Protecting Wealth the Bottom of the Pyramid

1
Weather Insurance/ Derivatives Marketing

• Protecting Wealth _at_ the Bottom of the Pyramid
• A presentation by
• Shailesh Naik , ITC Ltd IBD

2
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 .

3
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 _at_ right prices)

4
Background
5
Next big opportunity is rural India

• Background
• Rural India accounts for 70 of Indias
  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 .

6
. 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

7
This risk presents ..
Opportunity No1

• Farmers 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 _at_ Best quality _at_ Fair Price
• Distribution of FMCG , Consumer durables , Agri
  Inputs , financial services to Rural economy

8
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 gt 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.
9
Weather Insurance/ derivative a Better
Alternative
Weather indexes can form the basis of an
insurance contract that protects farmers from
weather riskCausal analysis of agriculture
losses complied by General insurance
corporations 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

10
Weather Index Insurance a logical choice
Market opportunity ITC e Choupal decides to
market Weather Insurance - transfer rural
economy risk
11
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 ..

12
Proposition Delivery Problems

• Farmers 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

13
Proposition Delivery Problems

• Insurance companys 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 insurances
  market and repeat sales.

14
Proposition Delivery Problems

• Insurance companys 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

15
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

16
Weather Insurance

• Converting opportunity in to business model

17
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
18
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 )

19
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

20
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

21
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.

22
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.

23
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 .

24
Value Creation for the Ecosystem

• Farmers
• Extended Organisation
• Partner Companies
• ITC

25
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

26
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 Sanchalaks 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.

27
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
  Companys 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.

28
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

29
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 .

30

• Thank You

31
Sales Planning sheet ITC Chart Cropping
Calendar risk
32
Risk that needs to be protected
Insurance Cover
Govt. Relief
33
Designing Crop specific WICropping Calendar risk

• A rainfall index is normally split into 3 or
  more crop growth phases
• Objective maximise the correlation between
  index and loss of crop yield

34
Generic Weather Insurance Payout structure
Drought Protection