Weather Insurance/

Derivatives Marketing
Protecting Wealth @ the Bottom of the Pyramid

A presentation by:

Shailesh Naik , ITC Ltd – IBD

BIODATA

 Shailesh Naik
 Head - ITC e choupal Financial services
 Responsible for Insurance and investment products that are sold
through ITC echoupal channel
 Education Qualification
 MBA + Bachelor in Mechanical Engineering
 Year of experience
 10 + experience in sales and marketing in diverse industries like
financial services , FMCG , Automobiles .
About ITC Ltd.

 ITC is one of India's foremost private sector companies

 Diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers,
Packaging, Agri-Business, Packaged Foods & Confectionery, Branded Apparel,
Greeting Cards and other FMCG products.

 ITC's Agri-Business ( ITC -IBD) is one of India's largest

exporters of agricultural products.
 Supply Chain Initiative of this division – ITC e Choupal has transformed rural
economy in MP , UP ,Rajasthan and Maharashtra
 Better rates for farm produce ( eliminating Middleman )
 Access to better quality of FMCG , Non FMCG , consumer durables, agri
inputs and financial services ( Direct assess @ right prices)
Background
Next big opportunity is rural India

 Background:
 Rural India accounts for 70% of India’s population
 Rural market is set to reform
 Rural non-agri sectors such as infrastructure (construction, electricity, gas &
water supply), rural health, education, tourism, transport, communication
are exhibiting high growth rates
 Financial service providers such as banks, life, non-life insurance are
aggressively looking at rural India, which is expected to revolutionize rural
India in the coming future
 But betting on rural economy is ….
…. A high risk game..

 Rural economy
 Highly dependent on agriculture
 Very few people have assured monthly
income like their city counter parts
 Any change in agriculture income has a
multiplier effect on the economy
 Agricultural Income is subjected to high risk
 Production / Volume Risk

Weather , Pest , labour and process inefficiency

Out put Risk

Govt Policy Risk

National & international price risk
This risk presents
…….. Opportunity No1

 Farmer’s Problem: Risk of Crop failure

 “To increase my crop yields and incomes I need to adopt better inputs and practices
which require higher investments. But who will protect me if my crop fails”
 Despite knowledge and cash to invest in productivity techniques which enhances
farm income, farmer adopts risk reduction strategy by reducing his input cost.
 A Good risk mitigation tool will help rural economy by bringing higher investment
and increasing productivity

 ITC e choupal context :

 The above risk is threat to e choupal business model
 ITC e choupal business model is a based on
 Procurement of Crop @ Best quality @ Fair Price
 Distribution of FMCG , Consumer durables , Agri Inputs , financial services to Rural economy
How is it being addressed today

 The government on its part tries to address output risk atleast for loanne
farmers through subsidized Multi peril crop insurance
 However, the effectiveness of crop insurance has been below expectation on
account of following issues
 High monitoring and administrative costs
 Moral hazard
 Adverse selection due to asymmetric information
 High subsidies
 Long claim settlement time ( often > 1 yr ) Hence irrelevant to small farmers

During the period of 2000- 2004 NAIS collected Rs 1242 crores of insurance
premium and settled claims worth Rs 4991 crores

Despite this Retail sales of Crop Insurance is very low.

Weather Insurance/ derivative – a
Better Alternative

Weather indexes can form the basis of an insurance contract that protects farmers
from weather risk

Causal analysis of agriculture losses complied by General insurance corporation’s

crop insurance cell indicates 90% of crop losses are related to weather.

 An index insurance contract indemnifies based on the value of an “index”- not

on losses measured in the field

 An index is a variable that is highly correlated with losses and that cannot be
influenced by the insured .Example indices: rainfall, temperature, regional
yield, river levels
 Weather Index Insurance – a logical
choice

Advantages
Less moral hazard and adverse selection

Timely payout Market opportunity

Lower administrative costs ITC e Choupal decides to market
Weather Insurance - transfer
Standardized and transparent structure
rural economy risk

Availability and negotiability

Reinsurance acceptability

Versatility
Converting concept into business
proposition

 Weather Insurance as a concept is great but globally it

has failed to go beyond pilot stage for mitigating
agriculture risk

Subsidies, bundling with loans and agri inputs etc have
been tried by various countries

Yet repeat sales and pilot scale up has been an issue
because of …..
Proposition Delivery Problems

Farmer’s problem: Product is not relevant to my needs..

 In Dec 2005 weather insurance for wheat was designed to cover crop failure
for excessive heat. However crops damage was on account of unseasonable
rainfall in March 2006
 A relevant weather insurance product needs to
 Maximise the correlation between index and loss of crop yield
 Give choice to farmer to cover independently various weather risks that his
crop can face.

Weather Station should be as close to farm as possible
 Max 25 kms for Rain fall
 Max 40 kms for Temp
Proposition Delivery Problems

Insurance company’s problem: Lack of capability and high

cost for product customization

• Product customization requires

 Information on local cropping pattern
 Continuous monitoring of weather impact on crops.
 This data is very costly to procure and needs to be regularly validated for
accuracy.
 Insurance companies hence have limited themselves to generic weather
insurance covers or at most few crop / region specific designs.
 This in turn has limited weather insurance’s market and repeat sales.
Proposition Delivery Problems


Insurance company’s problem: High Distribution cost
 The spread and diversity of target customers make cost effective distribution
a big challenge.
 37% of the urban population live in 23 cities
 35% of the rural population live in 100000 villages
 General insurance companies who sell crop and weather insurance portfolio
do not have good rural agent network like Life Insurance Company (LIC).
 WI being a seasonal product has a very short sales window of around 10 –
20 days before risk commencement period.
 Thus in an entire year sales force is engaged for just 40 days
Market opportunity


ITC echoupal is uniquely positioned to address these problems
 ITC e Choupal had 6000 Sanchalaks (lead Farmers) with internet
connectivity spread across 4 states giving field information and
weather data to local farmers on regular basis .

Field Demonstration Plot officers /consultants who share best
practices with farmers have immense knowledge to develop relevant
products

Megatop Insurance services a associate company of ITC through its
IRDA broker trained field force already selling Life Insurance through
e Choupal provided cost effective distribution channel
 Weather Insurance

Converting opportunity in to business model

Market segmentation , Target &
Positioning


Customer who has experienced the peril -
 Position as Insurance Product

Customer who understand peril but has not experienced :
 Position WI as cost effective necessary input for crop

Rs 250
Market segmentation , Target &
Positioning


Crop Specific WI
 Offers more scientific solution patterned with crop growth cycle - but
difficult to get complete historical data to structure products and hence
limits districts where this product can be offered
 Complex to understand and bit expensive
 Target segment
 Medium/Large Farmers ( 8 acre +)

Generic WI
 This is easier to develop for all districts as the normal rainfall and the
seasonal rainfall figures are easily available, thus we can pan out to
larger geographical area
 Target segment
 Small farmers ( 3+ acre )
Value proposition :Product differentiation

 Increasing product Relevance to farmers

 Agri experts on its panel and Sanchalak ( lead farmer ) to design
weather insurance product - Crop wise, district wise and phase wise
 Three key inputs were focused on
 The cropping pattern To indicate sales potential & prioritize sales
effort
 The peril identification for that crop & Weighted index setting for each
phase of the crop  To improve relevance to customers

Pricing - To improve consumer affordability and product
sustainability
Value proposition :Product differentiation

• Increasing product Relevance to farmers

 Step 1: Understand cropping pattern in a district.

 Step 2: Interact with farmers on the perils they had faced in last few years
which impacted their crop yields
 Step 3: Along with the Insurance company and weather stations find if we
have relevant weather data (for last 15-20 years) for that region.
 Step 4 : Design relevant phase wise triggers along with agri experts
 Step 5: Insurance companies quote premium for these products
 Step 6: The best quote received is tested with field for affordability
Value proposition : Customer Service

1) Fortnight Weather Data to Consumers :

 Farmers now understand weather impact on crops and when their claim
is triggered.
 With experience we have requested insurance companies to install
weather stations at specific locations for better accuracy and faster data
availability

2) Benchmark of Claim settlement within 45 days

This all has ensured us repeat sales.

Creating Awareness

 Sales kit: To enable internal staff and extended

organization conduct village meetings
 Films: In regional language that explains needs and
benefits of Weather insurance
 Visibility: POPs and Visuals that indicates Mausam
Beema is as important as other inputs
 Communication Pitch for each product is made and
given in huge quantities.
Getting Cost advantage :
Improving Productivity

 Sales Planning:
 Sales Planning a very critical step to improve sales force productivity.
 The sales window is 10-20 days and hence we needed to cover crops
that can engage people across the year.

Bundling with field demonstration plots :
 ITC e Choupal Agri-Extension officers (AEO) are involved in spreading
best practices in agriculture.

On these field demonstration plots of around 1 acre AEO guides
farmers to use right quality inputs at right time and in right quantity. The
yields at these farms have been 20% -100% more than normal.
 Weather insurance propagation through this channel has increased
awareness and provided us another cost effective distribution channel .
Value Creation for the
Ecosystem
Farmers
Extended Organisation
Partner Companies
ITC
Value for key stakeholders

Farmers
 Risk mitigation tool specifically designed to cover their risk
 Timely claim settlement :
 Settled claims worth 14 lacs in 2005-06 Rabi season and 30 lacs in
2006 Kharif season.
 The claim settlement period has now crashed down from 90 days to
less than 40 days as compared to over 360 days in Crop Insurance
 Broker who represents them rather than a agent who represent
Insurance company
 Ajmer case wherein the data given by IMD Weather station was
incorrect
 ITC along with farmers took Insurance company to Weather station
made to reevaluate the data and subsequently honour claim
Value for key stakeholders


Sanchalaks / Sanyojaks : Lead farmers in Village

 Brokerage Income :
 Around 1300 Sanchalaks - our extended organization have earned
commission ranging from Rs 200 to Rs 20000 with just 10 days effort
around kharif season
 This income is around 1% to 25% of their annual income
 Respect and honour
 Claims settlement reinforced Sanchalak’s respect in village
community as a “Friend in need is Friend indeed”
 This goes a long way in reinforcing the value proposition of our other
business too.
Value for key stakeholders

 Partner Companies
 Low cost distribution channel
 Partner is designing more relevant product
 Provide locations for future weather station for better recording &
monitoring of weather data
 We account for 25% of total Agriculture Insurance Company’s Weather
Insurance overall sale and almost 100% sale in echoupal districts.
 Additionally this sale is not “a free offer on Seeds or Fertilizers” or forced
option for taking low interest loans.
 All ITC e Choupal consumers buy weather insurance voluntarily after
getting convinced about its benefits. This we believe is the real test of
product sustainability in the market.
Value for key stakeholders


ITC – e choupal
 De risk rural economy
 ITC e choupal earns Rs 22000 million as revenue from rural market
 Weather insurance sale protects this economy from weather shocks and
improves sustainability of our earnings
 ITC e Choupal brand Value enhanced
 Timely claim settlement and sensitivity to farmers has improved ITC e
choupal brand value
 Improves viability for extended organisation
 Sanchalak earning in this business adds to total revenue he earns from
his choupal
 Revenue Earned
 Commission from WI adds to ITC e choupal bottom line
Way forward to increase business

 External
 Improving Infrastructure :
 Increase number of Weather stations to reduce basis risk
 Timely and Correct data
 Sensitivity to Consumers
 A pool to protect farmers in case crop failure is across the region and weather risk fail to
map / solve the same
 Regulation change / Government support
 Market Development support fee for organization that is working hard to develop the
market
 Government endorsement for this product and support through advertising
 Product subsidy
 Internal
 ITC is convinced about the product and its potential
 Right Segmentation – leading to better design – With Sales force Motivation will drive the
volumes in years to come ….
Thank You
Sales Planning sheet : ITC Chart
Cropping Calendar risk …
Crop Risk Start Risk End Phase Perils

Coriander - Frost 15-Dec 08-FebVegetative Frost bite damaging the crop

Potato - RF 16-Dec 31-JanVegetative Unseasonal rainfall in a day above a threshold level, which shall
cause formation of late blight disease in potato crop and thus
damaging it

Potato - Frost 16-Dec 31-JanVegetative Frost bite damaging the crop

Coriander - RF 10-Feb 19-MarMaturity Unseasonal rainfall in a day above a threshold level, which shall
impact the quality of yield

Mustard - RF 16-Feb 31-MarMaturity Unseasonal rainfall in a day above a threshold level, which shall
impact the quality of yield

Gram - Heat 16-Feb 31-MarMaturity Sum of deviations from threshold of average temperature would
trigger a claim.This is offered for both fortnights separately which
would impact milking stage

Gram - RF 16-Feb 31-MarMaturity Unseasonal rainfall in a day above a threshold level, which shall
impact the quality of yield

Barley - Heat 21-Feb 20-MarMaturity Sum of deviations from threshold of average temperature would
trigger a claim.This is offered for both fortnights separately which
would impact milking stage

Wheat - Heat 01-Mar 30-MarMaturity Sum of deviations from threshold of average temperature would
trigger a claim.This is offered for both fortnights separately which
would impact milking stage

Wheat - RF 01-Mar 15-AprMaturity Unseasonal rainfall in a day above a threshold level, which shall
impact the quality of yield

Barley - RF 01-Mar 15-AprMaturity Unseasonal rainfall in a day above a threshold level, which shall
impact the quality of yield
Risk that needs to be protected
Insurance Cover

Low probability High probability Low probability

Extreme weather Normal weather Extreme weather
events (droughts) events (excess
rainfall or flood)

The producers
generally perceive
this as their risk
High Consequence Low Consequence High Consequence
Extremely low yields Reduced yields Extremely low yields

Govt. Relief
Designing Crop specific WI
Cropping Calendar risk

*Maize yields are particularly sensitive to

rainfall during the tasseling stage and the yield
formation stage – rainfall during the latter
phase determines the size of the maize grain

Sowing and
establishment
period is also critical
crop survival

Diagram taken from the FAO’s maize water requirement report*

• A rainfall index is normally split into 3 or more crop growth phases

• Objective: maximise the correlation between index and loss of crop yield
Generic Weather Insurance :
Payout structure : Drought Protection

Payout perEXAMPLE
Hectare for OF
Maize DroughtSTRUCTURE
PAYOUT Protection, Lilongwe Region
9000

8000

7000
Financial payout
Maximum Payout - increment
ha)
per hct)

6000
per mm
(unit per

5000
Payout (MKW

4000
Payout

3000
Long-Term
Average Rainfall
2000

1000 Trigger Rainfall

Level
0
0 10 20 30 40 50 60 70
Deficit Rainfall
Maize Rainfall Index
Index (mm.)