Mutuals' as a Livestock Insurance

Mutuals’ or Insurance

Introduction

Livestock is an important source of household income for developing countries (including India). Approximately, 100 million households are dependent upon livestock as either the primary or secondary source of income in India alone. Any disease, accident, or theft of livestock leads to a substantial loss to the household. Apart from this, huge production risks associated with dairying activities render animal husbandry business a risky proposition for the low-income households. Production risks can be related either to scarcity of input e.g. dry and green fodder, water, etc. for the animals, or, to high morbidity in the case of individual animals or in case of an epidemic. The tropical climate and poor hygienic conditions present here are some of the factors that trigger or aggravate diseases such as Mastitis, Foot and Mouth Disease (FMD) and Hemorrhagic Septicemias (HS). Above all, the loss of assets is the biggest challenge for cattle owners as it leads to a precipitous fall in their income. Business risks in livestock rearing make it all the more important to regard insurance as an efficient measure to provide safety to low income households. The first imperative is to understand how customers and suppliers perceive the value of the potential product.

The Government of India effectively launched the first livestock insurance scheme in the 1970s for the purpose of asset building at the bottom of pyramid, and, thus pioneered the role of market maker. Yet, its coverage is not more than 7% of the cattle population. Various schemes were used to increase the spread of livestock insurance, with public insurers as risk carriers. Livestock insurance has been offered as a compulsory product with bank credit for dairying activities. The main problem is that offering sustainable livestock insurance is mostly hampered by unreliable data on livestock mortality and by low set premiums. It is seen that insurers go rural mainly because of social and rural obligations stipulated by regulation, and do not bother about competitive pricing. This, at times, leads to dumping of underpriced policies.

The cost-effectiveness and product delivery efficiency of different distribution channels is crucial to ensure the success of micro-insurance business. With new micro-insurance regulations in place, the insurers are hopeful about entering rural markets with lower transaction costs and about catering to a larger rural population. Challenges are also faced by insurers in the sense that the burden of all risks are passed on to the insurer as ex-ante risk mitigation strategies in the form of vaccination, de-worming, etc. are not well in place. Lack of veterinarians and physical infrastructure for animal husbandry adds to the woes of insurers.

Instances of high loss ratios are very difficult to control due to the remoteness of the villages. Insurers were highly aware of the lengthy process of claims settlement and showed keen interest to reduce the claim settlement process by use of technology. Insurers agreed that livestock insurance uptake would be a challenge unless a strong infrastructure is built and institutions are made more efficient. It is important to point out that in the presently distorted market scenario the demand also remains a big problem due to lack of awareness and unwillingness to pay the premium amount. The main challenges to livestock insurance can be summarized as: • Unorganized market and poor veterinary infrastructure • Absence of actuarial pricing due to lack of data and challenges due to moral hazard and adverse selection • Incentive system for risk reduction and challenges in valuation and identification • Absence of bundled comprehensive financial products • Lack of proper incentive system for sales staff • Lengthy claims settlement process • Absence of concentrated marketing and product awareness

Solutions can be sought to improve the livestock insurance markets throughout the world by creating databases that can help price the premium actuarially. Smart subsidies can be incorporated by the government or multi-lateral agencies later to help increase the uptake. Better marketing strategies and incentivizing insurance sales agents to sell livestock insurance products will certainly help to boost demand. Technology is being incorporated at various levels from identification to cash management. Finally, the livestock insurance sector can aim to build strong livestock management systems. Risk reduction and risk transfer systems should be integrated so that the overall performance of the livestock sector can be improved. Insurers should ideally take the residual risk so that they have enough incentive to reach out to the market and sell the product. Although insurance markets are underdeveloped in developing countries, recent developments in the field of micro-insurance will hopefully increase demand in rural areas.

Risk

Individuals typically become concerned about risk when one or more of the potential outcomes are unfavorable. Thus, when someone says that an individual is “taking a risk”; they typically mean that the individual is faced with a situation where there is at least some chance that a loss will occur.
Economic decision-makers are often risk-averse. This implies that given the choice between a less risky alternative and a more risky alternative, they will often choose the less risky alternative even when the expected return is less than the expected return of the more risky alternative. This is why insurance markets exist. Risk-averse individuals are willing to pay an insurance premium to reduce their risk exposure.
From a societal perspective, risk reduces incentives for investment and economic growth.
Of course, entrepreneurship is all about taking risks. This is evidenced by common business maxims like “nothing ventured, nothing gained”. Typically, expected returns are positively related to risk. Anyone who has an investment portfolio has been confronted with the risk-return trade-off. Investments that have the highest potential for growth typically are also quite risky. Low-risk investments, such as savings accounts, typically offer lower expected rates of return. Recognizing this trade-off, economic decision-makers do not attempt to eliminate all risk. Instead, they attempt to manage their exposure to risk so as to not take on any more risk than what is required to attain the desired rate of return.

Risk Management and Insurance

In general, economic decision-makers manage risk through mitigation, transfer and/or retention. Mitigation involves activities that reduce the likelihood of loss and/or the magnitude of loss. This may include establishing and following certain best management practices, as well as training employees on the implementation of those practices. It may also include investments in improved production, sanitation or safety technologies. Regardless, risk mitigation typically imposes costs on economic enterprises. Risk can also be managed through markets that for a fee will transfer risk from those who are less willing to accept it to those who are more willing to accept it. Examples of risk transfer mechanisms include cash forward contracts and hedging using futures or options contracts.

Insurance is probably the most common market-based risk management instrument. Insurance is a legal contract whereby risks are transferred from one party to another in exchange for a premium. Specifically, insurers agree to pay policyholders an indemnity contingent on a measurable index exceeding some threshold. Typically, the index is a measure of losses resulting from specified perils. Insurance purchasers are sufficiently risk averse that they are willing to accept a small loss with certainty (the insurance premium) rather than face the risk of a much larger loss. Insurance is a unique form of risk transfer in that it typically involves pooling risks. If the loss risks on insurance policies of individuals in the pool are not highly correlated, the statistical law of large numbers implies that pooling can reduce the variance of the insurer’s portfolio below the average of the individual policies. Thus, by pooling less than perfectly positively correlated risks, insurers actually reduce society’s aggregate exposure to the risk being insured. However, as discussed in the following sections of this chapter, different perils have different risk characteristics and not all perils are insurable. Retention is a final risk management strategy. Economic decision-makers may choose to simply retain all or part of their risk exposure. Retention may be the result of a deliberate decision based on careful consideration of the likelihood of loss, the potential magnitude of loss, and the costs associated with risk mitigation or risk transfer. However, retention can also occur unknowingly if decision-makers fail to recognize their risk exposure or fail to consider available risk migration and/or risk transfer opportunities. Further, the option to transfer risk is sometimes unavailable because no market exists.

Risks to Livelihoods Dependent on Livestock

India ranks second in terms of its livestock wealth across the world. Out of the total livestock in the country, around 38.2% are cows, 20.2% are buffaloes, 25.6% are goats, 12.7% are sheep, and 2.8% are pigs (Source: 17th Indian Livestock Census Report, 2005). The steady increase in population and inefficient distribution of resources is the reason a majority of poor households has very small or no agricultural land to be engaged in cropping activities. Therefore, a majority of the poorest among the Indian population depends on livestock as an important secondary source of livelihood. It is estimated that approximately 100 million people derive their livelihood from livestock either as a primary or secondary source of income. Livestock related activities help to maintain a daily inflow of income for these households. Additionally, small landholders obtain nearly half of their income from livestock.
Two-third of livestock owners are the most small and marginal farmers and laborers with poor resources, owning only one thirdportion of total agricultural land.

The livestock economy penetrates more equitably than agriculture in the Indian economy. Livestock rearing is central to the livelihoods and survival of millions of small and marginal farmers, and landless agricultural laborers across the country, particularly in the dry land regions of India. Large animals like cattle are expensive, and therefore carry higher risk exposure. Any disease, accident or theft leads to a significant loss to the household. Many households are pushed into dire straits once they lose their livestock to disease, or other reasons such as scarcity of water and fodder, sheer poverty, which forces them to sell their animals, thereby making it impossible for them to rebuild their stock.
Broadly we can classify risks into two categories:

Production risk: • Non-availability of inputs (dry and green fodder) for animals. • Morbidity (to individual animal or in case of an epidemic): Cattle disease is considered to be one of the main factors contributing to the reduction or stoppage of milk production due to diseases like mastitis, Foot and Mouth Disease (FMD) and Hemorrhagic Septicemia (HS). • Cattle mortality: The biggest challenge for cattle owners is loss of assets, as it leads to a dramatic fall in income. • Natural calamities like drought, earthquakes etc.

Price Risk: • Fluctuations in the costs of cattle and its products during disease outbreaks, and market losses happen due to reduced demand, which exposes farmers to income losses.

Proper vaccination, de-worming and curative measures for the animal husbandry sector are inadequate and under developed in the case of developing countries. A key concern, therefore, is whether and how the poor in developing countries can be shielded against risks faced by households dependent on livestock as a source of livelihood. The overall risk in the cattle owners‘portfolio can be dramatically reduced through common techniques like rearing a range of diversified animals and other informal risk hedging models like community ownership and management of cattle as observed in Self Help Groups (SHGs) and co-operatives. As formal risk-management services are under-developed cattle owners resort to high-stress coping mechanisms (borrowing from moneylenders, selling assets, etc.) that push them deeper into poverty. Hence, there lies a very big challenge of de-risking the low-income population to protect their livelihoods.

Feasibility of Livestock Insurance

Insurance for livestock death is currently available only on a very limited basis. Most policies are sold for high-valued sporting, companion or breeding animals. Insurance coverage for production animals is generally not available or is available only for losses caused by very specific perils. When considering the feasibility of new livestock insurance products, a number of important questions should be asked. The answers to these questions are critical to determining whether the case is insurable and, if so, whether sufficient demand will exist for the proposed insurance product.

Community-based Insurance Model

Community based insurance models are rare in India but it can help to reduce false claims, documentation, and cost of insurance including the transaction/time cost and potential risk, while, at the same time it increases insurance cover of loan-financed livestock assets. It can be a community-managed livestock insurance scheme which is done in co-operation and support from Self Help Groups (SHGs)/ SHG Federation’s. It introduced community supervision and the monitoring of insurance, making the community a major stakeholder in the process. The major advantage of this model is that it reduced the opportunity to raise false claims and also resulted in minimizing the origination and claims procedures.
There is a lack of well-designed micro-insurance products in the current market. The domestic insurance industry remains skeptical about the potential impact of insurance on the poor and vulnerable people.
In the other hand, it highlights that insurance companies tend to be reluctant to scale down their insurance products to make them affordable for the poor and vulnerable people due to high administration costs, lack of technical expertise, and lack of understanding of the potential of the micro-insurance market.

Development of a set of insurance products as one package

The concept aims to develop a new set of insurance product packages which consist of a variety of coverage of possible risks associated with beneficiaries’ daily lives such as property damage, health problems, accidental injuries and deaths rather than developing various insurance policies for each risk. The insurance product package will help the project beneficiaries to obtain a comprehensive coverage of risk management with a single insurance contract. On the other hand, insurance providers can save the administration costs by offering various types of insurance products in one package. The most appropriate set(s) of risk coverage, possible composition(s) of insurance policies, the terms and conditions of respective components in a package, and affordable premium levels will be assessed and determined in the early stage of the project implementation.

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Life insurance

A variety of life insurance policies will ensure that should you die, your family will be provided for. These policies are either offered as "individual policies" or "family policies". You may be able to obtain a discount for purchasing a family policy. It is common practice for banks offering mortgages to require you sign a life insurance policy that will guarantee full payment of your home should the principle wage-earner die or be unable to work, for whatever reason. This is a well-known market concept of life insurance; here we try to put same concept in our SHGs. SHG members can get insured through various insurance products running by Federation.

MUTUALS’- As a Project

SCOPE OF THE PROJECT

A. Duration
For 3 years to develop and pilot the poor micro-insurance products in the market.

B. Location
The Project Implementation Unit (PIU) will be located in Dholpur. The project will select 2-3 blocks in Dholpur. This is to pilot the micro-insurance products in rural areas in order to assess the applicability of the insurance products to various segments of the poor people. The pilot sites will be determined based on the result of the needs assessment / market analysis to be conducted at the early stage of the project.

C. Beneficiaries
The following are the micro-insurance project target beneficiaries. • Low income un-insured and under-insured men and women in the selected project implementing sites and • Insurance providers.

D. Outcome/ Overall Impact
The anticipated outcome of the project is that capacity of disadvantaged groups enhanced to mitigate economic and social vulnerabilities.

E. Objectives
The followings are the main objectives of the project: • To enhance risk-management capacity of the poor and vulnerable people and women by developing a feasible micro-insurance system at the district level • To build capacity of insurance providers to develop and offer micro-insurance products accessible and affordable for the poor and vulnerable people and women • To improve the micro-insurance policy frameworks and legal environment (can be done future).

F. Approach- Client oriented
The project will ensure a demand driven approach by identifying and monitoring the needs of the target beneficiaries. The insurance products and services will be developed based on the results of the need assessment to be conducted in the early stage of the project. The project will ensure to pay the same level of attention to all micro-insurance stakeholders including beneficiaries (clients), policy makers and insurance providers. The selection criteria of the target beneficiaries will be determined by the project in cooperation with the local government and participating insurance providers.

G. Project Outputs • Enhanced risk-management capacity of the poor and vulnerable people and women in the project pilot sites • Enhanced technical capacity of insurance providers to offer insurance services affordable and accessible for the poor and vulnerable people and women • Improved policy and regulatory frameworks on micro-insurance • Increased public awareness and knowledge on micro-insurance

H. Activity results • Major risks and specific insurance needs faced to the poor and vulnerable people identified with a gender disaggregated approach; • Knowledge of the project beneficiaries (the poor and vulnerable people and women in the target regions) on micro-insurance improved; and • Access of the project beneficiaries to affordable micro-insurance products increased through provision of the pilot insurance products in target project sites.

• Poor micro-insurance products developed to address the specific needs of poor and vulnerable people; and • Technical capacity of the participating insurance providers in designing, managing and promoting micro-insurance products developed through technical assistance.

• Public awareness toward micro-insurance increased through variety of public outreach activities; and • Awareness and knowledge of the government officials, policy makers, the insurance industry and other stakeholders on micro-insurance increased.

I. Activities • Status survey and need assessment: A need assessment will be conducted to identify insurance needs of the target beneficiaries (the poor and vulnerable people in the selected project pilot sites) in the early stage of the project implementation. The assessment results will be used for the purpose of insurance product development planned for the project’s next step. In addition, a survey will be conducted to identify the current economic and social status of the beneficiaries. The survey result will provide the baseline data to assess the project achievement. • Knowledge building workshops and capacity development training for the beneficiaries: A series of knowledge building workshops and capacity development trainings will be conducted for the project beneficiaries to improve their understanding on micro-insurance systems. • Provision of pilot micro-insurance products: The project will offer the specifically designed micro-insurance products to the beneficiaries in cooperation with the participating insurance providers in the community. Channels of insurance service delivery or local insurance agents/brokers for respective project areas will be identified. • Promotion and monitoring of the activities: Federation will be identified in the respective project area to promote the project activities and micro-insurance product for the purpose of smooth implementation on the ground. Federation can be one of the potential beneficiaries. The main tasks of the Federation are to work directly with communities in the project areas to raise the target beneficiaries’ awareness toward micro-insurance and its benefits. The close coordination among the project, Federation, and service delivery channels (agents/brokers). The brochures and handouts will be developed and distributed. • In-depth sector survey and market analysis: An in-depth sector survey will be conducted to identify and analyze existing (micro/ordinary) insurance products offered by commercial insurance providers in area (if any) and the demand on the insurance industry in the market. Special attentions shall be given to analyze potential and possibility of micro-insurance products in the market. • Development of the pilot micro-insurance product: Based on the results of the need assessment and market analysis, the pilot micro-insurance product targeting the needs of the project beneficiaries will be developed. The expected pilot micro-insurance products are to be considered a voluntary based insurance product. The level of premium, terms and conditions, and optimal mode of operations/administration of the products will be discussed and agreed. • Technical assistance and skill training for micro-insurance providers: The project will provide the participating insurance providers technical assistance and skill training on designing, managing and promoting micro-insurance product in the market. This includes technical trainings, knowledge building activities, workshops and advisory services. It is also expected that their institutional awareness and understanding on the importance of micro-insurance in the context of poverty reduction will be improved through their participation in the project pilot activities. • Insurance education campaign to improve public awareness and understanding on micro-insurance systems: Awareness raising activities targeting the general public will be conducted to advocate the concept and importance of the micro-insurance systems in people’s daily lives. Federations are expected to be one of main dissemination channels. The campaign will use various types of methods including all types of media (Pamphlets, brochures etc.).