Microinsurance Work for Small Farmers For Workshop on Climate Resilience on Agriculture July 10, 2012 Yoko Doi, Financial Specialist Financial and Private Sector Development Unit World Bank Jakarta Office 1
Table of Content 1. The concept of microinsurance Ø how micro- insurance could reduce risks of small- farmers; Ø what is current status of micro- insurance development in Indonesia and in the world Ø what are factors to be considered and developed for the success of micro- insurance development in Indonesia 2. What the World Bank has done in Indonesia (especially on microinsurance) & How the World Bank can assist 3. Q&A 2
The Concept of Microinsurance 3
What is Microinsurance? not a specific product or product line. It is also not limited to a specific provider type. Microinsurance is the provision of cover to a specific market segment, i.e. low- income persons. ~ IAIS (International Association of Insurance Supervisors) Issues Paper (2007) Products includes :Health, Life (i.e. Savings, Credit Life, Funeral), General Insurance (i.e. Agricultural Index, Livestock,) Key Characteristics of Microinsurance Distribution channel & claim settlement accessible: physically and financially Simple, easy to understand policy document Broadly inclusive, with few if any exclusions Premiums accommodate irregular cash flows Small sums insured, often for short terms Pre- underwritten, community or group pricing 4
Who is insured by whom? Formal insurance industry Informal insurance WEALTH Insurable, without access Uninsurable through market mechanisms POPULATION 5
NET PREMIUM 5% 70% Yoko Doi. 2012 The Microinsurance Bottom Line $50 PROFIT NET CLAIMS $2.5 $35 MI features: Premium from as low as $2 per annum Benefits tailored to low premium, with innovative product combinations Providing benefits in life Generally short- term, group policies Life funeral cover popular in Africa & Latin America $5 PROFIT $0.25 15% EXPENSES $7.5 NET CLAIMS $2.75 Minimize Regulatory & Other Costs 10% COMMISSION $5 EXPENSES COMMISSION $1 $1 Traditional Insurance Microinsurance Source: CENFRI
Delivery Channels.. Compulsory (MFIs/NGO MFIs) Democratic Group Endorsement (Coops, Mutuals, Labor Unions, Churches, Clubs ) Community based self insurance Prepayment of Services Database Selling Utilities, Telcos. Retail Chains/ Stores Standalone (Brokers/ Agents) Credit life: India, Philippines, South Africa, Colombia Brazil - PASI Community organizations- India.. Burial Societies Indonesia faith based community on funeral insurance, Credit unions (solidarity movement) Funeral Parlors : Brazil, Colombia HMO: Zambia, Uganda Brazil, Colombia Brazil, South Africa, Colombia and India (Fertilizers) India, Philippines, South Africa, Colombia
Insurance has a potential role in reducing vulnerability for small farmers Risk Management Strategies In the severe Weather Events Rely on assistance (inadequate, ad- hoc, poorly targeted, slow in disbursing) Take high interest loan Defaulting existing loan Selling assets & livestock or Only engage in low risk, low yield farming (limiting risk exposure) or Market- based risk financing mechanism (Insurance) Provide rapid access to post- disaster liquidity protecting livelihood providing for reconstruction recovery *** Less than 1% of people who live on less than $2 a day have access to formal insurance Locked into poverty cycle 8
Current Status of Microinsurance in Indonesia 9
Snapshot of Insurance Condition in Indonesia <Perceptions, Availability, Awareness> Low insurance penetration in Indonesia Mostly owned by the high income population Lack of affordable product and low awareness as well as understanding on insurance product are the main reasons other than low income Some uninsured people do willing to buy insurance if such product is available and can suit to their needs 10
Current features of Microinsurance Markets in Indonesia (1) 1. Low uptake of insurance less than 10% or an estimated 13.03 million Indonesian have life insurance coverage, at the end of 2005. in terms of micro insurance à less than 0.5 million lives insured less than 1% of total homeowners are insured and insurance of other assets including livestock, agriculture are even low. Less than US$0.5 billion insured losses out of an estimated US$4.45 billion loss from Tsunami (agriculture & livestock $141 mn, SMEs $280 mn...) Less than $400 mn insured losses out of an estimated US$1.7 billion in loss (Jakarta Floods in 2007).
Current Features of Microinsurance Markets in Indonesia (2) 2. Large proportion of population falls into low- income categories i.e., population living on less than $2 a day about 60% of Indonesian population (Source: 2009 UN Human Development Report) 3. High levels of informality informal sector accounts for a sizeable amount >40% of Indonesian work force is employed in the Agriculture Sector, which is predominantly informal sector; >53% of working population is employed in the informal sector 4. Large reliance on compulsory credit life insurance 5. Microinsurance definition vary but share low- risk features
Factors affecting development of Microinsurance in Indonesia(1) 1. Demand and Supply- side factors DEMAND SIDE ISSUES Lack of AWARENESS (i.e., education) and Perceived cost vs. Perceived value or current consumption vs. future benefits Lack of TRUST (i.e., poor experience of dealing with insurance companies in the past) AFFORDABILITY (mismatch between ability- to- pay and price of insurance product) Off- the- shelf product(s) do not meet the NEED (lack of customization of product to address the needs of the Poor) SUPPLY SIDE ISSUES A need to demystify insurance products & services including policy terms and conditions. Simplified CLAIMS SETTLEMENT PROCESS including documentation for claims processing. High TRANSCATION COSTS (i.e., need for lowering the cost of distribution and claims processing/settlement). Lack of investment in PRODUCT DEVELOPMENT i.e.,
Factors affecting development of Microinsurance in Indonesia(2) 2. Regulation and supervision a) Weak insurance definitions result in regulatory avoidance and arbitrage b) High regulatory barriers: limiting the entry of non- traditional actors/players c) Unlevel playing field: introduces bias against provision by potentially legitimate players. Adopting a risk- based supervision approach would be fair game. d) Strict demarcation increases (mono- line vs. composite insurance) the cost of offering a product that combines life, non- life and health 3. Macro economic conditions
Examples in other countries 15
Some examples from other countries Index or Parametric insurance products e.g., rainfall- index, mortality index, combined indemnity & parametric insurance Pre- Paid or Scratch card (similar to prepaid mobile telephone cards) for paying premiums Low- cost claims servicing model using community- managed call center and web- based claims management process
Weather Index Insurance: Malawi Example: Basic Concept: If rainfall levels are below or above pre- specified amounts, farmers loans repaid by insurance company directly to bank. 17
Prepaid Card for Premium Payments: Case in Kenya 1 st à Buy a policy from insurance outlet à Issues a Policy Number Buy the card from neighborhood or convenient stores Premiums of any denomination, and Any frequency (depending on cash- flow) Call the insurance call center Provide (or enter) your Policy Number Enter the Number on the Pre- paid card BENEFITS: Lower transaction cost Easy to use and pay premium whenever and from wherever you are Premiums could be paid in any denomination
Case in Kenya (1) Yoko Doi. 2012 19
Case in Kenya (1) Yoko Doi. 2012
Index based livestock insurance IBLI Sales in 2009 16% of eligible herders are insured 800,000 animals insured $140,000 of premium in 2009-10 Affordable and effective insurance Provide affordable and effective livestock insurance to all herders on a voluntary basis Flexible institutional structure Simple and stable structure for implementation in the short run that allows for flexibility in the future Ring fence the livestock insurance business Insulate the domestic insurance industry from catastrophic livestock losses Foundation consistent with the new regulatory environment Limit government financial exposure 21
Life & Property Insurance : Case in India Claim Settlement Process ZS Call Centre Desk verification of claim Inform relevant Area committee Transfer solatium to relevant SB A/c Claim event Village ATM Area Committee visits ATM, draws solatium Area Committee visits the village verifies the claim, completes the claim documentation and makes payment of the solatium Rural Poverty Reduction Project, Andhra Pradesh, INDIA
World Bank engagement : Financial Inclusion & Microinsurance 23
Financial Inclusion Engagement in Indonesia 2007 2008 2009 2010 2011 2012 Stages of Engagement Diagnostic Stage Individual Projects (TA to GoI etc.) Macro / National Strategy Pilot Project (Research on Fin. Literacy Assessment on MWs) Fin Literacy ToT for GoI NSFI development Projects / Engagement Two Diagnostics Studies (Nation Wide & Migrant Workers HHs) Assessment on KUR (GoI Credit Guarantee Program) PPP Fin Services for MWs Microinsurance Marketplace Microinsurance Regulatory Framework Review on MW Microinsurance Reform on GoI funded PNPM Mandiri RLFs Scheme Evaluation of TabunganKu (Basic bank account) Branchless Banking regulatory review 24
Who we works with Yoko Doi. 2012 Government of Indonesia Private Sector Civil Society Vice President Office Central Bank (Bank Indonesia) Coordinating Min. of Economic Affairs Bappenas Min. of Finance, Bapepam - LK Min. of Home Affairs Coordinating Min. of People s Welfares Min. of Public Works Min. of Cooperatives & SMEs BNP2TKI Min. of Manpower & Transmigration Local Government Commercial Banks BPRs (Rural Banks) Associations of Insurance Companies Credit Guarantee Companies PPTKIS (Migrant Workers Recruitment Companies) Research Institutes Local community based organizations 25
Comprehensive Approach to Financial Inclusion offers greater impact SME Finance Financial Infrastructure Mobile payments Ag Finance Micro finance INTEGRATED FINANCIAL INCLUSION: -Govt to Person Payments, CCTs -Use of existing institutions e.g. Post Offices, Savings Banks -Use of technology -Banks, NBFIs, Investors, Supply Chain all play role -CPFL Responsible Finance -Based on sound Financial Market Infrastructure -meets client needs PREVIOUSLY: Limited Financial Inclusion, focus on specific themes rather than an integrated and strategic framework, microfinance vulnerable to crises NOW: Comprehensive approach, Universal Financial Inclusion as a goal, sustainable and responsible growth, focus on Impact and Policy Frameworks 26
27 Yoko Doi. 2012 Promoting Microinsurance Partners: BNP2TKI, Bapepam- LK, Min. of Manpower & Transmigration Review of Mandatory TKI Insurance Background Support on Micro- insurance Development Background Supporting Government Initiatives Despite of its mandatory features critical problems still exist : its effectiveness to provide protection for MWs has been increasingly questionable. What the we are doing Conduct a review on the existing MWs insurance product and mechanism Gather information on type of data collected by any institution related to MWs The insurance industry in Indonesia is relatively small compared to the overall financial sector Bapepam- LK s master plan for 2010-2014 includes the development of micro insurance in Indonesia: a) expansion of the overall insurance market, particularly given the low levels of penetration; and b) as a tool for social protection/safety net What we are doing Support microinsurance marketplace Ø More details in the following page T.A. for Insurance Bureau of BapepamLK: Ø to develop regulation for microinsurance to support enabling environment in Indonesia
28 Yoko Doi. 2012 Promoting Micro- insurance Partners: Bapepam- LK, the Indonesia Insurance Council, Institute of Risk Management and Insurance (STIMRA), IFC, Global Index Insurance Facility (GIIF) Microinsurance Marketplace Event (October 2011) WB w/ Private Sector + GoI What we are doing Two days event consisting of plenary session and exhibition of existing micro insurance product Plenary session was used to share international and local best practices Exhibition was used to promote micro insurance product and services Around 370 people participated in the event coming from both insurance and non- insurance sector Call for proposal on innovative ideas in microinsurance product s/services
What should be done in Indonesia & how the World Bank can assist 29
Proposed actions to be undertaken in Indonesia 1. Develop a regulatory framework for microinsurance in Indonesia 2. Government to identify risks attached to the farmers and their farms especially related to microinsurance coverage 3. PPP to develop/create/modify microinsurance products/services for farmers: Provide microinsurance coverage for crop failure Provide microinsurance coverage growing trees Provide weather index/parametric- based insurance coverage Provide microinsurance coverage base on combined indemnity & parametric principle 4. Enhance the role of communities as alternative point for channel of distribution 30
The World Bank possible area of supporting microinsurance development 1. Provide relevant global experiences/best practices for establishing enabling regulatory framework for the Industry to participate and to protect insurance policy holders 2. Facilitate and to bring global practices/experiences of microinsurance products/services for underserved populations (i.e. farmers, lower income households) 3. Facilitate the possible Public and Private Partnership (PPP) on developing microinsurance schemes for underserved populations 4. Support in addressing development challenges on microinsurance for farmers in Indonesia 5. Support government to promote awareness and improve financial literacy on microinsurance 31
THANK YOU 32