Michael Anthony, Head of Microinsurance, Allianz SE was at IFMR, Chennai as CIRM’s special invitee on July 23, 2010. He is a spokesperson for the Munich based Allianz Group and a member of the Allianz Group’s Sustainability Strategy Team. In this capacity, he organises and chairs the Allianz stakeholder dialogues on some of the Group’s Corporate Social Responsibility (CSR). Michael is the reviewer of Allianz’s annual risk reports. His recent publications include reports on climate change, nanotechnology and pandemic viruses.

He informed the audience about the micro insurance initiatives of Bajaj Allianz, the Indian arm of Allianz.

-  He gave a brief account of the innovative savings cum life insurance product launched in 2008, through SKS, a channelpartner of Bajaj Allianz. The product allows certain flexibility in premium and payment. If unclaimed, the deposit is refunded after 5 years. In order to reach the rural population they have collaborated with dairy cooperatives and promoted the same product, helping policy owners to build assets over their lifetimes. This savings-cum-group policy can be customised and has features such as risk covers, premiums and payments terms as well as benefits and conditions.

-  Bajaj Allianz in its global initiatives, in partnership with CARE India is implementing the unique property insurance provided through Care International. In November 2008, when cyclone Nisha hit the shores of Tamil Nadu, 16,000 families were able to weather the damage it caused, because of the insurance they held with Allianz. This product covered a range of risks. The policy included payouts in case of total or partial disability, hospitalisation, loss or damage to the household or other assets, death, as well as an education grant for one child. This portfolio policy was helpful for LIH when the cyclone unleashed its fury. However, the product is still to achieve financial viability, and therefore product modification is being explored.

-   In another innovative pilot through CARE, Allianz offers a Health Mutual Insurance product, which aims to battle the special challenges of the micro insurance industry viz. high distribution costs, high probability of fraud, low willingness/ability to pay, and low financial literacy. This is achieved by leveraging the mutual model, where the community is directly involved in the administration and distribution of claims, which resolves the problem of distribution costs. The community chooses trusted doctors who, along with the peer-monitoring mechanism minimises the possibility of fraud either by the doctor or patient.

The unique modification in the model reduces risk to the community portfolio, through insurer risk layering with Mutuals. It shares the risk of high-cost events thus pushing down the premium. Bajaj-Allianz receives 33% of the premium, and in return handles all those medical procedures where the expenditure rises above a certain threshold. This enables the community to provide cheaper insurance addressing the problem of willingness/ability to pay. This product also leverages the expertise and local rapport of CARE India who acts as an intermediary partner, working with local NGOs in setting up Mutuals, financial education and capacity-building activities of its members. This model has the strength of both sides: the low cost and mutual control of local self help groups, as well as the reach and technical know-how of Bajaj Alliance. The product was piloted in Tamil Nadu in 2007.

When summarising, Michael identified core sector level challenges which Allianz was exposed to. They were

-  Credit life insurance: there is not still a big success mainly because of the commission (20-30% of the price).  But the claim is

growing up during the five years of product’s use.

-   Property insurance: There are very few at the moment in India even though tests had been realised in Africa and Indonesia.

Questions about the products from the audience were the following

-   To find a management of product’s fees

-   Are savings linked to micro insurance because clients need a profitable product?

-   Was there any exposure to equity? (problem of fees and profit for companies)

Also, they have still not ventured into agriculture and weather based insurance products and for these he showed a keen interest in discussions with the CIRM team.   In India, micro insurance is provided through NGO or MFIs. Concluding, he spoke of two major challenges in the Indian scenario. They were to

-  develop health insurance skills

-   justify the product’s price or rather propose separate added offer.

Michael’s talk provided the opportunity for sharing of knowledge and information that we hope will lead to further exchanges of ideas and solutions.

Inclusive growth is a top priority of the present government as seen by the efforts taken in the budget to increase rural spending. It is being given a lot of importance in order to close in on the development gap in the years ahead. To Bridge the gap between the “developing” and the “developed”, mainstream financial institutions have to play a substantial role in the rural market. It can be argued that the demand for financial products like insurance is hardly compelling in rural India. Venturing into such markets can be unprofitable for large financial companies. But that notion has gradually been changing because rural markets are mass markets that can provide voluminous demand for financial products, if the people can be convinced about their importance.  It is time to change the existing system where NGOs (non governmental organizations) and MFIs (microfinance institutions) bear the bulk of the risks involved at the rural level.  Mainstream financial institutions are much better equipped to deal with such risks and are gradually testing the rural waters. In the Palmyrah Workers’ Development Society (PWDS) was a field partner committed to this philosophy. It was therefore the ideal laboratory for this pilot.  

PWDS (Palmyrah Workers Developmet Society) operates in a network project called NEERA which involves 12 federations of Self Help Groups (SHGs). NEERA was founded in 1996 as an initiative by PWDS and its main objectives are community organization and federating, skill training, resource mobilization, awareness Generation, promotion of enterprises, market support and establishing linkages. PWDS while working on its Community Development mandate through its NEERA project realized that most families had a low health-seeking behavior due to the fear of losing wages, livelihoods and also having to bear the medical expenses. This is more evident in the case of women and the girl child. More than 35% of the borrowings from the SHGs (NEERA SHGs) had been for medical care/treatment. This trend affected the other development efforts and specifically, the income generation initiatives. Realizing the vulnerability of these groups, PWDS-NEERA partners felt the need to address this problem with a sustainability perspective by linking the mainstream health care providers and insurance companies with the participation of the community-based organizations. An affordable and user friendly insurance scheme (micro-insurance) if introduced with necessary forward and backward linkages could help not only these communities but also many other families through other NGOs implementing projects coordinated by PWDS. This was the motivation of PWDS to start working on a new micro health insurance scheme.

Having learnt from this experience, PWDS in a joint venture with Bharti-AXA is currently piloting an insurance model with technical and research support from CIRM. CIRM has been working for the growth of the Microinsurance sector for the last two years and it identified PWDS and its mainstreaming philosophy as an excellent opportunity for overall sectoral development. The community development outlook of PWDS, the sectoral development agenda of CIRM and the profit-motives of a private insurer- are the three “Pull” forces that can anchor an innovative Microinsurance scheme; and the concept of this scheme is a result of these three factors. The model is being implemented in the three districts of Kanyakumari, Tuticorin and Tirunelveli. The product being offered is health insurance and is sold as a group product.  At present, most micro insurance products are sold as group insurance due to the low ticket sizes and high transaction costs faced by the insurer. Thus it was time to think from the very scratch and in an ‘out-of-the box’ manor to surpass these access barriers and help the industry in general to access this huge potential market of rural clients directly. It is very clear from the community experience of PWDS as well as CIRM that once the benefits of a health insurance product and the good standards of service are demonstrated, the community is eager for a health insurance product and has the willingness to pay for the same. Also there should be no subsidies or discounts routed towards the insurance product because it impacts the replication and sustainability of the scheme directly. In this scheme the community would interact directly with the insurer via the community structures made for this project – by the federations viz. Insurance committees (or individual members of the same) may serve as agents or intermediaries. In this scheme to ensure the community participation the ownership of the product is given to them. This will reduce any conflicts and confusions regarding exclusions, inclusions, coverage and entitlements. This will also have a positive impact on the renewals and will enable a complete MATCH between the product and the needs of the community. All the decisions related to the product should be made in participation with the community. It is imperative that the Insurer understand that this is not a typical group insurance scheme for PWDS members but instead this is an opportunity to learn for the insurer and the sector in general, how to reach to the rural clients directly. PWDS and CIRM will act as facilitating and learning partners with the insurer for the first few years only and that too in a role that is gradually decreasing. Once the insurance awareness spreads and the client is convinced, it will capture the market as a retail product as opposed to just being a conventional group product.

 Insurers interacting with the community during a field visit

Community representatives brainstorming in discussion groups 

Community representatives presenting to the insurers 

Insurers making a presentation to community representatives

Retailing insurance requires innovation and customization. The model has to first capture the imagination of the people, break even and achieve sustainability in order to be a successful business model. The model for now, pitches the product at the SHG level through a conventional partner agent approach. The hierarchy is such that the SHGs constitute federations which form the network of NGOs under the care of PWDS. The federations of SHGs act as the service provider in this case. The fee received by a federation is distributed to the Insurance Coordinator (IC) and the Insurance Promoter (IP) who play a pivotal role in selling the product to the client. The Insurance Coordinator handles the accounting, computer work and is expected to be savvy in skills such as public relations and communication.  The Insurance Promoter on the other hand, is directly in the line of sales. He actually reaches the product to the client performing the main marketing functions required. Since the role of the IP is so crucial, over time, the aim is to uplift the IPs to the status of legal insurance agents. This model is being overseen by PWDS and CIRM presently and they are hopeful that the role of the mainstream insurers and the IPs will become more robust.

With regards to the willingness to spend on the policy and utilize the insurance, it is necessary to discuss copayment as it plays a big role in the insurance seeking behavior of the clients. The two products offered also vary as far as co payment is concerned. One offers the policy with co payment while the other does not. Co payment implies that in the event of sickness, part of the payment is met by the client. The premium for this product is less than one which does not offer copayment. Policies with no co payment have a higher premium and the entire coverage is provided by the insurer. While each has its advantages and disadvantages, at the rural level, the feeling is that a co payment product is more affordable because of the lesser premium charged. Since part of the payment is met by the client, there will be a certain responsibility in using the insurance policy and this in turn prevents moral hazards often faced by insurance providers.

There is tremendous potential for affordable health insurance products in rural markets. It will be interesting to see how this pilot health insurance model can be moulded to sell and service other lines of insurance products beyond health. Offering these as retail products will be even more challenging. PWDS and CIRM will implement this project over 36 months and will re evaluate the process from their research and field level findings. The ambition is to go beyond the group insurance engagement and pilot a retail business model that insurers can replicate and take to scale. If it can be demonstrated that rural retail business can be a sustainable business proposition, insurers would have an incentive to service rural clients, low income households in particular, more efficiently.

In the face of the shortcomings of weather index and yield based insurance, a new solution based on remote sensing applications has been proposed to provide an accurate and effective Insurance program. Currently being researched by the CIRM, remote sensing refers to the use of Imagery from Satellites orbiting space to estimate production yields in landholdings through a variety of methods. These include estimating the rainfall in a given area by measuring the temperature of storm clouds, a technique known as Thermal Infra Red (TIR), and measuring the foliage, or ‘greeness’, of a specific area through measuring the wavelength of radiations absorbed by leaves, creating what is known as the Normalized Difference Vegetative Index (NDVI). The NDVI and TIR help solve the issue of a lack of ground-based weather collection infrastructure, as they can be remotely calculated from Satellites. Thus, they bypass one of the biggest drawbacks of a traditional Weather Index based scheme. Moreover, an NDVI based production yield has been shown to share a far greater correlation to actual production yields, leading to more accurate estimates and therefore a more effective insurance product. Finally, NDVI schemes are also extremely advantageous because they are considered faster to estimate, easier to scale, and cheaper to implement than traditional weather index schemes.

An example of satellite imagery measuring a plant’s ‘greeness’

Source: Upadhyay Gargi, Ray S S, Panigrahy Sushma (2008)

Yet, just as with all the other Insurance solutions detailed before, the NDVI based schemes also suffer from certain issues. One of the primary concerns with an NDVI solution is that a large amount of agricultural land mapping must be carried out for the NDVI scheme to be put into place. This is because each landholding must be assigned into a specific grid, based on latitude and longitude, as the estimates of production within each production grid are used as proxies for the yields of the landholdings within the grid. Such information will most likely not be known by the policyholder, and will have to be attained through comprehensive land mapping, which may be a time consuming process. Another important concern is that an NDVI estimate may be prone to moral hazards, with policyholders potentially damaging their landholdings to lower production estimates and avail higher payouts. However, this problem can seemingly be overcome by combining the NDVI with the Weather Index to form a new composite index, seeing as moral hazard does not affect Weather Indexes as much. We shall discuss this new form of insurance in a future entry.

NDVI Insurance schemes have already been implemented throughout the world, as shown in the below table.

Source: Patankar (2009)

In regards to developing countries, India and nations in Western Africa have led the way in the implementation of NDVI schemes. In fact, a new set of NDVI insurance schemes in Western Africa is currently being researched and proposed by a team led by Michael Carter and Rachid Laajaj. This is not entirely surprising as India and Western Africa are particularly well suited to the requirements of NDVI. Both areas do not have extensive cloud cover, an impediment to NDVI measurement, as they have large, vast plains. Moreover, both India and Western Africa tend to grow the same crop, usually paddy, across large land areas, making NDVI measurement all the more accurate. In contrast, countries such as Sri Lanka, with small plot areas and high levels of cloud cover, are unsuited to NDVI Insurance schemes due to the difficulty of NDVI measurement in the given areas. This then represents yet another shortcoming of NDVI Insurance – it can only be implemented in locations that meet a very specific set of agricultural and geographical criteria. Outside of these areas, it is an ostensibly impractical insurance solution. However, the fact remains that in suitable locations, NDVI Insurance schemes carry many advantage and can possibly be used in conjunction with older schemes to create viable Insurance solutions. We shall explore this idea further in the next entry.

One of the biggest problems that farmers face in crop production is the volatility of weather patterns. A sudden drought, be it due to climate change or the whims and fancies of the gods, can lead to huge losses in crop yield and therefore income. As such, farmers require protection against the sheer unpredictability of weather – the so-called random acts of God that we are yet to fully predict or understand. The solution to this, many feel, lies in Weather Index Insurance.

Weather Index based Insurance is one of the new forms of Agricultural Insurance in India that holds much promise for overcoming the flaws of previous yield based schemes. This particular form of Insurance uses a specific parameter of weather in a given area, usually rainfall, as a proxy for the crop yield of the farmer’s landholding. Taking rainfall as the parameter, if net rainfall in a given season varies from an established level, the farmers will be compensated based on variance of the present rainfall from the established level of required rainfall.

This method holds many important advantages to area yield based schemes. First of all, it is far easier to calculate the indemnity payout in weather index based schemes, as it doesn’t necessitate actual assessment of yields in multiple tiny plots in remote rural areas. All that is required is to make a payouts based on the variation of the rainfall in a given area with an accepted standard level. This accepted standard level is calculated by comparing historical rainfall levels with crop yields and assessing the correlation between the two variables. Now, the advantage behind this form of insurance is that it is extremely transparent as the information required can be easily publicized and the method for calculating payouts is simple to understand. Moreover, as this index doesn’t require actual field based evaluation, the insurer is subject to far less information asymmetry leading to a reduction of moral hazard and adverse selection. These are particularly important considerations as they allow the insurers to dramatically reduce the premiums on the insurance products.

Finally, Weather Index Based Insurance has a much lower administrative cost leading to greater efficiency for both the insurer and the insured. The insured particularly benefits from this as the lower administrative costs and lower time lag allow for quicker claims payouts, which can be hugely important in times of severe income shocks. Thus, Weather Index Insurance has largely been seen as a more effective form of insurance than what has been provided in the past.

However, even this form of Insurance suffers from many important drawbacks that we must consider. To begin with, the weather in a given area may not always be representative of the weather in the entire area due to fluctuations in weather over small areas. This could lead to policyholders receiving inadequate compensations for their losses. Another important consideration is that the weather collection infrastructure in India is currently quite poor, leading to a lack of reliable data in remote rural areas. This can cause significant inaccuracies in production estimates due to the potentially significant proximity between a weather station and a given landholding.

An example of a simple weather station

Furthermore, historical weather data, needed to create models to estimate production yields, are also hard to come across, and when they are present, the costs of acquiring them are very high. Such data collection issues lead to imprecise payouts, with a variation of up to 40% between payouts and actual losses. In addition, the uncertainties caused by such data force insurers to higher premiums to compensate for what is known as ‘uncertainty loading’. Therefore, we find that a Weather Index based Insurance solution may not be the ideal solution either for providing Agricultural Insurance for farmers in rural areas. In the face of such problems, another new solution has been proposed which we shall proceed to see in the next blog entry.