S.V.R.K. PrabhakarIGES, Japan
Presented at the SLYCAN Trust Workshop on Inclusive and Participatory Climate and Disaster Insurance, 21 Jan 2021
(Webinar).
PARTICIPATION & INCLUSION FOR INSURANCE
EFFECTIVENESS
Outline• Why participatory & inclusive insurance?• Some examples• Conclusions
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Agricultural economies and livelihoods are averse to weather vagaries
FAO‐STAT, 2015
1966 drought
1967 flood
1976 drought
1979 drought
1981 dr., fl., cyc.
1987 drought
2002 drought
2004 dr. & fl.
2010 dr. & fl.
Took 6 years to recover!
32 MT lost in 1 year!(3.6 billion USD)
Agriculture being primary input provider, such a shock will have rippling effects on the entire economy!
Shock on the input supply markets and access to inputs after a major disaster is a major factor for the recovery.
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Individual Loss is a Collective Loss: Impact of 2010 Drought on NPA of Banks in India
0
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2
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4
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2009‐10 2011‐12
%
Agriculture NPAs in PSL, India• Increase in farm loan defaults (figures).• Increased fiscal burden on government: • Farm loan waivers to the tune of 14.4 billion US$ in 2008 by GOI
• In comparison GOI spent only ~163 million USD on insurance in 2008.
Source: RBI, 2014
Rainfall vs Agricultural NPAs
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Access to Finance is an Imperative for Resilience
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Access to financePath without access to finance
Resilience advantage
Climate shock
Risk InsuranceIf designed well, theorized benefits of insurance include:• Acts as a financial access tool
• Finances soon after disaster when needed the most• Loans when made conditional for borrowing
• Emphasis on risk mitigation compared to response• Provides a cost‐effective way of coping financial impacts• Covers the residual risks uncovered by other risk mitigation mechanisms.• Reduced fiscal burden on government• Provides opportunities for public‐private partnerships.• Helps communities and individuals to quickly renew and restore the livelihood activity.
• Depending on the way the insurance is designed, the insurance mechanism can address a variety of risks of climatic and non‐climatic nature.
Siamwalla & Valdes, 1986; Arnold, 2008; Swiss Re, 20106
Many of these theorized benefits are hard to realize on the ground!
Challenges in Realizing the Potential
Participatory & inclusive insurance may be able to address some of these issues
•High residual risks in agriculture: Only 35‐40% of agriculture is irrigated in Asia; low expansion of drought and flood‐tolerant varieties; poor extension facilities
• Inefficiencies owing to adverse selection and moral hazard• Poor availability of data to assess risks for designing effective products (e.g. weather data, damage data)
• Low willingness to pay: Economic, cultural and perceptional issues with both people at risk and policy makers
• High operational and premium costs• Delayed & under valued indemnity payments• Lack of trust on the insurance providers• Poorly developed re‐insurance industry
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The meaning of participatory & inclusive insurance
•Insurance products are developed in close consultation and participation of the subscriber base.
•Insurance products are tailored to make sure ‘no one left behind’•Highly vulnerable and those that cannot afford insurance otherwise are especially targeted
•In essence, these products uphold the principles of empowerment and non‐discrimination
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Benefits of participatory insurance
• Insurance products are developed in a top‐down manner (i.e. insurance company assesses the risks, designs the product looking at the potential subscriber base)
• Limited understanding on subscriber base and their risk characteristics
• Blanket products: products are not tailored to the specific needs
• Trust issues: Limited buy‐in
• High operational and premium costs
• Limited sustainability9
BAU Participatory• Insurance products are developed & implemented in close consultation with & participation of the subscriber base
• Products tend to be localized and specialized
• Potential to address the adverse selection and moral hazard issues
• High trust on insurance companies & products
• Operational and premium costs• Economies of scale doesn’t fit the bill!• Damage data collection• Reduced moral hazard and adverse selection
• Brings innovation to product design
Participatory insurance: Benefits
Source: Prabhakar et al., 2014 10
Costs…
Source: Prabhakar et al., 2014 11
Participation to Address Adverse Selection & Moral Hazard
•Production cost insurance (PCI) products tend to be affected by moral hazard and adverse selection
• The case of Philippines: When farmers participated as a group in designing/implementing the crop insurance • Farmer shared soil and crop conditions with the group• Farmers visit each others’ fields, monitor and support each other• Reduced unnecessary crop inputs and reduced crop production costs• Reduced crop losses• Reduced indemnity payments
12He et al., 2019
• Most governments address the insurance costs through subsidy on premium. Premium subsidies rose 250 percent over 2007 subsidy levels in the Asia Pacific region.
• Advantages• Easy to implement• High political impact
• Disadvantages• The real cost of risk is not conveyed to farmer • Possibility of high risk seeking behaviour • Disproportionately benefits rich farmers• Overall insurance costs remain same or even higher
Addresses High Insurance Costs
Country % Premium Subsidy
China 60%
Japan 49%
India 30%
Pakistan 70%
Philippines 100%*
ROK 50%
*for subsistence farmers onlyFAO 2011
Subsidy on Premium
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Technology‐enabled participation in insurance
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• Picture‐based crop insurance (PBI) enables farmers to collect damage data using an app that insurance companies can use to decide payouts
• High resolution and accurate data collection is possible at various stages of crop growth
• Low cost of data collection and processing
Source: IFPRI 2021
Technology‐enabled participation…• In Karnataka, farmers are providing crop cutting experiment (CCE) data to the government using a dedicated app.• Reduced the cost of the CCE• Reduced delay in loss assessments and indemnity payments• Increased trust on the government and loss assessment
• In Gujarat, digitization of livestock insurance • Subscribers participate in digitizing various stages of livestock insurance: marketing, enrolment and claim settlement process of a livestock product
• Reduced cost of processing/operational costs
• In Japan, web enrolment reduced the cost of insurance by 15% 15
Motivates Willingness to Pay
• Cheaper premium•Poor households can have quick access to finances (overdraft with withdrawal on premium) and hence will not feel deprived of money for long periods of time
• Interest earned on savings can provide additional advantage: Promotes savings
•Help build assets in the long‐term while protection against catastrophic risks
• Innovations in savings‐linked insurance include designing insurance products based on interest earned on savings could substantially reduce the premium burden on insurance holders
Group Savings‐Linked Insurance (Unit Linked Insurance Plan)
Monthly Payment100 USD
Risk Comp.20 USD
Savings Comp.
80 USD + int.
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• Payment of ecosystem services and carbon capture and sequestration proceeds could be linked to insurance premiums and or investments made on risk mitigation options that can generate substantial PES proceeds.
• E.g. certain types of intensive row‐cropping systems and ecological farm scapes can promote ecosystem services such as a clean and well‐regulated water supply, biodiversity, natural habitats for conservation and recreation, climate stabilization, and aesthetic and cultural amenities such as vibrant farm scapes etc. (Robertson et al. 2014).
Combining insurance with social security programs• 40% of global population is not protected and 75% are inadequately protected • Combining social security and insurance can help extend social protection to under‐served populations and can reduce the overall costs of insurance for the vulnerable sections of the population while extending financial inclusion benefits.
Combining insurance with payment of ecosystem services
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Bundling Approaches: Reaching the last mile
WFP 2016
• Bundling of risk management options can have synergistic impact on the overall insurance costs
• Horn of Africa Risk Transfer for Adaptation (HARITA) R4 Rural Resilience Initiative of Oxfam, WFP • Risk reduction through water harvesting and other activities through which farmers can earn vouchers to pay for their insurance
• Risk transfer through insurance: Partly subsidized and partly paid by the participating farmers
• Provide avenues for livelihood diversification for prudent risk taking
• Promote savings which act as risk reserves18
Conclusions•Participation and inclusion enablers •Affordability•Peoples technologies•Trust and willingness to engage
•Technologies such as satellite data, AI, and modelling tools takes precedence even in government programs (e.g. GoIPMFBY). Combining with peoples technologies can enable greater participation & inclusion.
•There is also a need to promote participatory risk mitigation (e.g. CBDRM etc.).
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THANK [email protected]
Visit for more information on our work on insurance: https://archive.iges.or.jp/en/natural‐resource/ad/riskspreading.html
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