3. Innovations in Agricultural Finance
• Furthermore, most index insurance focusses on one risk, most often rainfall, leaving the farmer (and loan) exposed to other natural risks (e.g. insects, fungi) as well as personal risks (illness, death, fire, theft). • The regulatory environment, including prudential supervision of the insurance provider and re-insurance, is not always conducive to micro and index insurance. • The distribution of index insurance remains a challenge, not in the least because of its complexity. However, in the case of index insurance linked to credit, distribution is normally ensured by the credit provider or related value chain partners. The key innovation in combining index insurance with credit is the standardisation of the approach, making reinsurance possible, and thus reducing lending risk. In many of the successful examples, index insurance is part of a value chain finance approach. This also solves the problem of how to distribute the insurance. Index insurance incorporated into value chain financing is distributed by the same entities that provide the credit, namely traders, technical operators, farmers’ associations, or (micro) finance institutions. The key factors ensuring the successful combination of index insurance with credit are the following: 1. To start with, the index insurance must be viable, including strong and transparent risk modelling , sufficient and capable weather stations, efficient product distribution and swift claim processing. 2. In most examples of successful index insurance coupled with credit, insurance is embedded in a total package of production-enhancing assistance to farmers. In the much-cited potato outgrower scheme of PepsiCo India, for example, PepsiCo — in conjunction with local facilitators — provides an assortment of high-quality inputs, credit, training and advice, and risk management via index insurance to its potato outgrowers (IFAD, Dos Santos, 2010). An environment of mutual understanding and trust is created, and farmers understand and appreciate the value of the insurance offered to them. 3. Indeed, index insurance is most effective and most likely to be sustainable (not needing external subsidies) when it facilitates access to other services (markets,
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© AFD / Creating Access to Agricultural Finance / July 2012