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From index based insurance towards comprehensive financial services


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Presented at FAO, Rome at Index Insurance Innovation Initiative’s Scientific Committee Meeting in January 2010. Mangesh represented CIRM as a consultant.

Published in: Economy & Finance, Business
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From index based insurance towards comprehensive financial services

  1. 1. From index based insurance towards comprehensive financial services
  2. 2. Journey of index insurance Index Insurance Index Insurance + Financial services
  3. 3. Agriculture credit scenario in India • Branch expansion policies in rural areas in 1980s helped banking outreach. 32,000 rural branches of Commercial banks and RRBs, 14,000 cooperative bank branches, 98,000 PACS • Problem of inequality: 66 percent of large farmers have a deposit account; 44 percent have access to credit. However, 87 percent of the poorest households do not have access to credit, and 71 percent do not have access to savings from a formal source. • Difficulty in accessing formal finance has resulted in a heavy reliance among poorer rural households on informal finance—mostly moneylenders, shopkeepers • Access to insurance, also remains limited among the rural poor, 82 percent of households had no insurance, and practically none of the poorest households surveyed had insurance (RFAS 2003). Top seven HDI states that account for almost 80% of cumulative insurance
  4. 4. Suggested journey Index insurance + Non financial services Index insurance + Non financial services + Financial services
  5. 5. Index insurance + Non financial service • Proposed services – Weather insurance (potato and rice) – Weather forecasts to enable farmers to take proactive steps • Key learning • How does comprehensive products affect: – Access to credit – Productivity – Agriculture practices – Attitude towards risk • Area profile – Relatively poorer agri-risk management infrastructure: Howrah and Kamrup (districts in West Bengal and Assam states of India) – Low agri credit penetration, thus low insurance take up (credit linked) • Channels – Rural banks, NGOs, MFIs, cooperatives, input firms, retail
  6. 6. Index insurance + Financial + Non financial • Pepsico contract farming model for chip grade potatoes • What does the package offer? – Greater access to capital • Credit – Risk transfer • Weather index insurance – Risk reduction • Seeds, agro chemicals, manures • Monitoring and advisory services • Assured market price with flexibility for upside pricing
  7. 7. Challenges involved • Difficulties due to basis risk • Imperfect understanding about the product • Product features, hedging high probable events
  8. 8. Optimal Conditions for Index Insurance Approach of CIRM Livestock, Demand side: Weather tickets • No cash (credit and savings) • Need driven (Modular products, constraints Portfolio covers, Bundling Credit linked with risk reduction packages) weather insurance • Perfect input and output • Affordability (Cash/ credit availability) markets • Literacy (Value of insurance, product WRMS, Pepsico, Long understanding) • Low basis risk, risk aversion, term weather products Supply side: hedging full production and • Bundling with other products, not a part of it process innovation • Pricing (Lack of infrastructure) Localized NDVI, • Perfect understanding about w.s. the product • Weather data is readily available
  9. 9. Rough to Right Loop Product Innovation Market Making Action Data Policy Product Dev Warehousing Training Research Advocacy Goal Guiding Principles Agriculture Scale Modified Livestock Risk Mgmt Behaviour Health Safety Service not Product Catastrophe Nets Residual Risk For Long Term Savings/Annuities All Replicability Welfare impacts Life Risk Decision Delivery OTC Enablers Technology Models Products Communication / Education Support Systems Website: Blog: