced of the importance of agriculture microinsurance.”

Currently, the greatest hopes for bringing agriculture microinsurance to scale in Africa lie in the development of index insurance. This approach to insurance provision pays out benefits on the basis of a predetermined index (e.g. rainfall level, livestock mortality rates) for loss of assets and investments resulting from weather and catastrophic events, without requiring the traditional services of insurance claims assessors to assess individual losses. The main advantage of this type of insurance is the potential for a faster and more objective claims settlement process, with a significant reduction in costs. With the development of new technologies for the management of insurance schemes, such as the adoption of mobile payments, costs have the potential to drop even further. As the dynamics regulating claim payments are known to both parties at the onset, index insurance also reduces the information asymmetry between clients and insurers on the risks insured, something that continues to be an issue for classic insurance schemes.

Initial pilot studies in index insurance schemes are showing promising results, especially with mixed products where the basis-risk (the discrepancy between the measurement and the actual level of risk on the ground of a given index) for individual farmers can be reduced. However, there are some drawbacks which still need to be overcome for index insurance to really take off. Until now, the number of different crop types that this type of insurance can cover has been very limited. Furthermore, the availability of reliable historical data is paramount to ensure appropriate, fair, and viable pricing both for client and insurer, and the upfront cost of setting up the requisite infrastructure for generating, collecting, and processing this data is generally too high for any company to take on. What is needed is infrastructure financing at a larger scale.

At the conference “La microassurance agricole en Afrique de l’Ouest : réalités et perspectives”, held in Paris in February, an expert panel moderated by Philippe Guichandut, Director of Development and Technical Assistance at the Grameen Credit Agricole Foundation discussed how to improve the adoption of agricultural insurance in West Africa, including the ideal level and nature of government intervention. While opinions varied on this issue, there was unanimous agreement that government subsidies are necessary for agriculture insurance to be viable and affordable, especially in the launching phase, and for the sector to reach scale.

Financial support is needed primarily in the shape of premium subsidies (in North America, the largest agriculture market, subsidies reach 73 percent of crop insurance premiums), but it may also include public reinsurance, or assistance for setting up the infrastructure (e.g. weather stations, satellites, data processing, and analysis expertise) enabling the availability of the data essential for index insurance schemes to work. Of course, government support needs to be devised carefully and should not substitute for good design and management of the insurance scheme itself. Lessons on how not to do it can be drawn from experiences all over the world.  One may argue that the long-term sustainability of a scheme is dependent on whether there is a business case for it. It is indeed the hope of many that with the improved use of technology and availability of reliable historical data, agriculture index insurance will in time constitute a viable business for a range of key crops. However, it can also be argued that the case for agriculture insurance goes beyond the business case, as it has an important role to play in ensuring the well-being of societies, including food security and economic development in both developing and developed countries.

On the panel, Jean-Christophe Debar, Director of the FARM Foundation, and Francois-Xavier Albouy, Vice-President at Planet Guarantee, underlined that the cost of financial support to develop the agriculture insurance sector has to be measured against the costs of non-insurance, a cost that includes both lives and food security in Africa. When measured on such a scale, it becomes clear that governments worldwide, and especially in West Africa, undoubtedly have a key role and also a huge responsibility in supporting the development of the agriculture insurance sector.

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Weather Index Insurance to Benefit from New NASA Satellite

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On Thursday NASA and the Japan Aerospace Exploration Agency launched a new weather and climate satellite that generates a near-global view of precipitation, closing previous large observation gaps. This development has the potential to inform an array of important weather-related activities, including weather index insurance.

The satellite, known as the Global Precipitation Measurement (GPM) satellite, uses a radiometer and dual-frequency radar to measure the presence and even the intensity of rain, snow, and ice, to a time window of three hours, across a geographic range of 65 degrees north to 65 degrees south latitude. Data generated by the satellite will be publicly available to anyone around the world.

A Japanese H-IIA rocket launching the GPM satellite from the Tanegashima Space Center in Tanegashima, Japan.

NASA’s predecessor satellite was only able to detect rain, and not to varying intensities. It also covered a more limited geographic area of 35 degrees north to 35 degrees south. The new NASA satellite could prove an invaluable resource for weather-related initiatives like disaster response and relief.

Weather index insurance is well-positioned to benefit from the newly detailed precipitation data. Weather index insurance offers a payout to farmers in the event of extreme weather, such as drought or a hurricane. The financial support helps farmers sustain their families while their source of livelihood, their land, recovers. This safeguard also makes it less risky to take out loans to invest in the productivity of land. The payout is triggered by weather index readings that register as extreme weather. This mechanism yields low transaction costs – a necessity as it rarely is practical for insurance agents to travel to smallholder farmers and verify the weather and land conditions.

Available weather data has been a limiting factor for the scope and accuracy of weather index insurance. A few years ago, those with index insurance hit by Hurricane Sandy in the Caribbean were not able to receive payouts because the limited range of the NASA satellites in operation did not cover the impact zone. As the new satellite expands the data’s geographic reach, weather index insurance is also positioned to expand. With the new satellite, weather index insurance could expand beyond rain, too. Hail storms, for example, are currently a significant risk in countries like Malawi and Zambia, but the data has been lacking to support weather index insurance with hail coverage.

When we heard about this exciting development, we reached out to Véronique Faber, Executive Director of the Microinsurance Network, to see what she thought. “This data will be a game-changer, especially as NASA plans to give access to everyone in the world,” she said, adding, “Stakeholders involved in weather index insurance for small farm holders will watch this space closely!”

Along with these potential advantages, it’s important to consider a few factors that might constrain the satellite’s ability to support weather index insurance. Typically, insurance product pricing and design is calibrated using historical data on claims and damage. This will be lacking at first when the new satellite data comes on stream, and could limit its rapid use. There is also the potential for the satellite’s new techniques to not be as accurate as hoped across all regions. It’s still not uncommon for particular satellites to be more or less accurate for particular geographies. For instance, the previous NASA satellite was more accurate in the Caribbean and East Asia than it was in Africa.

*Some of this post’s content was generously provided by MicroEnsure.

Image credit: NASA/Bill Ingalls

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Microinsurance Gets Three Wishes

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There are endless ways to measure the successes of a given year. Number of clients reached. Total new stakeholder endorsement. Amount of capital invested… Though when assessing almost anything, it’s important to think holistically and not be biased by the numbers. That said, I think I can speak for most of the Center in saying that we are excited to share that several CFI-affiliated publications were among the Microfinance Gateway’s Most Popular Publications of 2012. No small feat considering 546 new resources were added to the Gateway this past year. Here’s a brief listing of the CFI pubs that made this top cut:

Over-Indebtedness in Microfinance: An Empirical Analysis of Related Factors on the Borrower Level

This paper by Jessica Schicks analyses the over-indebtedness of microborrowers in Ghana, examining its relationship with poverty, adverse shocks, loan returns, and financial literacy. In defining over-indebtedness, the paper adopts a client perspective, taking into account clients’ repayment struggles and the sacrifices they make to fulfill payment obligations. Some of the paper’s findings are the following:

• Poorer micro-borrowers are more likely to be over-indebted;
• Risk of over-indebtedness further increases with the occurrence of adverse economic shocks to a borrower’s income or expenses;
• Likelihood of over-indebtedness is higher for borrowers with low returns on their investment and if borrowers use loans at least in part for non-productive purposes;
• Over-indebtedness is higher for borrowers with low, debt-specific financial literacy. General financial literacy is negatively associated with over-indebtedness.

The paper received research and financial support from the Smart Campaign. A less academic version of the paper, published by the Smart Campaign in 2011, can be found here.

Smart Microinsurance: An Overview for Microfinance Institutions on Incorporating Client Protection Practices into Microinsurance

Produced jointly by the Smart Campaign and the Microinsurance Network, this toolkit provides client protection guidance for MFIs offering microinsurance products through external insurance companies. The toolkit includes three sections: a listing of social performance indicators for microinsurance; guidance for product design and partnerships; and guidance for incorporating the Client Protection Principles into each phase of the microinsurance process. The toolkit identifies service points of contact and offers best practices for policies and procedures.

Risk and Relevance: The 2012 Microfinance Banana Skins Survey

Although in a different category than the Most Popular Publications of 2012, the Banana Skins report of 2012 was among the top four in the Gateway’s Most Popular Microfinance Voices of 2012 category. The Banana Skins report series presents the most pressing risks facing the microfinance industry and what can be done to manage them. Staying Relevant, the fourth report in the series, found a pressing importance on managing corporate governance risk.

For the full library of CFI publications, papers, and resources, visit our website. 

Image credit: CGAP Microfinance Gateway

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CFI Publishes ‘Over-Indebtedness of Microborrowers in Ghana’ Report by Jessica Schicks

> Posted by Adriana Magdas, Senior Associate, CFI

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.” 

Low-income individuals need insurance at least as much as those with higher incomes, due to higher vulnerability and a smaller cushion of resources to draw upon in times of need. The good news is that the number of people covered by microinsurance rose from 78 million in 2007 to 135 million in 2009, and today, more generous estimates place that number at around 500 million.

If microinsurance has grown so rapidly, why worry about it?

First, because most of the market is still unreached. According to Lloyds, the actual market potential is somewhere between 1.5 and 3 billion. Recent growth is disproportionate, with 80 percent of the insured in Asia. Latin America has only 15 percent of the insured and Africa only 5 percent.

Second, because expanding the reach of microinsurance proves to be challenging. The Financial Inclusion 2020 campaign and its partner, the Microinsurance Network, organized a webinar to discuss these challenges with microinsurance experts. From this conversation, three main lessons stuck with me. Microinsurance products must be:

• Simple and tailored to clients’ respective contexts
• Very affordable, even as compared to other financial products for low income consumers
• Innovative to achieve scale

Simple products tailored to client needs

In our webinar, participants repeatedly brought up the importance of developing products with client needs in mind. This is no easy task as low-income clients are exposed to more risks than higher income clients, such as natural disasters, conflict, accidents, and infectious diseases. Most of these risks are not covered by traditional insurance policies. Given the limited resources of most low-income clients, they must access their claims as soon as the need arises, but most insurance companies take too long to disburse funds due to extensive claims processes. ParaLife, a Switzerland-based company that delivers microinsurance to low-income clients and persons with disabilities addresses these issues by covering a wide range of risks, conducting community based risk-assessments, and working with partners to pay claims within 48 hours.

Affordability

Most of our webinar participants identified high costs as a main reason for the low uptake of microinsurance products. Administrative costs for microinsurance are high, and commercial insurers have little information on the histories of their clients, which results in higher premiums. Some participants suggested connecting pricing to low-cost items clients buy on a regular basis, such as non-essential food items and mobile airtime. Innovative companies are already acting on this need. YuCover, (a mobile insurance product launched in Kenya by YuMobile in partnership with MicroEnsure and Jubilee Insurance), provides life and disability insurance to YuMobile pre-paid consumers. The product is affordable and rewards YuMobile subscribers with a renewable monthly life and disability cover based on the amount of airtime re-charged each month.

Innovation for scale

To make all this work, innovation in distribution, product design, and risk assessment are a must. Partnerships with well trusted brands, whether a mobile provider, a store, or a financial institution will encourage better uptake, as will the use of mobile technology for payments and disbursements. Additionally, innovations in risk assessment for commercial providers can lower administrative costs for managing accounts. An example is the Innovations in Microinsurance project launched in the Philippines by the German Federal Ministry for Economic Cooperation and Development together with the Department of Finance of the Philippines and a local provider of life and property insurance. They developed a climate index insurance product that allows insurance settlement payments to be evaluated for clients as a group and lowers administrative costs for the provider while ensuring quicker post-event response.

How do these challenges for microinsurance tie into CFI’s work on the Financial Inclusion 2020 campaign? We believe full financial inclusion includes widespread access to quality microinsurance products. The project will continue to work with the Microinsurance Network and other insurance providers to integrate microinsurance into each of the five roadmaps to financial inclusion we are developing (Product Range, Financial Capability, Technology, Credit Reporting, and Client Protection). Stay tuned.

Image Credit: IOMBA

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