Weather-index based microinsurance schemes are beginning to grow up, as the schemes which were often launched as pilot projects with backing from development banks or agencies start to target a sustainable future as viable social businesses.
We’ve covered this interesting sector for many years, watching the development of weather-index insurance and the use of innovative parametric or index-based triggers. Artemis’ interest in microinsurance stems from our belief that as the initiatives grow they will require reinsurance protection and also that the innovative trigger techniques used could one day become more broadly used triggers for emerging country insurance or reinsurance risk transfer.
Both of those beliefs are now beginning to come to fruition, as microinsurance and weather-index insurance schemes are now starting to achieve the kind of scale that makes them increasingly relevant to reinsurers.
They aren’t yet at the scale where they are bringing large reinsurance programs that would be attractive to global reinsurers, or indeed insurance-linked securities (ILS) players, but one day they will be. However, as they grow the microinsurance providers are beginning to restructure themselves as they target achieving sustainability as a business, while seeking to retain the social good aspect that micro entails.
One good sign for sustainability is the increasing interest in entering these emerging markets that is shown by large reinsurance players, as well as the increasing number of companies launching their own microinsurance products, often without any backing from development players. It shows that the sector is growing up and that companies are now finding ways to make micro into a viable business model.
The other belief, that the innovative weather index and parametric triggers used in microinsurance schemes would become more broadly used, is also increasingly being seen more broadly across the insurance and reinsurance market. A great recent example is the African Risk Capacity (ARC), a catastrophe insurance pooling facility targeting food security for its policyholders, which is also seeking to use innovative triggers to issue catastrophe bonds to protect African countries against the impacts of climate change related losses.
Some of the trigger technologies introduced by microinsurance pilots, such as satellite sensing and weather related crop yield indices, are beginning to be seen in use by weather risk management and insurance products. The microinsurance industry has had so much scientific focus that it has become a test-bed for some technologies which are likely to receive increasing usage across the insurance and reinsurance industry for emerging markets where indemnity protection is often not prevalent or even desired or understood.
ARC itself and its Extreme Climate Facility (XCF), the multi-year funding mechanism that hopes to be the issuer of climate change cat bonds, takes a lot from the developments made by microinsurance over the years and applies its own scientific modelling approach to create a unique index trigger. ARC explains:
The XCF will be entirely driven by objective climate data, using Africa’s meteorological climatology as a baseline. XCF establishes a multi-hazard Extreme Climate Index (ECI) for each African climatic region. The index will track increases in the frequency and magnitude of extreme climate events over and above the baseline. When the index exceeds pre-determined thresholds, countries will automatically receive payments from the XCF to support their pre-approved climate adaptation plans. Should they occur, payments would start small and would increase with subsequent cat bond issuances, growing alongside increasing evidence of observed deviations from the baseline climatology.
The advancements made in weather linked insurance triggers by microinsurance and the continuing advancements being made by initiatives such as ARC will benefit the entire insurance and reinsurance industry in years to come, especially in emerging markets and possibly also as parametric weather or natural disaster risk transfer for large corporations in years to come.
In terms of the maturity of the weather-index microinsurance sector, the best example is perhaps the Kilimo Salama pilot project, which launched in 2009 and has provided both index-based and indemnity insurance products to as many as 200,000 people in 2013.
The Kilimo Salama pilot was one of the first to use innovative weather-index techniques and to combine them with mobile-money as far back as in 2010. The use of M-Pesa as a payment tool for a parametric weather insurance contract four years ago was ground breaking, perhaps not receiving the attention it deserved at the time.
Since then Kilimo Salam, backed by the Syngenta Foundation and others, has grown to provide insurance to smallholder farmers and small business owners in Kenya, Rwanda and Tanzania. The pilot is no more though and Kilimo Salama has been spun off from Syngenta to become a private company, aiming to be operated as a social business.
This is a big deal, as it is the first time in 30 years that Syngenta has spun off a project to become a separate company, which is pleasing as it clearly demonstrates a desire to make microinsurance into a sustainable, viable business and industry, while retaining the social good angle that it began with.
The new company, ACRE Africa, has now officially launched its products in Kenya, adding to Tanzania and Rwanda where the company already has operations. ACRE intends to champion innovation in insurance in the region, continuing to leverage scientific principles and climate data, to create insurance products which are predictable, reliable and easily understood.
“We are determined to champion a paradigm shift towards equity, fairness and innovation in the agricultural sector. Majority of the farmers are small holder farmers. The agriculture insurance market in Kenya focuses mainly on large scale farmers, therefore Acre Africa seeks to address this problem by developing insurance products for the small holder farmers that are affordable and accessible,” commented CEO of ACRE Dr. CJ Jones.
By 2018 ACRE hopes to cover 3 million customers, across 10 African countries, with expected sums insured of $800m plus. At that point of scale the scheme suddenly becomes very relevant to reinsurers and maybe even the ILS market. As other micro schemes also scale, with estimates suggesting that as many as 1 billion people could buy microinsurance products by 2020, the relevance of this sector continues to grow.
ACRE is just one microinsurance company that has grown up out of a pilot project, but others are expected to follow. The microinsurance sector is beginning to gain scale and come of age. The next few years of its development and the continued innovation around weather or climate indices and parametric triggers are set to be fascinating and could pave the way for future initiatives that will increasingly matter to the reinsurance and ILS markets.