Interview with Peer Stein: Index Insurance Is For Farmers What Credit Scoring Was For Consumer and Small Bank Lending

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Is index insurance poised for a great leap forward similar to the rapid growth experienced by microfinance and credit bureaus in the 1990s?

Index insurance clearly holds a lot of promise to help unlock productivity gains and protect farmers all around the world. Index insurance is for insuring farmers, MSMEs and individuals what credit scoring was for consumer and small business lending - a huge opportunity to make financial services much more widely available at lower cost by using smart analytics and data. In this sense, index insurance may be even more promising than microcredit because the underlying business model is inherently scalable and less demanding in terms of client interaction than microfinance. Index insurance is also an important missing piece of the microfinance risk management strategy.

What are the main constraints to the growth of index insurance markets in developing countries? Price? Lack of historical weather data? Design? Distribution?

As for any insurance product, distribution is key. Finding and being able to work with the right aggregators, and building smart distribution channels that leverage technology, will be critical to its success because the objective in the agriculture space is to reach millions of small farmers in rural areas. Index insurance should take advantage of the growth in mobile banking, leveraging among others distribution partnerships with mobile telecommunications companies.

 

Data is just as important as distribution. For index insurance to work, product design requires data. Lots of it. And that is truly the main constraint for emerging markets. Similar to the constraints we see in introducing low-cost lending technologies using credit scoring for developing markets - which rely heavily on data available through credit bureaus in particular - the adaptation of index-based insurance for farmers relies heavily on the availability of rainfall and moisture data, historical yield data, and soil type data.

How can IFC ensure that sustainable markets for index insurance succeed in developing countries?

It will require time and effort to develop the required data infrastructure in emerging markets. Similar to the efforts building credit bureaus and movable collateral registries for small business lending to be possible at low cost and scale, index insurance will require significant investments in the data infrastructure, including weather stations and satellite data, typically under the stewardship or close involvement of national meteorological departments. Investments in data infrastructure will have to be complemented by efforts to build markets for index- based insurance and ensure that companies serving small farmers and other low income beneficiaries in developing countries will be viable in the long run.