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MARKET ASSESSMENT FOR AGRICULTURAL INSURANCE IN NEPAL

Presented by on behalf of

ACKNOWLEDGMENT

This market assessment was carried out by the Deutsche Gesellschaft für Internationale Zusammenarbeit Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia program (GIZ RFPI Asia), funded by the German Federal Ministry for Economic Coopera-tion and Development (BMZ). Its completion was made possible by the support of the In-surance Board of Nepal (Beema Samiti). GIZ RFPI Asia expresses its gratitude to col-leagues from Beema Samiti who were instrumental in the design, implementation and evaluation of the results of this assessment. Further contact details: GIZ RFPI Asia Dr. Antonis Malagardis Program Director Insurance Commission Complex 1071 U.N. Avenue, Ermita, Manila Philippines 1000 Telephone: +63 2 353 1044 -45 E-mail: [email protected] Beema Samiti Prof. Fatta Bahadur K.C. Chairman Chabahil, Ka.Ma.Pa-7, P.O. Box 2172, Kathmandu, Nepal Telephone: +977 4810928 E-mail: [email protected]

Prepared by: Moslehuddin Ahmed, Gana Pati Ojha, Lilian Steinhäuser AFC Consultants International GmbH (AFC) Dottendorfer Str. 82 53129 Bonn, Germany Telephone: +49 - 2 28 - 98 57 9 - 0 E-mail: [email protected] Web: www.afci.de On behalf of: Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ) Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia) RFPI Office, Insurance Commission Complex 1071 UN Avenue, Ermita, Manila, Phillipines For any further information please contact at AFC: Ms Johannes Buschmeier Telephone +49 (0) 228 – 98579 – 60 Email: [email protected] Ms Lilian Steinhäuser Telephone +49 (0) 228 – 98579 – 63 Email: [email protected]

Kathmandu, September 2014

mailto:[email protected]

EXECUTIVE SUMMARY

The object of this market assessment is to assess the demand for agricultural insurance, with emphasis on crop insurance, among farmers in Nepal, review the current supply of crop in-surance products, identify the policy and regulatory barriers, and on the basis of analysis, propose prototype insurance products for the farmers. The survey also looks the regulatory framework and recommends changes in order to make the prototype insurance products a success.

Though the survey started off aiming at agriculture insurance as a whole, it eventually placed particular focus on crop insurance, rather than livestock insurance, as crop insurance showed higher demand; it is facing more challenges and has made very little penetration in the sector.

Nepal has a population of 26.6 million (Female 13.9 million and male 12.7 million). The total number of households is 5.7 million and an average household has 4.7 members. Poor rural people in Nepal generally have larger families, very small landholdings or none at all, and low literacy rate. Nepal has 4.1 million hectare of agricultural land out of which 3.1 million hectare is under cultivation and 1.0 million hectare is uncultivated. Out of Nepal’s GDP of NPR 1,599,172 million, agriculture accounts for NPR 555,585 million or 34.7 percent.

4 Focus Group Discussions were held in Kaski district between June 5 and 6, 2014, partici-pated in by 47 rice, maize, vegetable, fruit, livestock and dairy farmers; 2 FGDs were held in Chitwon district on 27th August 2014, participated by 30 rice farmers and banana farmers. The team also visited supply-side and distribution-side organisations, regulator and policy makers in Kathmandu and Pokhara in Kaski district and interviewed their officials/executives. 4 workshops to validate the findings were also held in Kathmandu, participated by regulators, government officials, insurers, support organizations and intermediaries.

All the farmers know about agricultural insurance but their awareness about insurance in general and the level of their insurance education is poor. Except for a few farmers, none of the participants have any crop insurance, though they suffer immensely in times of natural calamities and their living standard is considerably affected. The present ’input cost’ basis of compensation is not acceptable to them. They would like to buy crop insurance but not the present products. The small farmers manage their risk by rotating their crops. When they suffer losses, they take loan, reduce their household expenditure or sell assets. The larger farmers have financial resources to withstand their losses. A large percentage of the farmers do not have any disposable income and cannot buy insurance.

None of the livestock farmers presently have any insurance. They are able to manage their risk and do not find the current product as a ’value for money’ proposition. They are not in-terested in livestock insurance.

Beema Samiti launched four agricultural insurance products in 2013 (crop, livestock, birds and fish) through its Crop, Livestock and Poultry Insurance Directive (CLID). There are sev-eral other agricultural insurance products or insurance like products available in the country – all of them, except for one by Deposit Insurance and Credit Guarantee Corporation, are un-regulated and from organisations like MFIs, coopratives, self-help groups etc. After the launching of CLID, 14 non-life insurance companies entered the agricultural insurance mar-ket (12 livestock and 2 crop). There is no reinsurance facility for agricultural insurance in Ne-pal. The insurers pool their risk amongst themselves to meet any catastrophic event. Beema Samiti submitted a Draft Microinsurance Directive to its Board of Directors in April 2014. The Directive has been approved by its Board and it is currently regulating microinsurance busi-ness in the country.

In addition to insurance agents, the industry also uses MFIs/NGOs/co-ops etc. as distribution channels. Beema Samiti allows use of them. Alternative distribution channels such as devel-opment banks, suppliers of fertilizers or seeds or pesticides or insecticides, utility companies, chain stores, retail outlets such as town/village corner stores, foreign remittance payment networks, cell phone airtime providers and SIM card are not currently utilized by the insur-ance industry. Use of some of them would require permission from Beema Samiti and other regulators, where relevant. There are several potential partners available for the distribution channel; involvement of these organisations would make a substantial impact on the cost of delivery of agricultural insurance.

Based on the results of the market assessment, the study team proposes three different pro-to type products to close the supply-demand gap: two indemnity-based and one area-yield index based crop insurance product. Furthermore, the team recommends the piloting of a Crop Weather Indexed Insurance product. In order to promote the inclusive insurance market in Nepal the study also provides several recommendations for regulatory improvements.

TABLE OF CONTENTS

Abbreviations ....................................................................................................................... 4

1 Introduction ................................................................................................................. 1

1.1 Background 1 1.2 Objectives of this Market Assessment 1 1.3 Methodology 1

2 Demand for insurance ................................................................................................ 4

2.1 Profile of farmers participating in FGDs 4 2.2 Farmers’ insurance coverage 6 2.3 Risk assessment 7 2.4 Precautionary and Mitigation Mechanisms 9 2.5 Understanding and Perceptions of Insurance 9

3 Recommendations for potential Market for Agricultural Insurance ...................... 12

3.1 Target market 12 3.2 Affordability 13 3.3 Desired products 14

4 Supply chain for agricultural insurance .................................................................. 15

4.1 Distribution channels 15 4.2 Existing microinsurance and agricultural insurance products 16 4.3 Recommendations for the supply chain 21 4.4 Potential product features of crop insurance 21 4.5 Potential partnerships in market development 23

5 Regulatory Environment ........................................................................................... 25

5.1 Current issues 25 5.2 Industry perspectives on regulatory improvements needed 30 5.3 Recommendations for regulatory improvements 32

6 Financial literacy and consumer protection ............................................................ 36

6.1 Current environment for promoting financial literacy and consumer protection 36 6.2 Recommendations to improve financial literacy and consumer protection 37

7 Conclusion................................................................................................................. 40

Appendix 1: Questionnaire for demand-side FGDS ......................................................... 42

Appendix 2: List of Organisations Visited ........................................................................ 49

Appendix 3: Cattle, Bird and Crop Insurance ................................................................... 50

Appendix 4: Proposed Design for Prototype Products ................................................... 52

Bibliography ....................................................................................................................... 56

ABBREVIATIONS

A2ii Access to Insurance Initiative

ADB Asian Development Bank

ADB Agriculture Development Board

ADBL Agricultural Development Bank Limited

AFC AFC Consultants International

AICL Agriculture Inputs Corporation Limited

ASC Agriculture Service Centre

BS Beema Samiti (insurance Regulator)

BMZ German Federal Ministry for Economic Cooperation and Development

CEAPRED Centre for Environmental and Agricultural Policy Research, Extension and Development

CENFRI Centre for Financial Regulation and Inclusion

CG Community Group

CLDP Community Livestock Development Program

CLID Crop, Livestock and Poultry Insurance Directive

Co-ops Cooperatives

CSD The Centre for Self-Help Development

CWII Crop Weather Index Insurance

DICGC Deposit Insurance and Credit Guarantee Corporation

DMID Draft Microinsurance Directive

FAO Food and Agriculture Organization of the United Nations

FGD Focused Group Discussion

FINGOs FIinancial Intermediary Non-government Organisations

GiZ Gesellschaft für Internationale Zusammenarbeit GmbH

GoN Government of Nepal

Ha Hectare

ILO International Labour Organisation

IRDA Insurance Regulatory and Development Authority

IU Insured Unit

LDFB Local Development Fund Board

LSC Livestock Service Centre

MFDBs Microfinance Development Banks

MFIs Microfinance Institutions

MID Micro Insurance Directives 2071

MOAD Ministry of Agricultural Development

MoF Ministry of Finance

MT Metric Tons

NGOs Non-government Organisation

NUBL Nirdhan Uttan Bank Limited

NPR Nepalese Rupees

PDDP Participatory District Development Programme

RFPI Asia Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia

SACCOs Savings and Credit Cooperatives

SAIA South African Insurance Association

SFCL Small Farmers Cooperatives Limited

SFDP Small farmer Development Programme

SICL Shikhar Insurance Company Limited

SKBB Sana Kisan Bikas Bank Ltd

SPF Social Protection Fund

STEP Strategies and Tools against Social Exclusiom and Poverty

Swiss Re Swiss Reinsurance Group

USAID United States Agency for International Development

VDC Village Development Committee

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1 INTRODUCTION

1.1 Background

The German Federal Ministry for Economic Cooperation and Development (BMZ) funded program the Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia) seeks to improve the regulatory and supervisory preconditions for effective insurance protection of low-income people in Asia. Until the end of the program phase in 2015, RFPI Asia plans to support countries in Asia to enhance their insurance regulation and supervision towards improving access to insurance products. Its activities include facilitating the devel-opment of enabling insurance regulatory and policy environments in the region towards en-suring inclusive insurance markets as well as promoting innovative insurance solutions that meet the needs of the low income population, including small farmers.

AFC Consultants International (AFC) was commissioned by the RFPI Asia program to con-duct this market assessment in Nepal and three other Asian countries. Of great priority to Nepal is how to serve the small farmers with innovative risk protection solutions so as to fur-ther promote their financial inclusion. Currently, there are already a number of livestock in-surance products available. However, the knowledge about the demand for crop insurance is very limited. Additionally, the regulators do not have a sound regulatory framework in place to accommodate microinsurance as a new line of business.

Livestock insurance has been implemented in Nepal since 1987. Currently 14 insurance companies, out of 17, are offering livestock insurance. Over 150,000 heads of cattle or buffa-los are insured each year; all of them are tied to the livestock loan taken by the farmers. The FGD participants however showed very little interest in livestock insurance.

There is a shortage of crop insurance in Nepal. Regulated crop insurance started in January 2013. As of now, only two insurance companies offer crop insurance; between them they have only 56 policyholders. Only three crops are covered (banana, coffee and tomato). Even after 18 months of operation, crop insurance is not being actively promoted by the insurers or sought after by the farmers.

This market assessment therefore placed particular focus on crop insurance to ascertain what are the challenges faced by crop insurance in Nepal, why the insurers and the farmers are not interested, and how these can be overcome.

1.2 Objectives of this Market Assessment

This market assessment of agricultural insurance, in particular crop insurance, is part of an AFC assignment on behalf of RFPI Asia which is intended to provide inputs to the thematic area of crop insurance in Nepal. To be more specific, this market assessment aims at provid-ing insights into the supply of and demand for inclusive insurance products that target the small farmers in rural areas. Based on the results, AFC held workshops with the industry and the insurance regulator Beema Samiti on the design and regulation of inclusive insurance products. Furthermore, AFC developped capacity building materials needed for potential crop insurance clients and insurance salesmen. The follow-up work on drafting and imple-menting an improved insurance regulation will be supported by RFPI Asia.

1.3 Methodology

AFC worked with a team of three experts to conduct this market assessment. Focus Group Discussion (FGD) guidelines and risk provider questions were developed to solicit pertinent information for the assignment. The guidelines are given in Appendix 1.

In total, the team talked to 77 farmers who participated in the FGDs. Four FGDs were held in Kaski district between June 5 and 6, 2014, participated in by 47 rice, maize, vegetable, fruit,

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livestock and dairy farmers; 2 FGDs were held in Chitwon district on 27th August 2014, par-ticipated by 15 rice farmers and 15 banana farmers.

Kaski district was selected because it represents the hill regions of Nepal; it also has similar a climate to Terai areas, specifically the temperature in the plain region of Pokhara. Because of the climatic diversity, agriculture crops that thrive well under sub-tropical and temperate climates are grown in this region. The major crops are rice, maize, wheat, vegetables and fruits. Livestock farming is also popular in the region (buffalo, cow, goat and poultry); some entrepreneurs also commercially farm fish. Kaski district suffers from frequent hailstorms. Also, some farmers have experience in livestock insurance which was useful for this study. The likelihood of accepting insurance by the farmers in this region is considered to be high.

Chitwon district was selected because of its location and it represents the major Terai region. It is located at the central part of Terai, has diverse culture and ethnicity, and is considered one of the most advanced districts suitable for piloting the innovations. The rice farmers were selected for the FGD as rice is the main staple of Terai people and more than 50 percent of this agricultural land in this region is under rice cultivation. Banana farmers were selected because it is commercially grown in this area and likelihood for these farmers to buy crop insurance is higher than any other group.

By collecting evidence, stories and other data, the team aimed in particular to:

Build a comprehensive understanding of the rural farmers’ formal and informal trans-action practices

Establish a baseline of findings, insights, and frameworks that will guide and inspire future developments in insurance services and concepts

Identify opportunities for expanding use of and access to insurance services and products in under-served and newly opportune areas

Uncover attitudes, perceptions and practices around money, borrowing, savings, in-vestments and insurance from the point of view of the consumer

Understand the risks faced by the farmers

Understand their priority areas to insure

Understand their experience with existing livestock and crop insurance

Assess their awareness and attitude towards insurance

Ascertains their willingness and ability to purchase insurance

Ascertain their affiliation with cooperatives, Microfinance Institutions (MFIs) and vil-lage organisations

The participants in the FGD were selected by local associations/organisations of which they were members. It cannot therefore be said that the selection was totally unbiased or that it was a random selection.

On the supply, distribution and regulatory sides, the team visited 18 organisations in Kath-mandu and Pokhara in Kaski district between June 3 and 14, 2014 to interview their offi-cials/executives. The names of the organisations visited are given in Appendix 2.

Insurance companies were interviewed for their views on:

Corporate objectives

Interest in inclusive insurance market

Regulatory barriers to reach inclusive insurance market

Challenges and barriers in the existing crop insurance program in Nepal

Reasons for limited participation by insurers in Nepal’s crop insurance program

Feasibility of Index-based weather insurance in Nepal Distribution companies were interviewed for their views on:

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Regulatory barriers and challenges in acting as distribution channels for crop insur-ance

Willingness and suitability for acting as distribution channels for crop insurance Extensive discussions were held with the officials and executives of several minis-tries/departments/corporations, Rastra Bank and Beema Samiti. In-depth views of the gov-ernment officials and regulators were sought on crop insurance recently introduced in Nepal and the reasons for its poor uptake. Their views on index-based insurance were probed, and the support that can be provided by them in this connection was inquired about.

A de-briefing meeting/presentation was held at Beema Samiti on June 14, 2014; eight mem-bers of the Microinsurance Technical Committee were present (six Beema Samiti execu-tives/officials, one insurance company executive and one legal advisor). Observations and findings of the FGD with farmers and other stakeholders met during the country mission were presented. It was followed by a lengthy discussion and a Q & A session.

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2 DEMAND FOR INSURANCE

2.1 Profile of farmers participating in FGDs

Table 1: Crop, number and land size of the farmers that participated in FGD

Crop

Cultivated Total Female Male

Average land

Type of landholding

Share cropper

Rented land

Land owner

KASKI DISTRICT

1 Rice 12 8 4 0.46 ha 2 - 12

2 Maize 14 9 5 0.44 ha - - 14

3 Potato 12 9 3 0.25 ha 4 6 6

4 Fruit 9 - 9 1.33 ha - 9 -

Sub-total 47 26 21 0.53 ha 6 15 32

CHITWON DISTRICT

5 Rice 15 1 14 0.98 ha 1 - 15

6 Banana 15 - 15 7.40 ha 12 12 3

Sub-total 30 1 29 4.19 ha 13 12 18

TOTAL 77 27 50 2.36 ha 19 27 50

Kaski district

Kaski district has wide range of geographical variation that ranges from sub-tropical to tundra climate indicating the possibility of producing different crops; its elevation varies from 450 meters to 8091 meters above sea level. The total area of the district is 201,700 hectares of which about 44.1 percent is forest area, 12.3 percent is shrubland, 14.1 percent agricultural land including grassland, 0.9 percent is covered by water bodies, 5.2 percent is barren land and 23.4 percent of the area is covered by snow.1 It is inhabited by 492,0982 people and above 50 percent is engaged in the agriculture sector.

Total agricultural land of the district is about 22,816 hectare of which 21,500 hectare are un-der paddy cultivation 15,573 hectare are under maize cultivation, 14,757 hectare are under millet cultivation, 6,821 hectare are under wheat cultivation, 1,685 hectare are under potato cultivation, 3,032 hectare are under vegetable cultivation and 2,168 hectare are under fruit fruit cultivation.3

There were 47 FGD participants in Kaski District (26 women and 21 men). The farmers were from Pokhara, Lekhnath, Hemja and Bharatpokhari. Women participants were in majority because many men from this area have migrated to the Gulf countries and Malaysia for tem-porary employment. Thus farming is now carried out by the female members of those house-holds. The age of the participants ranged from 22 to 62 years. Three participants were un-

1 Ministry of Agricultural Development, Nepal; 2013

2 Census 2011


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married and 44 were married. Their landholdings ranged from 0.05 to 2.00 hectares (average 0.53 hectare; national average 0.8684 hectare); fruit farmers’ landholdings varied from 0.3 to 3 hectares (average 1.33 hectare).

32 farmers cultivated their own their land (rice: 12, maize: 14 and potato: 6) and 15 farmers cultivated rented land (potato: 6 and fruit 9). In addition six farmers (two rice and four potato) were also share-croppers. The rice share-croppers shared 5 percent of their production with the landowner; potato share-croppers gave only a small quantity of their produce as a token share and their land use was virtually free for them. Some of the farmers also reared cows (two), buffalos (four) and goats (two), fish (two) and cultivated vegetables (five). The vegeta-ble farming was on a commercial basis whereas rearing of animals and fish were mostly for own consumption, though some sold their surplus produce. Climate change has affected orange farming in this area and their yield is in decline. All the orange farmers participating in the FGD are gradually moving away from orange farming to other fruits and livestock.

Annual household earnings of the participants varied between NPR 65,000 to 480,000 and their expediture varied between NPR 120,000 and NPR 480,000. Some of the participants reported higher expenditure than income. Measures taken by the participants for making up the shortfall were not verified. The participants did mention that they habitually borrow from friends, relatives, neighbours and informal societies when they are in financial difficulties. Many farmers also have income from livestock (buffalos, cows, goats and poultry) and from dairy. Children’s education had the highest priority in their expenditure, followed by food, utilities, and healthcare.

Chitwon district

After getting feedback from Beema Samiti, the team decided to carry out two additional FGDs in the Terai (plain region). Chitwon has a population of 579,984, mostly of Brahmin, Chhetri, Tharu, Newar, Gurung, Magars, Tamang and Chepang caste/ethnicity.5 Chitwon belongs largely to tropical zone covering almost 93 percent of its total land of about 2,238 square kilometer (2.2 million hectare). The land use of Chitwan is as follows: 0.5 percent housing, 28.5 percent agricultural land, 45.2 percent forest land, 7.6 percent grassland, 4.2 percent shrubland, 4.9 percent covered by sand, gravel and boulders, 1.4 percent covered by water bodies and remaining 7.7 percent are used for a large number of smaller activities.6

Total agriculture land in Chitwan district is 46,894 hectare and rice is cultivated on 28,625 hectare with yield of 3.312 MTs/Ha, which is slightly higher than the national average yield of 3.171 MTs/Ha. In case of banana, the total land covered by banana in Nepal is 13,367 hec-tare of which 11,864 hectare was at the stage of production in 2013. The production in 2013 was recorded as 182,004 MTs with an average yield of 15.34 MTs/Ha of production age of plant. In Chitwan the land covered by banana was 680 hectare of which 670 hectare was in productive stage and production in 2013 was 11,710 ton with yield of 17.48 MTs/Ha which was remarkably higher yield than national average as per the Central Bureau of Statistics 2013. This statistical information, however, is different from the statistics provided by partici-pant of the FGD. According to them, there is a Chitwan Commercial Banana Committee wherein 400 farmers are members and commercial banana production is done in 1,040 hec-tare.7 It is usual in Nepal that statistics do vary by sources in many cases.

There were a total of 30 FGD participants from Chitwon district: 15 rice farmers and 15 ba-nana farmers. There were 29 males and one female participant. The reason of male domi-nance is not immediately known. All the male participants were married; only the female par-ticipant was unmarried. The rice farmers were from western Chitwon (Patihani, Parbatipur,


5 Web-site of Chitwon District Development Committee (DDC); 2014

6 Web-site of Chitwon District Development Committee (DDC); 2014


http://en.wikipedia.org/wiki/Chhetri

http://en.wikipedia.org/wiki/Tharu_people

http://en.wikipedia.org/wiki/Newar

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Jagatpur, and Shukranagar) and the banana farmers were from eastern Chitwon (Ratnana-gar, Jutpani, Thimura, and Panchakanya, western Chitwon (Jagatpur) and central Chitwon (Bharatpur).

Land size ranged from 0.2 to 39.0 hectare with an average of 4.20 hectare; this is larger than the national average landholding of 0.868 hectare8. The rice farms are smaller in size than the banana farms. Another interesting feature is that all the rice farmers had cultivated their own land; whereas, only 3 out the 15 banana farmers cultivated their own land and the re-maining 12 cultivated leased land. In addition one rice farmer and 12 banana farmers were share cropper as well. The lands were leased for five years with an average annual rent varying from NPR 19,231 to 76,923/Ha (average rent NPR 58,547/Ha). According to partici-pants, the optimum plant population per hectare is 2,250; the cost of production per plant NPR 269 and income NPR 461 with net profit NPR 192.

Input cost for rice cultivation is on the average NPR 100,000 per hectare and the selling price of rice is on the average NPR 110,000 per hectare, giving the rice farmer an average earning of NPR 10,000/Ha per season. Input cost of banana cultivation is on the average NPR 393,750/Ha and the selling price of banana is on the average NPR 675,000/Ha, giving the farmer an average earning of NPR 281,250/Ha per season. Banana has a 16 months grow-ing season; during this time the farmers can harvest four rice crops. Therefore, a rice farmer would have an earning of NPR 40,000 during the 16 months banana cultivation season. The banana farmers are financially much better off than rice farmers, earning almost 7 times more than the rice farmers. Almost all rice farmers have livestock (buffalo, cow etc.) to sup-plement their income; whereas very few banana farmers have livestock.

Children’s education has the highest priority in their household expenditure, followed by healthcare costs, house rent, transport, communication and food. Demand for cash arises at the time of plantation, marriage and other ceremonies and school/college admission of chil-dren.

2.2 Farmers’ insurance coverage

Kaski district

None of the participants have livestock or crop insurance at present. Only two participating farmers bought insurance in the past; both were mandatory livestock insurance in getting loans. One farmer bought insurance about 18 years ago when a cow was bought with a bank loan; the second one was about four years ago when a buffalo was bought with a loan from a cooperative. In both cases the insured animals died while insured and both the farmers re-ceived insurance compensations.

The orange growers, who are gradually moving to other fruits such as pomegranate, olive etc. and/or livestock, do not have any insurance at present. They also do not find the live-stock insurance scheme a “good value for money“ proposition. According to them, they are able to manage their risks themelves at a lower cost. These farmers have large landholdings and are not considered to be in the low-income group.

The paddy, maize and vegetable farmers do not have any insurance at present; they never bought any insurance in the past, nor do they find the “input insurance“ coverage adequate or a “good value for money“ proposition. The perils faced by them include hailstorms, crop diseases and pests. However, they are not aware that such perils can be covered by existing crop insurance schemes in Nepal. These farmers have small landholdings and fall under the low income category.


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Very few of the participants have bank loans or loans from MFIs/cooperatives; none of the participants mentioned of any credit/life insurance bought by them. This could be an over-sight by them; it is also possible that they were not aware that they were sold a mandatory credit/life insurance with their loans.

Chitwon district

In Chitwon district, there were seven rice farmers in FGDs who had crop insurance through their seed supplier (Shree Ram Multipurpose Seed Company) and when their crop failed, they received compensation. The banana farmers are planning to participate in the meeting organized by Helvetas Nepal regarding crop insurance in DADO office Bharatpur on August 31, 2014. They might buy crop insurance after attending the meeting.

None of the other participants from Chitwon district have any insurance.

2.3 Risk assessment

Kaski district

All participants mentioned adverse weather conditions as the most serious risk faced by them. Hailstorms occur every year in Kaski area with different degrees of intensity and dam-age to the crop. In 2011, there was complete destruction of the maize crop in Lekhnaath ar-ea. Hailstorms occurring at harvest time also damage the rice crop; this tends to occur every 4 to 5 years. Wind is another weather related risk reported by them as damaging the crops every year, especially the maize crop but it is not very severe. Another risk reported by them is prolonged drought due to climate change. In addition, the farmers also face crop failures as a result of disease and pests. Two major diseases and pests mentioned are rice blast (Pyricularia grisea) and “Raate” or brown leaf spot (Helminthosporium oryzae) or sheath blight (Rhizoctonia solani) for rice cultivation. Stem borer was mentioned as the major pest for maize cultivation. For potatoes, late blight (Phytophthora infestans) is a major risk that occurs on cloudy days and clear nights during the tuber formation and maturation stage. Tu-ber rot in storage was also a risk mentioned by the participants. As storage systems are ru-dimentary in this area, high damage of tubers during storage period is common. For fruits, especially mandarin orange, citrus greening, canker, and root-rot were major diseases re-ported and stem borer was the cause of major insect damage to the tree. The severity of the citrus decline is so acute that farmers are shifting from citrus to other products such as pom-egranate and livestock. Table 2 below lists the risks and the ranking for different crops.

Adverse weather condition is a major risk for the crop farmers in this area; hailstorm risk is common for three out of four crops grown in this area. Late blight of potatoes is also related to weather conditions as it occurs when the day is cloudy and night is clear. Weather has also affected mandarin orange farming in this area. The prolonged dry period after the har-vest of the fruit has contributed to further decline in citrus production in this area. Hailstorms during the months of March, April and May also affect the tender stem bearing fruits and young fruits. These risks have affected the household income of the farmers, and as a result some of the rice and maize farmers had to cut back on their food consumtion. The potato farmers had difficulties in paying back their loans.

Chitwon district

The rice and banana farnersin Chitwon district also identified adverse weather condition as a major risk in their area. Rice farmers identified untimely rain, prolonged dry season, high wind, hailstorm, rice blast (Pyricularia grisea), brown leaf spot (Helminthosporium oryzae), and stem borer and some soil insects as major risks. Amongst these risks, untimely rain, especially rain during the harvest time and prolonged dry during transplanting and growing season was rated number one risk followed by hailstorms and high wind after the flowering stage of rice. In case of banana, major risks were cold wave, hailstones, high speed wind,

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wild animal, stem borer, beetle, sigatoga disease and stem breaking due mainly to micronu-trient deficiency. Of these, high wind was indentified as highest risk, combined effect of stem borer, beetle, sigatoga disease and stem breaking as second highest risk, and cold wave were idenfied as the third highest risk. Even the disease and insect have something to do with weather. For example, stem borer damage and blast disease is severe when there is rain in the day time and sky is covered with cloud during night.

In case of banana, the FGD pointed out there are instances when after a high wind the ba-nana plants were left standing with the sheath twisted and/or broken half or crippled and the plant does not bear fruits; the insurers do not consider it as a loss but to the farmers it is total loss. The risks given above have affected the livelihoods of participants. Last year there was NPR 90 million loss of 208 banana farmers in the district due to high wind. They also suffer from hailstones and untimely rain.

In 2012, there was damage on rice by untimely rain that occurred after the harvest of rice seed that was still in the field. Likewise, hailstorms damaged wheat and broad bean in the same year.

Table 2: Risks assessment for different crops

CROP RISK RANKING

KASKI DISTRICT

1 Rice

Hailstorm 1

Blast 2

Raate 3

2 Maize

Hailstorm 1

Stem borer 2

Storm 3

3 Potato

Late blight 1

Potato tuber moth 2

Hailstorm 3

4 Fruit (Orange)

Citrus greening 1

Root rot 2

Stem borer 3

CHITWON DISTRICT

5 Rice

Untimely rain and prolonged dry spell 1

Hailstorm 2

High wind 3

6 Banana

High wind 1

Combined effect of stem borer, beetle, sigatoga disease and stem breaking

2

Cold wave 3

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2.4 Precautionary and Mitigation Mechanisms

Kaski district

The uninsured farmers bear the crop/livestock losses personally out of their savings; in most cases their savings were not sufficient and they had to take a loan. Almost every participant was a member of a local group (farmers’ group, mothers’ group, forest users’ group, etc) and/or cooperative, such as small farmers’ cooperative society. As a mandatory provision, every household has formal or informal savings in their respective groups and they first uti-lise these savings to cope with loses arising out of a risk situation. All the participants have access to a bank locally or nearby and some participants have bank accounts. All of them have trust in banks and some of them borrow money from the bank to cope with their risks.

Most of their loans are private borrowings from relatives and friends, although the commer-cial farmers have taken loans either from their local groups, cooperatives or banks. Though they have to pay a higher interest rate for private borrowings, the farmers find it easier and no collateral was needed. The compound interest charged by the banks make it more ex-pensive to borrow from them in the long run. Some of the participants sell their livestock to mitigate the losses suffered but none of them reported selling land or ornaments. The fruit farmers are gradually replacing mandarin orange by pomegranate, olive and/or by livestock (cows and buffaloes) as a mitigation mechanism.

Chitwon district

The farmers bear the losses personally out of the saving, and when savings are not suffi-cient, they apply for a loan. Out of 30 participants, 21 mentioned that they have taken loan, mostly from the bank; a few of them have borrowed from friends and neighbors to oversome financial hardship when faced with a crop failure. They provide their own land or land of fami-ly members as collateral when borrowing from banks.

The Chitwon FGD participants are members of some groups, cooperatives or committees. The banana farmers have formed the Chitwan Commercial Banana Committee to collectively raise their voices about their concerns. To take the membership, every member is required to deposit a certain amount of money on a monthly basis. Every member is also entitled to get loan from the amount of money s/he has deposited in the group. Many participants told that they also take loan from the bank when needed.

There was also a compensation given by the government against the damage on banana in the year 2013; however the amount was too small compared to the loss as per the partici-pants. Similarly, rice farmers had run insurance through Shree Ram Multipurpose Seed Company. They had collected NPR 7 million for three years as premium from 52 farmers and the government subsidies. The annual collection was at the rate of NPR 22,500 per hectare, of which 75 percent was contributed by the government and 25 percent contributed by the farmers. Rice crop in Chitwon area was damaged in 2013, and the seed company paid NPR 4 million to farmers for compensation out of the NPR 7 million collected as premium. The compensation was made on the basis of 80 percent of the costs.

2.5 Understanding and Perceptions of Insurance

Kaski district

All the participants have heard about insurance but, except for some of the fruit farmers, the awareness and understanding of insurance by the other participants is very poor. The fruit farmers have large landholdings and are not considered poor. They seem to understand the concept of insurance and are able to understand and calculate the relative benefits of carry-ing the risk themselves instead of buying insurance. However, they do not seem to under-stand the possibility of total loss of their herd or crop in the event of a catastrophic risk.

10

Some of the crop farmers would like to see simple crop insurance procedures and a “yield coverage“ instead of the present “input cost coverage“; some of them would like to know more about insurance before taking a decision. When asked what type of farmers should insure their crop, the small farmers responded that all farmers should insure their crop, whereas the large farmholders responded that insurance is not attractive for them as the compensation amount at present is lower than the premium that is to be paid. The fruit farm-ers are not interested in crop insurance as the fruit production is falling.

When asked if they would be interested in buying crop insurance, all 12 rice farmers, ex-pressed interest. Out of 14 maize farmers, 8 were interested and 6 were undecided, and out of 12 potato farmers, 7 were interested and 5 were undecided. None of the 9 fruit farmers were interested in crop insurance. When summarised, their responses are as follows:

Chart 1: Percentage of participating farmers showing interest in crop insurance

Chitwon district

Seven rice farmers from Chitwon district are participating in an informal insurance scheme run by their seed supplier – Shree Ram Multipurpose Seed Company. The other rice farmers know about the insurance, but their understanding and perception is very poor. The banana farmers know about insurance and are interested in insurance. All of them have attended a meeting organized by Helvetas Nepal regarding crop insurance at DADO, Bharatpur. They feel that their crops should be insured even though they cultivate banana in the leased land; their land owners are not cooperative and do not supporting them. This is a unique situation and the insurance companies need to adjust their strategies/policies to address the issues associated with leased land.

All the participants were aware of the subsidies provided by government on the premium and the amount that farmers are required to pay, but they were not aware that the subsidy has now been increased from 50 percent to 75 percent. Asked if they would be interested in buy-ing crop insurance, all rice formers and all banana farmers said yes. However they had res-ervations about the current crop insurance scheme.

The banana farmers were concerned about some technical issues regarding the losses and compensations paid by the insurance companies at present. They stated that 90 percent of their input cost is incurred during plantation and the months following plantation – April to September. The insurance company normally compensates on the basis of average monthly cost. This means that if there was a claim in the early months of cultivation, the compensa-tion would be substantially less than their input cost. They would like this basis changed.

11

Also, they would like to have single package covering several crops under a single premium and the value of their yield rather that input cost covered.

The rice farmers were divided in their opinion. Some wanted it on input cost basis and the others wanted on the value of their yield. The reason given was that there is not much differ-ence between the input cost and the value of their yield. Finally, they all agreed that sum amount be fixed on the basis of value of their yield.

12

3 RECOMMENDATIONS FOR POTENTIAL MARKET FOR AGRICULTURAL INSURANCE

3.1 Target market

Nepal has 4.1 million hectare of agricultural land out of which 3.1 million hectare is under cultivation and 1.0 million hectare is uncultivated. Out of Nepal’s GDP of NPR 1,599,172 mil-lion, agriculture accounts for NPR 555,585 million or 34.7 percent. Nepal has a population of 26.6 million (Female 13.9 million and male 12.7 million). The total number of households is 5.7 million and an average household has 4.7 members. Poor rural people in Nepal generally have larger families, very small landholdings or none at all, and low literacy rate.9

Population density in the country varies according to altitude – averaging more than 1,000 persons per square km in the low Terai region, about 300 persons per square km in hilly re-gions and as few as 30 persons per square km in mountainous areas. The population is also concentrated in specific ethnic, caste and marginalized groups, particularly those of the low-est caste and indigenous peoples. According to the national living standards survey conduct-ed in 2010-2011, over 30 percent of Nepalese people live on less than NPR 14,000 per per-son, per month. While the overall poverty rate for Nepal is 25 percent, this figure increases to 45 percent in the mid-western region and 46 percent in the far-western region.10

Table 3: Agriculture data11

Details Value (in million)

1 Country’s GDP at current price in million NPR NPR 1,599,172

Agriculture NPR 555,585

Non-agriculture NPR 1,043,587

2 Agricultural land area in million hectare Ha 4,121

Cultivated Ha 3,091

Uncultivated Ha 1,030

Table 4: Crop data

12

Crop Area

(hectare) Production

(metric tons) Yield

(kg/ha) Input cost (NPR/Qt)

1 Paddy 1,420,570 4,504,503 3,171 1,066.8

2 Maize 849,635 1,999,010 2,353 1,170.8

3 Wheat 754,243 1,727,346 2,290 1,609.0

4 Millet 274,350 305,588 1,114 n/a

5 Vegetable 246,392 3,301,684 13,400 515.5

6 Oilseed 215,600 179,000 830 n/a

7 Lentil 206,522 226,931 1,099 n/a

9 Statistical Information on Nepalese Agriculture 2069/70 by Agri-Business Promotion and Statistics Division,

Ministry of Agricultural Development. Nepal; December 2013 10

Rural Poverty in Nepal by International Fund for Agricultural Development (IFAD); 2013 11

Statistical Information on Nepalese Agriculture 2069/70 by Agri-Business Promotion and Statistics Division,

Ministry of Agricultural Development. Nepal; December 2013 12

Ibid

13

Crop Area

(hectare) Production

(metric tons) Yield

(kg/ha) Input cost (NPR/Qt)

8 Potato 197,234 2,690,421 13,641 904.7

9 Fruits 101,480 938,731 925 n/a

10 Sugarcane 64,483 2,930,000 45,438 75.0

Nepal’s economy is largely dependent on agriculture. Recent estimates suggest that 80% of Nepal's economically active population is engaged in agriculture for their livelihoods. Women constitute more than 60 percent of the agricultural labour force.13 The government of Nepal has laid emphasis on improving productivity of rice and maize and diversifying crops with high value agricultural products including fruits and vegetables.

Paddy is the largest agriculture produce in terms of area under cultivation (1.4 million hec-tare) and output (4.5 million MTs). Vegetable, with 246,392 hectare under cultivation, is the second largest in terms of output (3.3 million MTs). Maize, wheat, potato, fruits and sugar-cane also account for a substantial part in the agricultural production of the country.

75 percent of the farmers have less than 1 hectare of landholding, 24 percent holds between 1 and 5 hectare of land and only 1 percent have landholdings more than 5 hectare. In the remote hill and mountain zones, the terrain is rugged, rainfall is low and the poor-quality soil is difficult to farm. Agricultural landholdings per household in these areas are the smallest in the country. The land of Terai area is more productive than hill and mountain land. About 82 percent of cropped area is planted with cereal crops, but basic staple grains contribute only about 30 percent of agricultural GDP, while export crops contribute about 50 percent. The share of high-value crops in total cultivated area is still small. The production of agriculture sector occupies one-third space in total GDP.14

The FGD identified the small and medium sized rural farmers as being the target group15. The large farmers are able to manage their risk themselves. However, they still remain ex-posed to catastrophic risks and would require such coverage.

3.2 Affordability

Average annual income per household was NPR 297,500 ranging from 65,000 to 480,000, whereas an average per annum expenditure was NPR 315,000 ranging from 120,000 to 480,000. Farmers had different sources of income including crop, dairy, poultry, fish, small ruminants, and employment. As regards the expenditure, education is the number one priori-ty area that participants invest in, followed by food and utilities, and health and medicine.

The farmers also have the willingness to pay. Almost all the participants showed willingness to buy indemnity types of yield insurance for crops. They are not willing to buy input cost in-surance for crops or livestock insurance.

Among the participating rice farmers, about 43 percent were able to meet their regular household expenses such as school fee of children, treatment, food and beverages and utili-ties out of their earnings. The rest of the rice farmers (57 percent) were not able to meet their household expenses out of their earnings. They normally borrow to meet the shortfalls; when they are not able to repay their loan, they normally have to sell their land to pay back the loan. Among the participating banana farmers, all of them had more income than their regu-lar expenses. They have also have taken loan but the loan is generally to expand areas un-der commercial cultivation of banana. Therefore, banana farmers can easily afford insurance

13

Ministry of Agricultural Development, Nepal; 2012 14

Nepal Economic Survey 2011/2012 15

See Table 1 for number of farmers, farm size and crop cultivated

14

premium. They made a point that they would like the insurance compensation amount to be NPR 675,000 per Ha, which is the value of their yield, or at least NPR 540,000 per Ha, which is their input cost. They were willing to pay a premium of upto 4 percent of the sum insured.

The FGD identified that most fruit (banana) and vegetable (potato) farmers are able to afford insurance but the rice farmers would require a subsidied insurance product. All farmers in Chitwon district are willing to buy crop insurance but only 57 percent of the farmers in Kaski district are willing. Most farmers in Chitwon district and Kaski district are not willing to buy livestock insurance.

3.3 Desired products

The team discussed the concept of crop indemnity-based insurance and crop weather index insurance (CWII) with the participants, with examples of “concept products“. The participants understood both the products but had a lot of questions and reservations about the CWII product.

All the participants demanded crop insurance. Their preference is for indemnity based prod-uct with compensation paid on yield basis. The participants do not like the input cost basis of compensation; they are not happy with the level of compensation. They would like a product that covers multiple crops and multiple perils. Most of them prefer to pay premium by one installment but some wanted a half-yearly payment option. They all have bank accounts and would be able to pay their premium through the bank; however, some of them prefer to pay the premium through their local organisation. They are quite happy with 5 percent premium and 80 percent compensation on sum assured. They are concerned about assessing the value of their yield and basis of assessing the loss.

The team discussed indemnity-based livestock insurance with the participants; an example of a “concept product“ was given. As stated in the previous chapter none of the participants showed any interest in buying this prototype livestock insurance.

The FGD established that each type of Nepali farmer needs tailor-made crop insurance solu-tions. The subsistence farmers, like the rice farmers, would not benefit from traditional crop insurance. They do not have the ability to pay for insurance and some kind of subsidy would be required by them. A limited number of the small to medium sized farmers are being pro-vided crop insurance by their seed suppliers, co-ops and MFIs; these organisations are also providing some of them with livestock insurance. A large majority of them do not have any insurance. Large farmers are also being provided crop insurance by their seed suppliers, co-ops/MFIs, and a few private insurers. These farmers would also benefit from a new form of crop insurance that offers them value for their money.

Discussions with the insurers, BS executives and some government officials disclosed con-siderable interest in CWII. A power point presentation was made to them at a workshop that generated extensive discussion on CWII. The insurers would like to see of some peril specif-ic, area specific and crop specific piloting of CWII in Nepal. BS would support them.

CWII overcomes some of the challenges faced by traditional crop insurance programmes by delinking indemnification from individual production. Instead, the payout is based on an ob-servable index, which is unrelated to a farmer’s own effort or the insurer’s assessment. Be-cause of these contracting innovations, CWII has the potential to be a financially sustainable mechanism to mitigate the risks faced by the agricultural households in Nepal.

15

4 SUPPLY CHAIN FOR AGRICULTURAL INSURANCE

4.1 Distribution channels

Achieving scale through cost-effective distribution is one of the biggest challenges faced by insurers in Nepal’s agricultural insurance sector, where customers are typically unfamiliar with insurance products and often sceptical of the insurers. To be able to effectively reach the large and remote client base, the insurance companies in Nepal would need innovative new distribution models as alternatives to traditional microinsurance distribution approaches currently used such as agents, microfinance institutions (MFIs) and Co-operatives (Co-ops).

Distribution does not only entail sales; distribution is a much wider concept than simply get-ting the insurance product to the client and collecting premiums. Distribution covers all inter-actions that take place between the insurer and the policyholders, and all the in-between procedures. This includes policy origination, premium collection and policy administration, as well as all marketing, sales and claims activities, such as helping clients with claim forms, assiting the policyholders with collection of claims documents, and helping with complaints of dissatisfied policyholders, and ultimate satisfactory disposal of the complaints.

Sales and premium collection are the phases in the distribution process that matter most to the insurers and their agents; but these are not the phases where client value is realised. Clients realise value at the servicing and claims processing stages; these services have to be developed further by the value chain partners in Nepal. Most agricultural insurers in Nepal have concentrated on sales and premium collection, and servicing and claims processes are yet to be developed fully.

Distribution process involves several different activities by different entities. In Nepal the dif-ferent entities currently involved in the distribution process include insurance companies through their agents, microinsurance agents, MFIs, co-ops and similar organisations. Alter-native microinsurance distribution channels, though in existence for a long time in Nepal, have not been recognised by the regulator or involved by the industry. In order to achieve scale at a low cost, the regulator and the insurance industry have to give consideration to all the different entities and their relative functions in the distribution value chain.

Microinsurance Agents, MFIs and Co-ops

One of the most commonly used distribution channels for agricultural insurance in Nepal is insurance agent; some insurers also use MFIs and Co-ops. The rights, duties, responsibili-ties, codes of conduct and other provisions relating to insurance agents are specified by BS. The Insurance Act 2049 (1992) defines Insurance Agent as "a person other than a salaried employee of an Insurer who has obtained a license pursuant to Section 30, to work on behalf of the Insurer on the basis of commission“.

The Draft Micro Insurance Directive (DMID) 2014 has introduced the concept of Micro Insur-ance Agent, that is defined as “person or entity appointed by insurer to work as micro insur-ance agent to sell and distribute micro insurance policies. Non-Governmental organizations/ International Non-Governmental organization, self-help groups, microfinance institutions, persons and other groups can also be included under micro insurance agent“. Though co-ops are not specifically mentioned, BS allows co-ops to act as microinsurance agents.

The rights, duties, responsibilities, codes of conduct and other provisions relating to micro insurance agents are as follows:

1. Micro insurance agents must be licensed by BS. 2. Insurance companies can only appoint micro insurance agents who have completed

the training and are licensed.

16

3. Microinsurance agents’ training can be given by insurance companies or by BS. Agents trained by BS can be employed by any insurance company but agents trained by an insurance company can only be employed by that company.

4. An individual or a MFI/Cooperative can be appointed as a micro insurance agent. In case of an organisation, a senior executive such as a director, of that organisation must undergo the training.

5. The insurance company shall be responsible for all acts of the micro insurance agent,

including damages for all losses caused to insured by the microinsurance agent.

6. Micro insurance agent’s commission and rates are specified in the Directive.

Alternative Distribution Channels in Nepal

For the purposes of this study, alternative distribution is defined as models utilising partner-ships with organisations traditionally not in the insurance space. Examples of such organisa-tions in Nepal are development banks, suppliers of fertilizers or seeds or pesticides or insec-ticides, utility companies, chain stores, retail outlets such as town/village corner stores, for-eign remittance payment networks, cell phone airtime providers and SIM card vendors. The farmers in Nepal are already using the services provided by these organisations and trust them. Approaching potential insurance clients through such alternative distribution channels would increase insurance penetration.

Many of these organisations are not named in the DMID. However, DMID does mention, “persons and other groups can also be included under micro insurance agent“. It is therefore assumed that the alternative distribution channels mentioned above would be considered by BS if approached.

Many of the above organisations have their own regulatory environment and therefore using such organisations’ services in the agricultural insurance sector would entail cooperations and agreement of other regulatory bodies such as the Rastra Bank, Telecom Regulators etc.

4.2 Existing microinsurance and agricultural insurance products

Around 1.67 million people in Nepal are reached by MFIs and co-ops, and form a very spe-cial niche for the microinsurance market.16 There are 24 licensed Microfinance Development Banks (MFDBs), 45 licensed Financial Intermediary Non-government Organisations (FIN-GOs), 16 licensed Savings and Credit Cooperatives (SACCOs) and more than 5000 non-licensed SACCOs currently working with the poor to enhance access to finance for the base-of-the-pyramid segment of Nepal. Most of these organisations offer or organise insurance for their borrowers/members. There is no comprehensive list of the organisations and the prod-ucts being offered but it is estimated that around 80 percent of MFIs offer some kind of mi-croinsurance or unregulated informal insurance product to their clients. Nearly all of the FIN-GOs and MFDBs offer in-house unregulated insurance products or social protection schemes.

Agricultural insurance is not new in Nepal. For example, Deposit Insurance and Credit Guar-antee Corporation (DICGC) is protecting livestock loans since 1987, and thereby indirectly providing livestock insurance; it charges 4 percent premium of total value to clients and gets another 4 percent premium from the government to protect the loans of small borrowers of banks, FINGOs and SACCOs. Furthermore, MFIs provide credit-linked insurance to their borrowers charging 1 percent of the total loan as premium at the time of loan disbursement. Some of these loans are taken by farmers for crop farming and purchase of livestock.

In 2003, the International Labour Organisation (ILO) compiled an inventory of microinsurance

products in Nepal and information on variousfeatures of these products. The study lists un-

16

PlaNet Finance, 2013; Insights into Microinsurance in Nepal, Kathmandu, Nepal

17

regulated informal insurance products offered by 21 organizations, 5 of which were financial institutions while the remaining 16 were non-financial institutions. The products listed are life/credit life (8), accident & disability (5), healthcare (10) and housing (1). While this study is out of date and not comprehensive, it does provide some insight into market supply of micro-insurance in Nepal.17

Microinsurance schemes offered in Nepal are social protection fund products (SPF), life, credit/life, healthcare, accident/disability, livestock and crop insurance. SPF products are insurance-like informal risk protection products offered by MFIs. These products offer protec-tion to MFI clients for a broad array of risks. Risks covered by such products mostly include: death of the client, death of client’s spouse or close family member, maternity benefits and losses due to damages to the clients’ dwellings caused by natural calamities. Some products also cover predefined illnesses. The products are available both in rural and urban areas, though the majority of the hill and mountain districts are not covered18.

The following paragraphs describe some of the organisations that operate microinsurance schemes in Nepal and the products they offer.

Small Farmer Cooperative Limited Livestock Insurance

In 1970, Agricultural Development Bank Limited (ADBL) established a Small Farmers’ DevelProject, which extended credit to 200,000 small farmers in 450 sub-project offices in 600 villages in Nepal. In 1988, with support from GIZ, the best performing sub-project offices were transformed into Small Farmers Cooperatives Limited (SFCL). In 2001, Government of Nepal (GoN) and ADBL formed the Sana Kisan Bikas Bank Ltd (SKBB - Small Farmers De-velopment Bank) to provide wholesale credit, consultancy services and non-financial ser-vices to the SFCLs. Approximately 200 of the SFCLs provide individual animal mortality cov-erage and loss of use of the animal to their members.

Deposit Insurance and Credit Guarantee Corporation

Nepal introduced a livestock insurance scheme in 1987, implemented jointly by Nepal Rastra Bank and Deposit Insurance and Credit Guarantee Corporation (DICGC). The scheme was specifically designed to protect commercial bank lending to small farmers to purchase cattle, buffalo or small ruminants. The coverage provides comprehensive mortality and loss of work-ing use protection for livestock and offers ‘all risk mortality coverage’. The scheme provides protection for the amount of credit and does not cover the full market value of the animal; and the coverage is automatically terminated when the loan has been repaid normally after 2 to 3 years. It should be noted that, though it is a credit guarantee scheme, in the absence of al-ternative livestock insurance products, the program has been successful for 20 years in ena-bling small livestock producers to access institutional livestock credit and to then protect these loans in the event of the death of the animal.

Centre for Self-Help Development

The Centre for Self-Help Development (CSD) is a Non-government Organisation (NGO) and provides livestock insurance linked to microfinance. It also provides an integrated life insur-ance, household contents insurance and maternity health care insurance program. It started in 1991 and has over 58,000 members and works with women’s group.

17 Strategies and Tools against Social Exclusiom and Poverty (STEP), An Inventory of Micro-insurance Schemes

in Nepal, International Labour Organization (ILO), Kathmandu, Nepal 18

Ibid

18

The policy covers 80 percent of the cost of the livestock for death of the livestock and 40 percent of the cost of the livestock for unproductiveness of the livestock either due to acci-dent or illness. The premium is 6 percent of the total costs of the livestock.

Scheme Run by Participatory District Development Program19

Participatory District Development Program (PDDP) in Kavrepalanchowk district started a livestock insurance scheme in 1997 with financial assistance of Local Development Fund Board (LDFB). The PDDP supports the social empowerment process at the village level through the development of self-governing community institutions, mainly Community Live-stock Cooperatives (CLC). The insurance scheme is managed on a voluntary basis by the local CLC. At present, the insurance programme is operating in 15 Village Development Committees (VDC) of Kavrepalanchowk district. It covers all the CLC livestocks registered at the District Cooperative Office (DCO). The scheme covers 3,522 farmers and insures over 10,000 cattle. The farmers contribute 10 percent of the cost of the livestock; half of the pre-mium is paid by the farmer and the other half is paid by the Small Farmers Development Bank. In the event of death of the animal, 80 percent of the cost of the animal is paid as con-pensation; 40 percent of the cost of the animal is paid in the event of unproductiveness as a result of an accident or illness. The farmer can also get free treatment up to NPR 300 or 20 percent of the total treatment cost if it exceeds NPR 300. There is no waiting period or co-payment and the premium is paybale every 18 months.

Scheme run by Center for Micro Finance20

Centre for Microfinance (CMF), an apex microfinance network institution in Nepal, does train-ing, conducts action research, coordinates and works as country focal point as well as advo-cacy. CMF started a pilot project in Nepal in 2002 in partnership with a life insurance compa-ny, to provide mandatory credit/life insurance to protect the loan portfolio of MFIs as part of their “action research“. The premium is 0.7 percent. Several MFIs like Bindhabasini Coopera-tive, Nirdhan Utthan Bank (NUB), Madhyamanchal Grameen Bank, Pashchimanchal Gram-een Bank and Swabalamban Bikas Bank (SB Bank) joined the scheme and were distribution channels of the credit-life insurance product for the benefit of their own borrowers. After the CMF “action research“ closed, the MFIs continued the scheme through life insurers of their own choice at the same premium but with a slight variation to suit their own needs. For ex-ample, the Bindhabasini Co-op runs a voluntary scheme, while all others have mandatory scheme. All MFIs, except SB Bank and NUB, pay the outstanding loan balance and funeral expenses in case of death. SB Bank covers death of member (NPR 5,000 to 7,500), death of member’s spouse (NPR 2,500 to 3,750), maternity benefit (NPR 1,000, livestock (NPR 2,500 to 20,000) and damage to property (NPR 2,000). NUB pays the full loan amount to the nomi-nee (in case of accident death double) and 45 percent as funeral expense. NUB currently has 130,000 policyholders.

Community Livestock Development Program

The Community Livestock Development Program (CLDP) was started in 2004 with funding from the Asian Development Bank (ADB) and technical support from Food and Agriculture Organization of the United Nations (FAO). It is implemented by the Department of Livestock. CLDP offers two different models of livestock insurance program: (a) Community Managed Insurance Scheme, which is provided for dairy animals and goats; and (b) Milk Co-op Man-aged Insurance Scheme. The insurance schemes provide ‘all risks mortality’ and ‘loss of use coverage’ and are closely linked to livestock credit. The CLDP program is operating in the 22 districts of western, mid-western and far western Nepal, and livestock insurance programs are operating in about 50 percent of these districts with approximately 200 community man-

19 Inventory Strategies and Tools against Social Exclusiom and Poverty (STEP), An Inventory of Micro-

insurance Schemes in Nepal, International Labour Organization (ILO), Kathmandu, Nepal 20

Micro Insurance Business in Nepal; Mahendra Adhikari, Nepal;

19

aged schemes and dairy co-op schemes insuring about 5,000 animals. This represents less than 1 percent of the national herd of dairy cows. Details of the insurance scheme are given below:

Text Box 1: Community Livestock Development Program

a) Community managed insurance scheme

- Minimum number of households: 100

- Minimum number of animals insured: Cattle: 50; Goats: 150

- First year: Establishment of insurance fund

- Farmers contribution: NRs 50,000 (dairy animals) and NRs 25,000 (goats)

- CLDP support: NRs 50,000 (dairy animals) and NRs 25,000 (goats)

- From second year onwards, the annual premium rates are set at: 3 percent for large animals, 5 percent

for goats. In case of the death of the animal up to 80 percent of the sum assured indemnity is paid to

the farmer

b) Milk Cooperative Managed insurance Scheme

- Requirements are similar to above and are open to any interested member of the cooperative rearing

dairy animals.

Banana and Vegetables Pilot Insurance Program

After suffering huge banana damage by strong winds in 2005, several hundred farmers in Chitwan and Nawalparasi Districts established the Agriculture Insurance Multipurpose Coop-erative in 2006. The insurance scheme has been supported by the Department of Agriculture Development since 2007. Also, vegetable farmers of Ramnagar VDC, Nawalparasi District have an insurance scheme against comprehensive hail, drought, flood, landslide and wind damage of their vegetables and cereal crops. Banana premiums are NPR 2 per banana plant for a compensation of NPR 15 per plant, vegetable premiums are NPR 100 per 0.033 hec-tare for compensation of NPR 1500 per 0.033 hectare and premium charges for paddy/maize are NPR 50 per 0.033 hectare for compensation of NPR 750 per 0.033 hectare. Government provides only technical support.

Crop Insurance in Nawalparasi

Several co-ops in Nawalparasi district piloted a crop insurance scheme in 2008 with the as-sistance of Agriculture Development Board and the Ministry of Agriculture for the coopera-tives’ members. This project is yet to be tested for full-scale operation. The number of policy-holders is small and the coverage of these insurance programs is also very low.

Livestock insurance and crop insurance by regulated insurance companies

Out of the 17 non-life insurance companies in Nepal, 2 offer livestock insurance and crop insurance (vegetable, banana and coffee) and 12 offer only livestock insurance (buffalo, cow, goat, poultry and fishery). The premium and the sum assured are as per tarrif given by BS. The names of the insurers are given below.

Table 5: Name of insurance companies offering crop and livestock insurance

1 Crop and Livestock

1. Nepal Insurance 2. NLG Insurance

2 Livestock

1. Alliance Insurance

20

2. Himalayan Insurance 3. Lumbini Insurance 4. National Insurance 5. NECO 6. Oriental Insurance 7. Premiere Insurance 8. Prudential Insurance 9. Sagarmatha Insurance 10. Shikhar Insurance 11. Sidhartha Insurance 12. United Insurance*

* = Started livestock insurance business only 2 months ago

There is no reinsurance available for agricultural insurance in Nepal. Only NLG insurance has been able to persuade their reinsurers, Hanover Re, to provide reinsurance coverage for their livestock portfolio but they do not have any coverage on their crop portfolio. In absence of reinsurance facility, three groups of insurers have formed a risk pool amongst themselves to share the cost in the event of any catastrophic events. The groups are as follows:

Table 6: Risk pool groups

Group 1

1. NECO Insurance 2. Nepal Insurance 3. Premier Insurance 4. Sagarmatha Insurance

Group 2

1. Alliance Insurance 2. Everest Insurance 3. Lumbini Insurance 4. Prudential Insurance 5. United Insurance

Group 3

1. Himalayan General Insurance 2. National Insurance 3. Oriental Insurance 4. Shikhar Insurance

As per tarrif, livestock sum assured for cows vary from NPR 30,000 to 150,000, for buffalos from NPR 30,000 to NPR 125,000, for Yak from NPR 12,000 to NPR 80,000 for sheep, goats and pigs from NPR 8,000 to NPR 10,000. The premium payable is 5 percent of the sum as-sured; 75 percent of the premium is paid by the government. All risks are covered; in the event of death, 90 percent of the sum assured is paid and in the case of permanent total dis-ability, 50 percent of the sum assured is paid. Deaths not reported within 3 days, missing livestock and theft are excluded.

For poultry/birds, the sum assured varies from NPR 400 to NPR 1,200. The premium paya-ble is 6 percent for commercial and 5 percent for domestic birds; the government pays 50 percent of the premium. Risks covered are fire, lightning, flood, inundation, landslide, subsid-ence, storm, hailstorm, snow, frost, illness and diseases.

21

Crop insurance is available for paddy, potato, vegetable and fruit farming, and covers 90 percent of the input cost. Premium payable is 5 percent of the sum assured; 75 percent of the premium is paid by the government. Risks covered are fire, lightning, flood, inundation, landslide, subsidence, storm, hailstorm, snow, frost, diseases, pests and insects.

4.3 Recommendations for the supply chain

Organizations such the NGOs, INGOs, self-help groups, MFIs and co-ops etc. offer an im-portant opportunity for the distribution of agricultural insurance products. Many such organi-zations are already trying to provide agricultural insurance coverage for their members.

Several banks have also set up their own insurance companies to facilitate the offering of agricultural insurance and microinsurance products to their customers. Banks get credit-life protection and livestock insurance for their borrowers from the (allied) connected insurance companies. All are focused on loan portfolio protection and the basic products that offer such protection.

The role of seasonal production credit in Nepal is critical to farmers who need to invest in improved seeds and fertilizers to raise their production and yields. When agricultural credit and insurance are linked, there is a potential for the bank or MFI to reduce its interest rates and increase their outreach. The linkages of crop and livestock insurance with credit provi-sion through the ADBL and other banks, MFIs, co-ops and SACCOS needs to be considered carefully by the insurance industry.

The team identified several organisations (see subchapter 4.1) during its survey that are will-ing to partner with insurance companies to assist in distribution of the insurers’ products. The team recommends all these organization to the insurers.

To provide crop insurance for scattered, low-income segment markets, particularly those in rural and remote areas, the insurance industry needs capacity, innovation, and cooperation among agencies, cross-sector business, society, and policy support from the government.

Considerable amount of research work on agricultural insurance has been done by a number of donors and support organisations; some of the work is on Nepal. Their research results are excellent reference documents. These are in the public domain and can be used by the insurance industry to improve their service and products. These are:

1. Access to Insurance Initiative (A2ii): www.access-to-insurance.org

2. Centre for Financial Regulation and Inclusion (CENFRI): www.cenfri.org

3. Food and Agriculture Organisation of the United Nations (FAO): www.fao.org

4. International Fund for Agricultural Development (IFAD): www.ifad.org

5. International Labour Organisation (ILO): www.ilo.org

6. Swiss Reinsurance Group (Swiss Re): www.swissre.org

7. The Asian Development Bank (ADB): www.adb.org

8. The World Bank Group (WB): www.worldbank.org

9. United States Agency for International Development (USAID): www.usaid.gov

4.4 Potential product features of crop insurance

On the basis of the feedback from FGD partcipants and the insurers, the team has identified the following as potentail crop insurance products:

1. Single peril indemnity-based crop insurance

2. Named peril indemnity-based crop insurance

22

3. Area-yield index crop insurance

4. Crop weather indexed insurance

Pro-type products have been designed for all four products described below; these have not as yet been discussed with the industry or the regulator. The pro-type products are given in Appendix 4 to the report.

1. Single peril indemnity-based crop insurance

Single peril insurance is the simplest and best known type of indemnity-based crop insur-ance, which is gaining popularity in many developing countries. Nepal’s neighbouring country India is a good example. Under a loss of yield indemnity policy, the peril (for example exces-sive rain or high wind or hail etc.), the crop (for example rice or potato or banana) and the sum assured (up to a maximum of average yield of the crop in that area) is covered by the policy. The peril, crop and the compensation amount is pre-determined in the policy. The claim is lodged by the policyholders if the peril occurs and crop damage is suffered. The physical damage to the crop is measured in the field soon after the loss event. Normally the damage is measured as a percentage and this percentage is applied to the agreed sum as-sured. The sum insured may be adjusted downwards if there are any damages due to any uninsured reasons.

Such product has its problems. Assessing damage may be time consuming and expensive. There may be dispute between the policyholder and the insurer on the extent of the damage and the yield; the yield value is normally average area yield as per the MOAD data and not the farm level yield of that policyholder. Damage, in the past, was normally done by a visit by the loss assessor; this is expensive and time consuming. Nowadays, low-cost technology is available which eliminates visit by the loss assesor and makes such insurance feasible.

This product is different from what is being offered in Nepal at present; it is single peril rather than a large number of perils covered under CLID. There no arbitrary capping of sum as-sured, the compensation is on the basis of the yield and the premium is acturially calculated.

2. Named peril indemnity-based crop insurance

This product is same as single peril indemnity based crop insurance except that it covers several named perils, normally upto three, for example excessive rain, high wind and hail etc. It also shares the same disadvantages.

3. Area-yield index based insurance

This product does not indemnify crop yield loss at the individual field or grower level but makes a payment to the insured according to the yield loss or shortfall against an index, which is the average area yield for that crop in that geographical area.

The policy establishes an insured yield, which is expressed as a percentage (called the “cov-erage level”) of the historical average yield for each crop in the defined geographical region. The geographical region is called the insured unit (IU). Farmers whose fields are located in the IU may purchase optional coverage levels, which normlly vary between 50 percent and 90 percent of historical average yield. The actual average yield for the insured crop is estab-lished by sample field measurement that involves crop cutting in the IU and an indemnity is paid by the amount that the actual average yield falls short of the insured yield coverage lev-el purchased by the policyholder.

This approach aims to overcome many of the drawbacks of the two products mentioned in Paragraphs 1 and 2 above. The key advantages of the area-yield approach are that moral hazard and anti-selection are minimized, and the costs of administering such a policy are

23

much reduced; this offers the potential to market this product at lower premium costs to the farmers. The main disadvantage of an area-yield policy is that an individual farmer may incur severe losses due to localized perils e.g. hail, or flooding from a nearby river, but because these localized losses do not impact the IU’s average yield, the farmer does not receive an indemnity.

India is a good example where Agriculture Insurance Company of India has been successful-ly offering this product for the past 20 years. For area-yield index program it is necessary to have an accurate system of measuring average crop yields for each selected crop within the defined IU. Furthermore there should ideally be a minimum of 10 to 15 years of historical yield data on which to calculate (a) the normal average yield for the selected crop; (b) the insured yield coverage level, expressed as a percentage of the average yield; and (c) the underlying pure loss cost rates associated with each coverage level. The team was informed that such data is available at MOAD for most of the country.

4. Crop weather-index based insurance

In order to meet the desires of the insurers, the team recommends piloting several CWII in selected areas where reliable weather stations and past weather data (at least 15 to 20 years) are available, the areas have high density of crop farmers and the areas are easily accessible. Piloting should be done over the next 1 to 2 years so that the industry is able to gather the experience and be able to launch WCII in the country within the next 3 to 5 years.

CWII would be suitable for Nepali small farmers. It is non-traditional and is a relatively new crop insurance product; has been implemented on a commercial basis in Indiai, Malawi and Mexico over the past 10 years or so.21 CWII is a simplified form of insurance, where pay-ments are made based on a weather index, rather than measurement of crop loss in the field. The index is selected to represent, as closely as possible, the crop yield loss likely to be experienced by the farmer. The most common application of CWII is against drought, where rainfall measurements are made at a reference weather station, during defined period, and insurance payouts are made based on a pre-established scale set out in the insurance poli-cy. The sum insured is normally based on the production costs for the selected crop and in-demnity payments are made when actual rainfall in the current cropping season, as meas-ured at the selected weather station, falls below pre-defined threshold levels. CWII can also be modeled for many other weather perils such as excessive rain or high wind.

Although theoretically promising, there are significant barriers to adopting CWII. These in-clude limited financial literacy, lack of infrastucture, inadequate data and inadequate trust in the insurance provider. In addition, basis risk, the risk of low correlation between insurance payouts and actual crop losses, is potentially a real threat both to demand for, and effective-ness of CWII. Another problem arising from index insurance is that the farmer, especially the smallholder farmer, does not understand and cannot trace the real mechanism of the cover. To give an example: smallholder farmers very often do not really know how many mms of rainfall is needed for a decent crop.

4.5 Potential partnerships in market development

During the survey the team identified the following potential distribution channel partners:

1. Centre for Environmental and Agricultural Policy Research, Extension and De-velopment (CEAPRED) is an agro development organization that works very closely with co-ops and other rural organization in 38 districts in Nepal. Some of the co-ops

21 The World Bank; Agriculture Insurance Feasibility Study for Nepal Global Facility for Deduction Reduction

and Recovery South Asia 2009, Washington DC

24

are already providing informal crop insurance to its members. CEEPRED is willing to act as a distribution channel for crop insurance.

2. Sana Kisan Bikas Bank is a development bank in Nepal which lends to MFIs (with 1.5 million to 1.8 million members) and co-ops (with over 350,000 members). The MFIs and co-ops are already providing informal insurance to its members. This organisation could be tapped to be a distribution channel through its member MFIs and co-ops.

3. Agriculture Inputs Corporation Limited (AICL) is a government owned corporation that supplies fertilizer to the farmers through 4,000 dealers and sub-dealers. The deal-ers and sub-dealers are co-ops. AICL would be willing to allow insurers to approach its dealers and sub-dealers to act as distribution channels for crop insurance products.

4. Nirdhan Utthan Bank Limited (NUBL) is a non-bank financial institution which pro-vides loans to MFIs, who in turn provide agricultural and other loans to nearly 160,000 members. NUBL is already providing credit-life insurance to over 130,000 MFI mem-bers through Met-Life ALICO. NUBL is willing to act as a distribution channel for crop insurance.

In addition, there are suppliers of seeds or pesticides or insecticides, utility companies, chain stores, retail outlets such as town/village corner stores, foreign remittance payment net-works, cell phone airtime providers and SIM card vendors who could be potential partners in market development. They are a new breed of unconventional distribution channels and the farmers in Nepal are already using their services and trust them.

Alternative distribution channels like the above are being used for market developmet in many developing countries in the world such as Bangladesh, India, Kenya, Malawi and Paki-stan. Some of these organisations, like seeds suppliers, are already supplying insurance but they do not fall under the definition of ‘microinsurance agent’ given in DMID. Permission would be required from SB to use their services. Many of the above organisations have their own regulatory environment and therefore using such organisations’ services in the agricul-tural insurance sector would entail cooperations and agreement of other regulatory bodies such as the Rastra Bank, Telecom Regulators etc.

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5 REGULATORY ENVIRONMENT

5.1 Current issues

Development in agricultural insurance and microinsurance regulation

The insurance sector in Nepal is governed by Insurance Act 2049 (1993) and is regulated by Beema Samiti (BS), a GoN-appointed body having its own Board of Directors, comprised of representatives of various government ministries and other representatives nominated by the government. The Insurance Act requires segregation of life, non-life businesses and reinsur-ance into separate companies and spells out various prudential norms, good governance standards and operating rules for insurance companies and there is no mention of agricultur-al insurance or microinsurance in the act. None of the provisions of the act are particularly relevant to agricultural insurance or microinsurance. Agricultural insurance (crop, livestock, aquaculture and forestry) is not specifically identified in any category of non-life business stated in the Act and currently falls under “miscellaneous insurance”.22 According to BS, agri-cultural crop, livestock, poultry and fishery are approved classes of insurance business in Nepal.

In June 2010, BS drafted a Micro Insurance Act and forwarded it to the Ministry of Finance (MoF) for approval; there was political instability in the country at that time and the ministry did not give this issue a priority and it was not approved. The draft act incorporated numer-ous prudential norms and tightened corporate governance norms for microinsurance opera-tion. The draft act contained three major policy level changes, which are:

Allow life insurance companies to introduce pension schemes

Allow general insurance companies to carry micro insurance products

Pave the way for establishment of reinsurance companies

In March 2011, BS formed a committee to identify suitable microinsurance products and the best distribution channels to reach the low-income households in rural and urban areas. The committee recommended six microinsurance products needed by the low-income house-holds, which are tabulated below:

Table 7: Micro insurance products

PRODUCTS MAXIMUM SUM

ASSURED (NRP)

PREMIUM AS % OF

SUM ASSURED

DISTRIBUTION CHANNEL

COMMISSION AS % OF PREMIUM

1 Agriculture23

100,00024

5%25

Coops, MFIs, CGs 15%

2 Micro Health 30,00026

2% Coops, MFIs, CGs 15%

3 Accident 100,000 0.10% Coops, MFIs, CGs 15%

4 Self-employment 100,000 0.15% Coops, MFIs, CGs 15%

5 Life with Endowment 50,000 As per age Coops, MFIs, CGs Existing provision

6 Term Life 100,000 As per age Coops, MFIs, CGs Existing provision

22

Chapter 2, Insurance Regulation 2049 (1993) 23

Livestock (cow, buffalo, yak, pig, goat, bird and fish) and Crop (cereal, vegetables and fruits) 24

Cow NRs 100,000, Buffalo NRs 150,000, Small Animals NRs 8,000 to 10,000, Bird NRs 400 to 1,200; 25

Same amont paid by the government; now reduced to 2.5% and same amount paid by the government 26

Per family; maximum 5 members

26

In July 2012, BS developed a new draft Micro Insurance Regulation and forwarded it to MoF for approval. MoF has not as yet approved the draft act and it is difficult to anticipate if and when the parliament will pass the Act, and therefore BS has now decided to regulate micro-insurance through Directives.

Agricultural insurance

In January 2013, BS introduced a Crop, Livestock and Poultry Insurance Directive (CLID) that makes it mandatory for all non-life insurance companies in Nepal to offer livestock and crop microinsurance. Under CLID, the products can be categorised in four broad spetrum: (1) crop, vegetable, fruits, (2) Livestock (cattle, buffalo, cow, pig, yak, goat) and (3) birds (poul-try, swan/duck) and (4) fish. The major provisions of the directive are:

Under crop insurance, the sum assured is equal to the cost of production (seed, seed-lings, fertilisers and labor cost until the crops/horticulture are ready for harvest.

Livestock and poultry insurance will provide coverage to all types of cows, oxen, buffa-los, male and female yaks, sheep, goat, pig, chicken, swan and ducks based on sum in-sured fixed by BS. Upper and lower ceilings of risk cover, age limit and amount of pre-mium and commission are specified clearly.

90 percent of the covered loss is to be borne by the insurance company and 10 percent by the policyholder.

Insurance is for 12 months. In case the insured plant, animal or fowl has a life span of less than 12 months, then the premium amount will be calculated based on the shorter life cycle.

Claims must be settled within 30 days from the first reporting date.

For livestock all risks are covered in the event of death; in the case of permanent total disability, 50 percent of the sum assured is paid. Deaths not reported within 3 days, missing livestock and theft are excluded.

For poultry/birds the risks covered are fire, lightning, flood, inundation, landslide, subsid-ence, storm, hailstorm, snow, frost, illness and diseases.

Crop insurance risks covered are fire, lightning, flood, inundation, landslide, subsidence, storm, hailstorm, snow, frost, diseases, pests and insects.

Table 8: Crop, Livestock and Poultry Insurance Directive

INSURANCE CATAGORY

RISKS COVERED EXCLUSIONS

1 CROP

Horticulture Rice, Potato

Fire, lightning, earth-quake, flood, subsid-ence, wind, storm, drought, landslide, hail, frost, fog Accidents Insects, pests, diseases

Carelessness or purpose of enjoyment of family mem-

bers

Jealousy or rivalry behavior

Loss due to order of government or authorised person or agency Stolen /theft

Sale

War, civil war or insurgency Revolution, army coup Radiation and nuclear effect Misrepresentation, concealing and hiding of information

2 LIVESTOCK

Goat, sheep, cow, yak, buffalo, pig

All perils except those excluded specifically

Loss due to carelessness

Lost, stolen theft or sold

Removal of identification mark but not timely intimated to

the insurer

Accidents more than 5 kms. away from pen (ex-

cept for husbandry, treatment, grazing)

27

The full detail of the summary published by BS is given in Appendix 3 of this report.

After CLID 12 non-life insurance companies started the livestock insuranance business and only 2 started offering crop insurance. Livestock insurance business has been going on in the country since 1987 by DICGC and the MFIs/NGOs/INGOs/Co-ops and the farmers know the product. Also, the lenders, who make this insurance mandatory for their borrowers to protect their loan portfolio, mostly initiate this business. The compensation amount for this product is related to the cost of the animal. These are the main reasons for relative success of livestock insurance as against crop insurance. Close to 150,000 animals are insured each year. The farmers normally take care of their animals and, in time of adverse weather condi-tions, they can quickly take preventive actions to protect the animals. The livestock insurance sector has long experience and over the years steps have been developed to prevent moral hazards. Livestock claims are relatively low.

On the other hand, crop insurance is very new in the country; the industry and the farmers do not have much previous experience to go by. Before CLID, a few MFIs, cooperatives and seed suppliers offered informal crop insurance in a very limited way. The two insurers that started offering crop insurance after CLID, have only 56 policyholders between them There is very high moral hazard and cost of verification is very expensive. There are other technical issues, as discussed under subchapter 5.2. Crop insurers, therefore, are finding it difficult to scale their business and the remaining companies are reluctant to enter this market.

The compensation on crop insurance is on the basis of input cost, which is not considered to be a “value for money” proposition by the farmers. A large number of farmers, especially the rice farmers, cannot afford the premium. As a result, the demand for crop insurance is quite low.

CLID itself is not sufficient to implement agricultural insurance. BS still needs to develop ag-ricultural insurance rules and regulations. The directive needs to be improved further for the effective implementation and monitoring of agricultural insurance. There is no obligation on commercial insurers to sell any minimum number of policies per year to socially backward

Loss when used for purposes other than that declared

for the policy

3 BIRDS

Poultry, swan, duck

Fire, lightening, earth-quake, flood, subsid-ence, wind, storm, drought, landslide, hail, frost, fog Accidents Insects and diseases

In case of commercial farming, death at more than 50

meters from cage; in case of domestic farming 1 km

from cage

In case of commercial farming, less than 5% death of

stock; in case of domestic farming, less than two deaths

Due to lack of balanced diet, regular health check up or

vaccination

Carelessness

4 FISH

Fire, lightening, earth-quake, flood, subsid-ence, drought, landslide, wind, storm, hail, frost and fog Accidents and poisoning Diseases and illnesses Lack of oxygen and ammonia

Loss due to carelessness or for enjoyment of

family members

Loss due to jealousy or rivalry behavior

Stolen, theft or sold

Exceeding the capacity of pond

Loss while changing of water or cleaning of pond

War, civil war, insurgency, revolution or coup

Radiation and nuclear effect

Misrepresentation, concealing and hiding of information

Loss due to order of GoN or GoN authorised person or

agency

28

and economically deprived rural community. BS was set up to supervise commercial insur-ance industry; there is lack of agriculture insurance expertise at BS (actuary, statisticians, underwriters, risk analysts and loss assessors etc.). This should be addressed through ex-tensive capacity building at BS. The same applies for BS expertise in microinsurance.

Commercial insurers are facing difficulties in selling agricultural insurance in rural areas as they do not have distribution network in those areas. The insurers need to think in terms of alternative distribution channels that are present in Nepal. Agriculture insurance is a social business rather than commercial business; the responsibility goes to government BS to es-tablish a new mechanism to deliver the insurance services to the household whose livelihood depends on agriculture.

Agricultural products vary from place to place. Also the risks attached to the products vary according to climate and topography. The current design of the products in CLID does not recognize these variations. The premium and the compensation packages designed in CLID are uniform throughout the country and need to be revised.

There is no livestock accident and mortality policy or table for cattle and buffalos in the coun-try. The risks covered under CLID are almost comprehensive coverage, making it very diffi-cult for the insurers to comply with. Some of the risks covered are catastrophic risks, expos-ing the insurer to the possibility of a huge claim, which, in the absence of reinsurance facility, could financially damage the insurer severely.

Table 9: Agricultural insurance data for 12 month to 16 July 2014

Type of Insurance Sum assured

NPR Premium income

NPR Claims

NPR Claims rate %

Livestock 592,324,110 29,003,093 12,620,875 43.52

Crop 15,222,743 756,953 253,753 33.52

Birds 1,218,500 66,917 114,800 171.56

Fish 16,339,260 306,513 Nil -

TOTAL 625,404,613 30,133,476 12,989,428 43.11

Microinsurance

In April 2014, BS completed the draft of the Micro Insurance Directives (DMID) 2071 and submitted this to its Board of Directors for approval. This was approved in October 2014 and it is now operational as Micro Insurance Directives 2071. It is expected that the MI Directive will booste development of microinsurance in Nepal.

Table 10: Draft Micro Insurance Directives 2071 -Type, Premium and Commission

TYPES OF MICROINSURANCE

MAXIMUM SUM ASSURED

PREMIUM AS % OF SUM

ASSURED

COMMISSION AS % OF PREMIUM

MINIMUM AGE AT ENTRY

MAXIMUM AGE AT ENTRY

Micro Non-life Insurance Business

1 Family Micro Insurance

200,000 NPR 0.25 15% - -

2 Health Family Micro Insurance

35,000 NPR 4.0 15% As per rules of insurer

As per rules of insurer

3 Accident Micro Insurance

150,000 NPR 5.0 15% - -

29

4 Livestock Micro Insurance

150,000 NPR 5.0 15% - -

5 Crops Micro Insurance

50,00027

NPR 5.0 15% - -

6 Other micro non-life insurance as determined by Samiti

Micro Life Insurance Business

7 Term Micro Life Insurance

150,000 NPR According to age As determined According to rules of in-

surer

According to rules of in-

surer

8 Endowment Micro Life Insu-rance

100,000 NPR According to age As determined According to rules of in-

surer

Accroding to rules of in-

surer

9 Whole Life Micro Life Insurance

NO DETAILS AVAILABLE

10 Other micro life insurance specified by Samiti

MID covers both microinsurance and agricultural insurance. The issues relating to agricultur-al insurance have been discussed under Agricultural Insurance chapter above.

Except for credit-life insurance through MFIs and cooperative by three out of the eight life insurance companies, the regulated insurers in Nepal do not offer any other microinsurance products. The main reason for this is the absence on microinsurance regulation.

MID defines microinsurance, life microinsurance and non-life microinsurance; it makes man-datory for every regulated insurance company in Nepal to operate microinsurance business. It identifies microinsurance products, caps the sum assured and the premium payable, states commission payable, claim settlement procedure and reporting requirements for the insurers. It also describes microinsurance agents’ qualifications, training and remuneration. One of the commendable features of MID is that it defines ‘microinsurance agent’ and under that allows NGOs, INGOs, self-help groups and MFIs to act as microinsurance agent. Many of the above details are not given for Whole Life Micro Life Insurance product in the MID.

There are a few gaps in the MID. It does not allow an individual to act as a MIA. This would prevent the insurane companies to employ their existing insurance agents to sell micro in-surance. The MID also has not included “cooperatives” in the list of organisations allowed to be appointed as MIA. However, BS allows cooperatives to be appointed as MIA and has con-firmed that it will continue to do so in the future.

MID, as it stands now, is not sufficient to implement microinsurance fully. BS still needs to develop microinsurance rules and regulations. The directive needs to be improved further for the effective implementation and monitoring of microinsurance. There is no obligation on commercial insurers to sell any minimum number of policies per year to socially backward and economically deprived rural community. The MID does not identify who is responsible for supervising the MIA. The number of people to be covered under Health Family Micro Insur-ance is not identified. The expression “family“ is not defined. Details of sum assured, premi-um, commission, minimum and maximum age are not defined for the product “Whole Life Micro Life Insurance“ . These gaps need to be dealt immediately otherwise it will only cause confusion in the market.

BS was set up to supervise commercial insurance industry; there is lack of microinsurance expertise at BS (actuary, statisticians, underwriters, risk analysts and loss assessors etc.). This should be addressed through extensive capacity building at BS.

27

Maximum input cost

30

5.2 Industry perspectives on regulatory improvements needed

The BS Chairman and the Board of Directors appreciate the need for robust microinsurance regulation in Nepal and is working hard towards it. When MID 2071 is implemented fully, it would help the low-income households to access insurance and help the insurers to enter the low-income sector.

Reinsurers are important stakeholders in the agricultural and microinsurance industry. They enable insurance providers to manage their risks and increase their capacity through tech-nical expertise, so that microinsurance management can improve its skills. However, there is no reinsurance available for crop insurance in Nepal. Out of 14 insurers in livestock insur-ance business only one insurer has been able to obtain reinsurance coverage. The remain-ing 13 do not have any reinsurance. Also no reinsurance facility exists for the insurers en-gaged in the crop insurance business. The insurers require a reinsurance facility for crop insurance; CLID is silent on reinsurance.

The insurers have indicated that the following challenges faced by them need to be ad-dressed by the regulator or the government:

1. Lack of awareness and insurance education in general amongst the small farmers re-sulting in resistance to pay premium.

2. In Nepal insurance is effective immediately on issuance of the policy; there is no waiting period and therefore the risk of moral hazard is very high. The regulator should control moral hazard.

3. It is very difficult and expensive to reach the small and marginal farmers, who need the agricultural insurance most. Insurance agents need to make personal visits to clients otherwise no policies can be sold. Reaching commercial farmers is relatively easier. Commission payable to agents is 15 percent less VAT = 12.75 percent; this is not enough incentive for the agents to travel to remote areas to sell microinsurance. The commission structure prescribed by the regulator does not recognise the relative costs and needs to be revised. GoN needs to think of some concessions or incentives for ag-ricultural insurance in remote areas.

4. Livestock mortality in Nepal rate is 6 to 8 percent but the premium prescribed by the regulator is only 5 percent of the sum insured. It is not actuarially calculated and is not in relation to the risk exposure of the insurers. Insurers would like livestock insurance premium revised. According to BS data, the claims ratio for the year to 16 July 2014 is 43.11%.28 Therefore, the team does not find the insurers’ view justifiable.

5. There are very few Agriculture Service Centre (ASC) in the country; only 312 ASC as against 999 Livestock Service Centre (LSC). ASCs are required for the support of po-tential crop insurance policyholders such as conducting insurance training, and explain-ing the importance of crop insurance. The insurers would like the regulator to take this up with the MOAD and have more ASCs opened in the country.

6. It is very difficult for the farmers to complete the Insurance Application forms them-selves. They need the services of the Technician and Junior Technician Assistant (JTA) to compute input cost separately for each farm and have the proposal form certified by a qualified TA/JTA; the input cost varies from farm to farm according to location, eleva-tion, distance from water source etc. and calculation of it is very difficult. There are very few JTAs available in the rural areas, and employing them exclusively by the insurers does not make economic sense; part-time JTA would cost NRP 10,000 PM + transport (motorcycle) + food.

7. Insurers want to utilise the services of the JTA employed by the Ministry of Agricultural Development (MOAD). Under the current government rules, insurance companies can-

28

See Table 9

31

not employ or engage the JTAs; neither are the JTAs allowed to provide any direct sup-port to insurance companies – paid or unpaid. The insurers would like the BS to obtain permission from the MOAD so the JTAs at the field level can assist the insurance com-panies.

8. For paddy, the ratio of yield to input cost is around two and half to three times. Per Hec-tare input cost for paddy is around NPR 20,000; value of yield per Hectare for paddy is around of NPR 50,000; in case of a claim, the insured farmer would get only 90 percent of input cost – NPR 18,000 or nearly 1/3 of the lost income. The farmers do not find it a ”value for money” proposition. The insurers would like an additional option to compen-sate on yield basis to make crop insurance more attractive to the farmers.

Table 11: Input Cost and Yield for ALOE VERA cultivation

Year 1 2 3 4 5

Yield Nil Mid High High High

Input cost 100% 100% 100% 50% 33%

9. Farmers cultivating crops with long growing period and multiple harvests have problem

with the current compensation policy of the insurers. For example, as shown in Table 7 above, Aloe Vera has two years of growing period, when there is high input cost and no yield in the first year and very little yield in the second year. In the 3rd, 4th and 5th year, there is high yield but the input costs gradually decrease. For these farmers, the year-by-year input cost and yield are not proportionate. The insurance company normally compensates on the basis of monthly average input cost, which is not acceptable to the farmers.

10. Accurate assessment of input cost for different crops, and crop losses in different re-gions are not readily available. That is why many insurers are holding back from enter-ing the crop insurance market.29 Insurers would like the BS to open a dialogue with the MOAD so that the insurers may have access to such data at the district level.

11. The insurance companies in Nepal are in agricultural insurance business because of their CSR commitment and directive from the Government; they want to support the na-tional objectives. Others have entered this sector because they wish to diversify their business. However, without substantial support from BS, insurance companies in Nepal cannot scale agricultural insurance; also this would not be sustainable.

12. Some of the terms and coditions imposed by BS do not support the market and should be removed. Terms and conditions such as the insured perils, capping of the sum as-sured, capping of the commission payable put a lot of restrictions on the insurer.

13. New/alternative channels of distribution are required and the regulator should take the initiative to identify the alternative channels and facilitate their entry in micro-insurance as a stakeholder.

14. There is no reinsurance available for agricultural insurance; this stops the insurers from scaling up business. GoN should encourage the foreign reinsurers operating in the country to provide reinsurance facility to the agricultural insurance sector. Alternatively, GoN should consider setting up a reinsurance company in Nepal either on public-private partnership basis with the insurance companies or other stakeholders in Nepal or only by the private sector stakeholders.

15. Commercial insurance companies and partnering MFIs interested in venturing into the agricultural insurance market require technical assistance and support from the regula-tor for the design of client friendly insurance products and processes. Therefore, partner MFIs, commercial insurance companies and other institutions interested in venturing in-

29

Only 2 out of 16 non-life insures are currently offering crop insurance

32

to agricultural insurance would benefit from one or more of the following kinds of tech-nical assistance:

Conducting market research to understand needs and demand of the bottom-of-the-

pyramid segment;

Designing insurance products based on client needs and pricing the products using

actuarial methods;

Designing efficient delivery process adapted to needs of the clients, mainly process

mapping and tasks distribution;

Creating insurance awareness among the target clients;

Developing infrastructure for successful implementation, mainly a simple IT-based

information system to manage microinsurance products. Often, capacity building of

the distribution partners (such as MFIs and cooperatives) is also needed to make

improvements in areas such as information technology, human resource manage-

ment, etc. before they can successfully manage their distribution related responsibil-

ities.

CLID or DMID do not address any of the above issues brought up by the insurers.

5.3 Recommendations for regulatory improvements

Regulatory guidelines regarding the insurance industry, financial inclusion and microfinance and social security policies create an enabling environment for effective microinsurance de-velopment. Regulation has played an important role in the development of the micro-insurance sector in several countries in Asia. The insurance providers in those areas are of the opinion that regulation has favoured the development of microinsurance in the region. It must be noted that the mere existence of microinsurance regulation/directive is not enough for the development of a productive and effective microinsurance sector. It is also important

to note that microinsurance has developedin some countries without specific microinsur-

ance regulation.

India and the Philippines have had microinsurance-specific regulations/directives in place for several years. In Nepal, the initial microinsurance-specific directive has been approved only recently.

Livestock insurance is not new in Nepal and there has been formal and informal in-country experience since 1987. Formal crop insurance has been introduced only in 2013 with the introduction of CLID. Prior to that only a few NGOs/INGOs/MFIs, co-ops and seed compa-nies offered informal crop insurance in the country. 12 regulated insurers, DICGC and a large number of informal organisations are operating livestock insurance in the country now; only 2 regulated insurers and the informal organisation stated above offer crop insurance in the country now. One of the reasons for relative success of livestock insurance is that it is man-datory for all livestock loans – whether through formal or informal sources. Whereas most crop farmers obtain their seed, fertiliser, pesticides and other inputs on credit rather than take loan for the purchase of these. The suppliers of input do not ask for any form of insurance.

The insurers in Nepal are hesitant to enter the crop insurance sector and make any invest-ment; some added facility or incentives may be required to coax them. While considering incentives, BS should avoid concessions that could work to the detriment of the industry. Concessions in prudential requirements, such as reduced capital, tend to weaken an organi-zation, increase the regulatory burden and compromise the protection of the policyholders.

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Premium subsidy Subsidized insurance premiums can have many negative consequences. International expe-rience shows that subsidizing premiums throttles the development of microinsurance; the program suffers once the subsidy is stopped or withdrawn. Also the subsidy does not always reach the deserving households and the non-poor find a way to access it. Subsidy eliminates the attitude of risk-taking capacity of farmers; also, it negatively affects the financial sustain-ability of the private sector. Government of Nepal (GoN) has chosen to subsidize 75 percent of the agricultural insuance premium to encourage insurers to enter the market and to reduce the cost of insurance for the farmers. However, the subsidy has not created the desired ef-fect and the agricultural insurance market has not taken off as yet. Many livestock farmers do not find the cost of insurance as a ”value for money” proposition and buy insurance only be-cause it is mandatory with their livestock loan. Many crop farmers find the premium still too expensive in relation to the benefit. Also a majority of the rice farmers still cannot afford to buy insurance. In the context of Nepal, a majority of the rice farmers require premium subsidy but most of the livestock farmers do not need premium subsidy. GoN and BS may have to rethink about the subsidy scheme and base it on economic status of insured and geo-climatic region. Based on these criteria, the following three models could be considered:

(i) 100 percent Subsidies Model, (ii) Partial Subsidies Model and (iii) No subsidy model

The poor, ultra poor farmers and farmers with less than 0.1 hectare area of land could be considered for more subsidy in premium. Subsidy policy could also be made dependent on other factors like family cash flow, assets, the previous year's income, number of dependents in the family, location of the farm etc.

Micro insurance product

In the MID, BS has defined microinsurance, identified the products that fall under microinsur-ance and has developed several agricultural insurance products; the benefit packages, peri-od of insurance, sum assured, the premium, underwriting policies, and state claims proce-dures. This would strengthen the industry and would have long lasting effects. However, DMID is not sufficient to implement microinsurance on its own; BS needs to further develop microinsurance rules and regulations. MID needs to be improved further for the effective im-plementation of microinsurance.

Reinsurance

Currently there is no reinsurance facility for agricultural insurance in Nepal. International re-insurers that operate in the Nepalese market do not at present offer this facility. In the ab-sence of reinsurance coverage, Nepalese insurance companies find it too risky to underwrite crop risks and many of them are holding back. A covariant event resulting in claims by all the crop insurance policyholders in an area would be fatal for a crop insurer. A state owned Re-insurance Company could solve this problem. Alternatively a reinsurance company on a PPP basis, owned by the government and all stakeholders could be considered.

Other support to promote microinsurance development

International experience shows concessions such as reduced income tax, reduced policy stamp duty, waiver of VAT or Service Tax, lower license fees for microinsurance agents etc. encourages microinsurance development. Regulator support for awareness raising, insur-ance education, developing partnership between players in the value chain would strengthen the industry and encourage the stakeholders.

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Mechanism to implement Agriculture Insurance in Nepal

The farmers in Nepal have an urgent need for agriculture insurance services on a massive scale. Under CLID the non-life insurers are instructed by BS to sell four cateories of products (Table 9). Also MID lists seven types of microinsurance products (Table 8) that will be man-datory for all insurers when it comes into effect. The existing mechanisms are not enough for the insurance industry to enter the market easily. More innovative approaches are required. There are normally two approaches in practice in other developing countries while delivering the agricultural insurance services. These are:

i. Activity-Based Approach:

All commercial insurers are already selling different insurance products to the public. Under this approach they are allowed by the regulator to sell microinsurance as an ad-ditional insurance product under the same regulatory regime. This approach is prac-ticed in India. Insurance Regulatory and Development Authority of India (IRDA) has made it mandatory to all commercial insurers to sell a certain number of social policies to the rural sector. In case of failing to meet the target of the minimum policy, the insur-ers need to pay a penalty.

The Indian microinsurance regulation has clarified that microinsurance falls under the social insurance category. The insurance companies have found it convenient to fulfil the regulatory requirement by developing and offering innovative microinsurance prod-ucts to the rural sector. Such products include life insurance, micro pension schemes, savings through insurance, personal accident and dsiability insurance, livestock insur-ance, crop insurance, index-based weather insurance, healthcare insurance and meso like index-based flood insurance.

Nepal is already following the activity based approach and it has made it mandatory for all non-life insurance companies to offer crop and livestock insurance under CLID and, when the DMID become effective, it would be mandatory for all life insurance compa-nies to also offer life and term-life microinsurance products.

ii. Institutional Approach:

The approach allows a separate entity to be established to sell only the microinsurance products to the public. For example, in India, Agriculture Insurance Company Ltd. is an institution that has been established to sell only agricultural insurance products. India has adopted both approaches, keeping microinsurance a national priority.

Mutual Benefit Associations (MBAs) in the Philippines are another example of the insti-tutional approach. MBAs are insurance schemes established to run on a not-for-profit basis, and exist for the purpose of helping their members. MBAs have a lower capital requirement and are regulated by the Insurance Commission. Such schemes are often managed by co-operatives and NGOs. The sense of ownership is high, especially among co-operative members because they know where their money goes, why, and how it is managed. There is often high face-to-face contact among those in the risk pool. The nature of the relationship is personal particularly in the smaller and longer-running schemes. The Philippines has a separate microinsurance regulatory frame-work and its implementing rules and regulations are translated into circulars. Insurance Memorandum Circular IMC No. 1 2010 facilitates the micro insurance business by the MBAs.

Under the South Africa Microinsurance Regulatory Framework (MRF), July 2011, which is likely to become law in 2014, dedicated microinsurance companies, especially set up to serve the low income sector, would be able to operate with lower capital re-quirements. South African insurance regulation already allows funeral parlours and co-operatives to offer “funeral insurance“ to members.

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Nepal has also adopted the institutional approach - DICGC has been insuring livestock indirectly since 1987. The scheme is specifically designed to protect commercial bank lending to small farmers to purchase cattle, buffalo or small ruminants. It is implement-ed jointly with Nepal Rastra Bank Like India, Nepal has also adopted both approaches.

The activity-based approach seems to be more suitable for Nepal than the institutional ap-proach. In spite of over 25 years of operation, DICGC has not been able to make any appre-ciable difference to livestock insurance penetration in Nepal. DICGC lacks commercial moti-vation and does not promote the sale of livestock insurance to the farmers. It issues the guarantee only when approached by the lending banks. Establishing another organisation to only deal with agricultural insurance will be time consuming, without any corresponding benefit.

The commercial insurers on the other hand operate on a profit motive; scaling microinsur-ance would be in their business interest. They also have a regulatory compulsion on them to enter the agriculture microinsurance market. However, as mentioned earlier, the minimum policy to be sold in each year by the insurers and the consequence of not meeting the mini-mum policies have not been given in either of the documents. There is an urgent need for a guideline on this.

Measuring market performance

Measuring performance helps identify what works, what does not work and what should be improved to increase outreach and provide the best value possible to clients. However, the nature of performance varies from provider to provider: while regulated commercial insurers

are foremostin following financial performance indicators, other providers (NGOs, CBOs,

mutuals, etc.) tend to attach more importance to a client-focus approach using social perfor-mance indicators, client satisfaction surveys and impact studies. BS needs to construct Key Performance Indicators for agricultural insurance for the providers in Nepal and compile a database.

Policy makers and other donor agencies

During a meeting between the team and the Ministry of Agriculture (MOA), the ministry shared their views on the crop insurance in Nepal. In MOA’s view crop insurance started only a year ago and it is too early to assess its success or failure. MOA would like to wait three to five years to see its impact but in the meantime it would like to look at what other alternatives are available; MOA would invite recommendations from GiZ.

MOA is of the opinion that crop insurance has not been effectively communicated to the farmers; the farmers do not understand it and compare this to life insurance. The incentives offered on insurance are not attractive to the crop farmers. Also, crop insurance is not suita-ble for subsistence farmers as they do not have the ability to scale their operations.

MOA also informed that the World Bank and USAID have shown interest in weather-index based crop insurance in Nepal and that GiZ’s work must not overlap with the work of other agencies. There must be coordination in the efforts of all three agencies and a common na-tional policy should be developed jointly, and if required MOA would be happy to act as coor-dinator.

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6 FINANCIAL LITERACY AND CONSUMER PROTECTION

6.1 Current environment for promoting financial literacy and con-sumer protection

The insurance companies in Nepal are struggling to scale agricultural insurance because of a lack of awareness of the importance of insurance to mitigate daily risks. There are gaps in people’s knowledge of and perceptions about insurance and other financial products. They also cannot comprehend their exposure to some risks - particularly covarient risks, when there is a possibility of a total loss during a single event. Insurance education is very im-portant when dealing with the farmers with such poor perception about risks.

This survey showed that the farmers do not understand insurance and hold several miscon-ceptions about insurance. The group also had a mixed opinion about potential insurance users. Crop farmers, mostly with small landholding, seem to think insurance is for rich peo-ple, whereas fruit and livestock farmers, mostly with large landholdings, seem to think it is for poor people. The livestock farmers stated that they are currently managing their own risk at a much lower cost than the premium that is charged by the insurance company. They are of the opinion that they run the risk of losing only one or two heads of animal in a year. They cannot comprehend the idea that their whole herd can die in the event of major landslide or flood or earthquake.

Some participants were automatically insured against the death of an animal by the lending bank when they bought an animal with a bank loan. These farmers did not like the mandatory insurance; there was no option for them. Given the option, they would not have insured their animals. Yet there are examples of farmers, as stated in subchapter 2.2, who first resented being sold mandatory livestock insurance but appreciated the benefits of insurance when their animals died subsequently and they received compensation.

None of the crop farmers had any insurance as they did not find the “in-put cost” a good val-ue proposition. In their opinion such insurance did not offer adequate compensation; their preference is for insurance of “yield value“.

Other participants mentioned that they have heard of insurance but did not know about it in detail. They have now expressed their desire that they would opt for insurance for rice, maize and potato if the procedure is simple and if they found it beneficial. But fruit farmers did not want to opt for insurance as their fruit trees are declining. They prefer to move into livestock raising. For livestock, they would not opt for insurance as they feel they can manage these risks by themselves. Some maize and potato growing participants were undecided as to whether they would insure the crops or not. They would want to know further details about insurance before making such a decision.

Education about agricultural insurance is important to raise awareness and create demand. Government, insurance associations, donors, and development agencies are expected to have significant roles in providing education on agriculture insurance and management of risks. Increasing the financial literacy of informal sector workers can change their perceptions about the complexity of insurance products. To overcome these obstacles, coordination be-tween the insurance industry, central government, local government, industry associations and social organizations is required.

There have been a few agricultural insurance pilot projects in Nepal. Although these pilot projects have failed for various reasons, the projects have helped building awaress about insurance amongst the beneficiaries, their family members and neighbours.

For agricultural insurance to work, there needs to be a significant investment in education at many levels. Policymakers and supervisors also have to understand the risks and potential of

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agricultural insurance, and therefore know-how transfer and dialogue are primary concerns. Donors and other promoters have to learn and have to be prepared to finance and technical-ly assist supervisors as well as agricultural insurance providers. Finally, the customers who demand agricultural insurance services are not well educated; governments, donors and the insurance industry have to assume a role in this area. These challenges have to be dealt with alongside the regulatory and supervision aspects.

The knowledge of insurance in the community varies quite widely, but is generally poor. Many people the team interviewed had heard of insurance but the majority of them could not explain how it works. A minority of respondents were policyholders who participated in insur-ance for education or retirement, or who purchased life and/or accident insurance. Some owned motorcycles and were covered by mandatory insurance that is purchased annually when the vehicle registration is renewed.

The insurance decision can thus be analysed in terms of the various factors that determine perceived cost and perceived value. Perceived cost is determined not only by the level of the premium, but also by what the person needs to sacrifice to buy insurance. This opportunity cost is much higher for a low-income consumer. Poor people do not like to part with cash. Perceived value, in turn, is impacted by:

The fact that low-income people place a disproportionally high value on current con-sumption, given their budget constraints, rather than future benefits; they have a high discount rate.

The level of trust in the institution to successfully deliver on claims.

The probability of the risk event occurring - with high frequency and/or probability risks such as health and life likely to receive priority in the minds of consumers.

The farmers in Kaski district prefer to save or invest their money in such a way that they can be certain that they are able to access it whenever they want. They did not accept the idea of paying into a policy and not necessarily receiving anything in return.

The perception among the majority of farmers surveyed is that they cannot afford insurance. This, however, was combined with a low level of knowledge about insurance and its costs. Respondents were open to the idea of insurance, however, and said that the insurance com-panies needed to market in their areas and provide more information about the products.

Raising awareness has two aspects: (a) a general knowledge of insurance and (b) specific familiarity with an insurance provider. Insurance awareness campaigns benefit all insurance providers; therefore individual insurers are in general reluctant to undertake such an initia-tive. An initiative must be taken by the regulators to involve the insurance industry as a whole to undertake customer education and awareness building. It is best done through an insur-ance association or the insurance training academy or similar apex bodies such as the Rural Microfinance Development Centre, Centre for Microfinance – Nepal, Sana Kisan Bikas Bank. Regulators can impose this responsibility through specific regulations or through emphasis-ing the need for it.

6.2 Recommendations to improve financial literacy and consumer protection

Many of the awareness-raising programmes that were successfully launched in other devel-oping countries can be replicated in Nepal to overcome the gap that exists in the country. Several examples are given below.

VimoSEWA, a women’s cooperative in Gujrat, India, has successfully raised awareness of rural low-income sector about its integrated life, health and property microinsurance product. Here VimoSEWA is an intermediary; it has negotiated life insurance and non-life insurance

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products from two or more insurers, bundled the products and delivered to it members as one product. VimoSEWA was able to almost double its membership and the number of poli-cyholders through their comprehensive awareness-raising programme.

Text box 2: Example of awareness-building programme by the intermediary

To assist in promotions, VimoSEWA in India uses “TORANS” (banners to hang in door-ways), street plays, short videos on the use of insurance, piggy banks, auto rickshaws with loudspeakers, district meetings, and the presence of senior staff during enrolment cam-paigns. Marketing expenses are around US$0.30 per insured. Sales activities are under-taken by “community leaders”—women selected from the local community to promote the insurance package.

Source: Access to Insurance Initiative – Toolkit IV (2013), South Africa

Nepal insurance industry can also take the lead in the microinsurance awareness and con-sumer education process through a strong industry association. Examples of Insurance As-sociation initiative in the awareness raising can be seen in South Africa.

Text box 3: Industry-Association driven consumer education programme

South African Insurance Association (SAIA) is a professional industry organization repre-senting short-term insurers. It offers various financial education interventions intended to increase consumer knowledge about insurance, as well as their rights and responsibilities when buying products from accredited financial services providers. Since 2005, SAIA has invested heavily in consumer education activities including radio campaigns and work-shops, drawing on compulsory contributions from industry members under the South Afri-can Financial Sector Charter. Channel-related lessons learned include that outsourcing to professional service providers is the most viable and efficient method for the successful implementation of financial education programs.


Donors also take the lead in awareness raising. In the Philippines GIZ, with financial support from ADB and Japan Fund for Poverty Reduction, carried out a four-day “Financial Literacy for Microinsurance” program in 16 regions across the country. The first 3 days were on train-ing and microinsurance advocacy and the last day was for a seminar open to the public. The Roadshow secured the interest of the public, commitment of various stakeholders in the mi-croinsurance value chain and created a critical mass of microinsurance advocates. Text box 4: Microinsurance education through Public Private Partnership (PPP)

GIZ, with support from the Asian Development Bank-Japan Fund for Poverty Reduction, partnered with the government of the Philippines to initiate a Roadshow for Financial Liter-acy for Microinsurance. Insurance associations and providers also joined in this collabora-tion. Importantly, the roadshow not only focused on consumers, but also on educating leg-islators, supervisors, national agencies, local government units, insurance providers, in-termediaries, support institutions, donors and other development partners on the key ad-vocacy messages for microinsurance.


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In many countries the insurance regulator has taken the initiative to launch awareness rais-ing programme for the benefit of the industry as a whole. In the example below the Insurance Supervisor of Swaziland took the lead.

Text box 5: Example of initiative taken by the Insurance Supervisor

One method of consumer education is to organize a dedicated day(s) where the insurance supervisor and insurers interact with the public and promote the concept of insurance. In Swaziland, for example, the Insurance Supervisor organizes an annual insurance open day or “trade fair” where they hire a popular musician to give a concert in a big stadium with free entry for the public. Insurers then have stalls where they display banners and distribute brochures and interact with those attending.


The primary function of insurance regulators and supervisors is to protect consumers. This can be achieved in three ways:

Protecting policyholders in general by ensuring the solvency of the insurers, which includes determining that insurance products may only be offered by licensed entities (both insurers and intermediaries) that remain financially sound and meet their obliga-tions.

Protecting individual policyholders, including prospective policyholders, from mis-selling and improper handling of claims, and ensuring that their grievances are re-dressed in a timely manner.

Developing insurance markets by improving market efficiency and including persons who currently have no access to or are unable to afford insurance through appropriate product design and delivery mechanisms.

Consumer protection can be achieved by defining insurance or by standardising insurance products with simple terms and conditions so that the policyholder can understand the prod-uct. Some countries are developing a standard for low cost insurance, often referred to as CAT standards (fair Charges, easy Access and decent Terms) with which insurance prod-ucts can be branded and easy recognition by clients. Many regulators, like the Phillipines, make it mandatory to identify microinsurance products with a distinctive logo. Defining insur-ance by quantifying the sum assured, or by setting an upper and lower ceiling of premiums, and identifying the target group help both the regulators and the insurers; it protects low-income policyholders and facilitates promotion of insurance.

The low-income market is vulnerable to abuse by agents or insurance sales persons; they may provide misinformation or mislead low-income clients while engaging in aggressive sales practices. Regulators need to impose suitable regulations or safeguards to protect the policyholders from such malpractices. Efficient and effective procedures and processes should be in place for lodging complaints and the resolution of disputes between insur-ers/insurance intermediaries and their customers, keeping in mind that low-income house-holds are likely to require alternative channels for communication and redress of complaints compared with mainstream insurance customers.

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7 CONCLUSION

With a huge percentage of the population in Nepal living under conditions of abject poverty and social deprivation, poverty alleviation is the biggest long-term development challenge for the government. Nepalese agriculture primarily consists of small family farms, which are mainly subsistence oriented and not adequate to meet the farmers’ household expenditure fully. Food grains dominate the agricultural products with paddy being the primary crop all over the country. A small segment of Nepalese agriculture has been commercialized and diversified.

Agriculture insurance enables farmers to remain creditworthy even in years of major crop or livestock loss. Traditional indemnity-based or indexed crop and livestock insurance can play an important role in protecting farmers’ consumption and productive assets in years of major production losses, thereby enabling them to avoid falling into the poverty trap. More im-portantly, it may enable them to pursue riskier, but potentially much more profitable farming activities which usually centre on the use of credit to purchase new production enhancing technology.

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Agricultural insurance is a complex line of business that requires highly technical expertise, both in development and operational phases. Private insurance providers in Nepal have proved to be efficient, without public intervention, for dealing with non-systemic risk, but may not be viable for systemic risks for smaller farmers. The primary role of GoN should be to address market and regulatory imperfections in order to encourage participation by the pri-vate insurance and reinsurance industry.31

Agriculture insurance is a social business rather than commercial business so that the re-sponsibility goes to government and BS to establish a new mechanism to deliver the insur-ance services to more than 3.7 million household whose livelihood depends on agriculture. The appropriate model is an activity-based model rather than an institutional approach since the commercial insurers are still not capable to bear the extra burden of social responsibility. They are, however, long-term strategic partners to implement the scheme. Insurance provid-ers in Nepal did not seem eager to enter the agricultural insurance sector and seem to be pessimistic for the future. The market conditions do not seem to have reached complete ma-turity yet.

The farmers that participated in the FGD, operating all sizes of farms, retain the risk of crop and livestock losses. Their risk management mainly consists of diversifying their income sources by switching to different crop and breeding cattle. They have hardly any risk-transfer tools, which in turn limits the availability and range of agricultural production credit offered by banks. Therefore, the development of a sustainable alternative to the current input-cost based crop insurance in Nepal will be a key topic in future agricultural development strate-gies as well as in climate change mitigation strategies.

In the discussion on agricultural insurance in Nepal, it is misleading to look for the solution at product level first and foremost. The problem of lacking appropriate risk management tools in agriculture, exacerbated by external institutional and information information dissemination challenges, cannot be solved with an insurance product alone – neither an index-based in-surance product nor an indemnity-based insurance product on its own. The weather does not uniformly affect the entire area; the crop varies with elevation, topography, location and even ethinicity. The problems and the difficulties faced by the FGD participants and the insurers have been discussed fully in subchapters 5.1 and 5.2 of the report. These explain partly why the proposals of index insurance over the last few years (the World Bank 2009; IFAD 2013;

30 IFAD and WFP; Agriculture Census. Asia and Pacific Commission on Agricultural Statistics Nepal, 2010 31 Mahul, O. and Stutley; Government Support to Agricultural Insurance: Challenges and Options for Develop-

ing Countries. The World Bank. Washington, DC; 2010

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Planet Finance 2013) have not resolved the problem of a lack of risk management tools in Nepal.

There are several major gaps and challenges in the microinsurance sector in Nepal. Besides the lack of appropriate insurance products, there is also a lack of insurance education and awareness on the demand side and restriction on use of non-conventional distribution chan-nels on the regulatory side to name a few. Opportunities for using distribution channels such as post offices, retail stores, chain stores, supermarkets, pawnshops, telecos, fertiliser sup-pliers, seed suppliers, pesticide suppliers, vet suppliers, farming equipment suppliers, medi-cal outlets such as clinics, pharmacies exist and could be considered by BS.

The regulated insurers in Nepal do not offer any microinsurance products except for credit-life insurance. Even then, this business is mostly initiated by lending institutions. The insurers are not keen to offer microinsurance in the absence of microinsurance regulation. The objec-tives of microinsurance regulation are to provide an environment that facilitates the participa-tion of the private sector in providing risk protection for the poor and ensures that the rights and privileges of the insured poor are protected and promptly acted upon. Microinsurance regulation also gives insurance providers the flexibility to put in place the necessary safe-guards against moral hazards.

At present, there is no separate microinsurance regulation in Nepal; insurance companies providing microinsurance are regulated under existing insurance laws applicable to conven-tional insurers. SB is fully convinced that a robust legal and regulatory microinsurance re-gime would encourage development of inclusive insurance for the poor. Thus, SB is interest-ed in and sensitive to the potential of microinsurance and its challenges and barriers.

MID will to some extent fill this gap. MID defines microinsurance, life microinsurance and non-life microinsurance; it makes microinsurance mandatory for every regulated insurance company in Nepal. It identifies microinsurance products, caps the sum assured and the pre-mium, states commisssion payable, claim settlement procedure and reporting requirements for the insurers. It also describes microinsurance agents’ qualifications, training and remu-neration. One of the commendable features of DMID is that it defines ‘microinsurance agent’ and under that allows NGOs, INGOs, self-help groups and MFIs to act as microinsurance agent. BS expects MID to boost the development of microinsurance in Nepal.

However, MID is not sufficient to implement microinsurance on its own; BS needs to develop microinsurance rules and regulations. MID needs to be improved further for the effective im-plementation of microinsurance. In its present form there is no obligation on commercial in-surers to sell any minimum number of policies per year to the low-income sector; this should be addressed. BS was set up to supervise commercial insurance industry; there is lack of microinsurance expertise at BS and it requires extensive capacity building.

Another reason for limited success for microinsurance in Nepal is the lack of awareness of the importance of insurance to mitigate daily risks. Gaps remain in people’s knowledge of and perceptions about insurance and other financial products. For microinsurance to work, there needs to be a significant investment in insurance education at many levels. Policymak-ers and supervisors also have to understand the risks and potential of microinsurance, and therefore know-how transfer and dialogue are primary concerns. Donors and other promoters have to learn and have to be prepared to finance and technically assist supervisors as well as microinsurance providers. Finally, the customers who demand microinsurance services are not well educated; governments, donors and the insurance industry have to assume a role in this area. These challenges have to be dealt with alongside the regulatory and super-vision aspects.

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APPENDIX 1: QUESTIONNAIRE FOR DEMAND-SIDE FGDS

Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia)

LOCATION: DATE:

QUALITATIVE SURVEY TOOL FOR AGRICULTURAL INSURANCE – DISCUSSION GUIDELINE TARGET: FARMERS IN TARGET AREA METHODOLOGY: FOCUS GROUPS

(TIME GIVEN BELOW IS ONLY FOR GUIDANCE; PLEASE ASSESS YOUR OWN TIME)

Number of partici-pants per discus-sion group:

Minimum = 6

Maximum = 12

Equipment required:

Voice Recorder with 6 hours recording capacity

Note:

Since the team would be working in rural areas, it is not advisable to use bulky equipment such as flip-charts, projectors etc.

1. INTRODUCTION (10 MINUTES) - See attached Guidance for Interviewer

DETAILS OF FGD PARTICIPANTS

NAME GENDER

M/F

AGE S/MR/D/W ADDRESS MOBILE

NO

1

2

3

4

5

6

7

8

9

10

11

12

M = MALE; F = FEMALE; S = SINGLE; MR = MARRIED; D = DIVORCED; W = WINDOWED

Introduce the dis-cussion

Reveal and under-stand the respond-ent’s perception on their day-to-day life

2. WARM UP (10 MIN) - See attached Guidance for Interviewer

3. LIVELIHOOD (20 MINUTES) As I would like to know what you do and what is your main source of farming income income/livelihood. If you have more than one source of farming income, please mention your main source.

3.1 CROP FARMER

Farm owner: (Put down the number of respondents)

How much land do you own? (Instead of putting individual holding, down an average figure for all)

3.2 TENANT/SHARED CROPPER: (Put down the number of respondents)

% of sharing: (Instead of putting individual sharing % for each, down an aver-age figure for all)

3.3 What crops do you grow? (Put down number of respondents)

Rice

Vegetables

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Fruits

Any other 3.4 FISHERIES (Put down the number of respondents) 3.5 POULTRY (Put down number of respondents and the average number of poultry) 3.6 DAIRY (Put down number of respondents and the average number of animals) 3.7 LIVESTOCK – SMALL RUMINANTS (Put down number of respondents and the aver-

age number of animals) 3.8 OTHERS

Understand the unexpected shock/ risk affecting them.

Identify the shock management pro-cedure

4. ASSESSMENT OF CRISIS SITUATIONS AND NEEDS (20 MINUTES)

4.1 Risk list

Thinking about your household/children, your crop and your livestock, which would be the moments when you would need a large amount of money for their needs?

Check for long-term perspective as well.

Can you think back, were there any moments in your life when something unexpected happened and you needed a large amount of money for it?

What happened?

Please give me examples from your own experience or experience of your close relation or acquaintance when some unexpected problems, natural disaster such as flood, heavy rain, drought/crop failure/death of live-stock/poultry etc. came up and you needed a large amount of money to solve the problem? Write down all risks mentioned by the respondents.

4.2 Ranking of risks impact on family life

I wrote down each risk mentioned by you in this discussion. I would now like you to indicate against each risk the following:

o Frequency with which these events occurred? o How much money did you need? o Where did you get the money? o How difficult was it for you to get the money? o How important was it for you to have/to get the money in that

particular moment? o Were there any occasions when you could not get the mon-

ey or could not get the full amount you needed? For each of the categories done ask them to clarify if they have ranked two or more risks as being equally important

Did these situations have any effect on you/your family members in any way? In what way? Explain.

4.3 Risk management strategies

How can one get the money in case of emergencies?

What can be done to get the necessary money?

What did you do? Where did you go? Who did you go to?

Did you get the money straight away or with difficulties?

With this experience do you have any plan how you would cope with such emergencies in the future?

Insurance and saving discussion:

- Awareness - Attitudes towa-

rds each of them

- Reveal poten-tial barriers

5. INSURANCE (30 MINUTES)

Considering all you have said so far, do you think you could an-ticipate some these problems and be prepared for them, in terms of money?

What ways? If not mentioned spontaneously, prompt on: insur-ance by saying…. Many people talk about insurance.

Do you think that this could be an alternative for you in order to have money when something unpredicted happens?

5.1 Awareness about insurance

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Are you aware of any insurance products?

How did you hear about this product? Where from?

Are there different types of insurances?

What do you/they know about insurance? 5.2 Benefits and drawbacks

From what you know or heard about insurance, do you think it has any advantages?

What are they?

Why do you think these are advantages?

What about drawbacks, do you think insurance has any?

What are they? Why do you say that? 5.3 Stereotype policyholder

In your point of view, who should be insured?

What kind of person: gender, age, marital status, lifestyle, finan-cial situation etc.?

Why this person? Explain. 5.4 Awareness about Insurance providers

Are you aware of any organizations offering insurance?

What do you know about these organizations?

How do you know about them? Check perception on insurance company versus NGOs/MFIs/CU/Co-Ops/FBOs/Village Groups etc.; local versus international insurers; Understand the level of trust in the insur-ance providers

Would you consider insuring with any one of these? Which one? Why?

Would you refuse to insure with any one of these? Which one? Why?

5.5 Usage

Do/did you have any insurance or know any one who has/had in-surance?

If answer is yes:

What made you/them to buy insurance? Explain.

What type of insurance did/do you/they have?

Have you/they ever received any benefits? Explain. Past users

Why didn’t you/they continue with the policy? Explain. Current users

When it will come to an end, will you/they renew it? Why? 5.6 Trial potential

Non-users

In which circumstances would you see yourself taking out insur-ance?

Past/current users

In which circumstances would you see yourself taking out insur-ance again?

Non-users/ Past/Current users

If the insurance was to be adapted to your particular needs and preferences, how should it be?

Returning to the risk discussion, which of the risks revealed in this discussion would you like to insure? Why?

5.7 Premium payment

Non-users:

If you were to take insurance, how would you like to pay the premium? Weekly? Monthly, Quarterly? Half-yearly? Yearly?

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Seasonally (linked to crops/selling of livestock).

How would you like to pay the premiums? At the office? To the agent?

Would you like to pay by cash/through? Past/current users

How are you paying/paid your premiums? Weekly? Monthly, Quarterly? Half-yearly? Yearly? Seasonally (linked to crops/selling of livestock)

Would you like to see any change in the payment method or fre-quency?

How did you pay the premiums? At the office? To the agent?

Did you pay cash/through bank 6. BANKING, SAVINGS AND BORROWINGS DISCUSSION (30 Minutes) 6.1 Banking/NGO/MFIs/Other Organizations

Are you aware of any place where money could be kept safely? What is your opinion about these? Check for perception on bank-ing market.

Can you name any bank in your area/town/village near you?

Do you trust banks? Why?

Would you put your money in banks?

Which one? Why?

Can you name any NGO/MFIs/CU/Co-Ops/Village Groups in your area/town/village near you?

Do you trust NGOs/MFIs/CU/Co-Ops/Village Groups?

If the answer is no - how can they generate your trust?

Would you put your money in NGO/MFIs/CU/Co-Ops/Village Groups?

If answer is no, why?

Do you have a Post Office Savings Bank in your vil-lage/town/town near you?

Do you trust a Post Office Savings Bank? How can they gener-ate your trust it? Why do you say so?

Would you put your money in a Post Office Savings Bank?

If the answer is no, why? 6.2 Proximity

Does distance to the place where you keep your money play any role in your decision to keep money with them?

If the answer is yes, how far are you prepared to travel to a place to deposit your money?

6.3 Extra cash - Insurance

Do you have any extra cash at any time?

What do you do with the extra cash?

What are your priorities at this moment? Probe for saving habits and priorities.

Would you be interested in buying insurance with the extra cash? Explain. Probe for interest in insurance

6.4 Loan

Do you have any loan?

Who from? o MFI Amount Interest rate o Bank Amount Interest rate o Cooperative Amount Interest rate o Informal Amount Interest rate o Your own group Amount Interest rate

Any assets mortgaged or pawned?

46

7. INCOME AND EXPENDITURE PATTERN (20 MINUTES) 7.1 Level of earnings

What would you say is the general level of earnings per day from agricul-ture and non-agriculture sector in this area?

7.2 Main breadwinner

In your household who is the main breadwinner?

Is there more than one breadwinner in your household?

Do you pool all your earnings together from all family members and spend out of it?

7.3 Source of income (Total household income per annum)

Crop Amount

Dairy Amount

Livestock Amount

Fisheries Amount

Employment Amount

Remittance Amount

Others Amount

7.4 Expenditure pattern

How much do you normally spend each month?

What is your most important expenditure?

What is the next important expenditure?

Concept evaluation in terms of: - spontaneous reac-tions - understanding - relevancy

8. CONCEPT EVALUATION (20 MINUTES PER CONCEPT PRODUCT)

PLEASE READ THE CONCEPT PRODUCT IN PARAGRAPH 9.1 BELOW. You should mention what risk it covers, sum insured, the period of coverage, and the premium.

EVALUATE:

8.1 SPONTANEOUS REACTIONS

WHAT WERE THE FIRST WORDS/ IDEAS/ THOUGHTS THAT CAME INTO YOUR MIND

WHEN YOU HEARD THE PRESENTATION?

IS THERE ANYTHING THAT CAUGHT YOUR ATTENTION? WHAT? WHY? IS THERE

ANYTHING YOU PARTICULARLY LIKED/ DISLIKED FROM THE PRESENTATION?

8.2 UNDERSTANDING

WHAT IS THIS PRODUCT ABOUT? WHAT DOES IT PROVIDE TO ITS USERS?

IS THERE ANYTHING UNCLEAR? WHAT?

8.3 BENEFITS PERCEIVED AND RELEVANCY

WHY DO YOU THINK SUCH A PRODUCT WAS DESIGNED? EXPLAIN.

WHAT WOULD BE THE BENEFITS OF THIS INSURANCE PRODUCT?

ARE THESE BENEFITS RELEVANT TO YOU? WHICH? WHY IS THAT?

DOES THIS INSURANCE HAVE ANY DISADVANTAGES? WHICH WOULD THEY BE?

WHY DO YOU CONSIDER THESE AS DISADVANTAGES? EXPLAIN.

8.4 DISTINCTIVENESS

IS THIS INSURANCE CONCEPT DIFFERENT FROM WHAT YOU KNOW/ HAVE HEARD/ USE OR FROM PREVIOUSLY MENTIONED COPING STRATEGIES?

- IF YES: IN WHAT WAY DO YOU FIND IT DIFFERENT? EXPLAIN. - ARE THERE ANY ADVANTAGES/ DISADVANTAGES? WHICH WOULD

THEY BE? WHY DO YOU SAY SO? - IF NOT: WHAT ARE THE COMMON CHARACTERISTICS IT SHARES

WITH THE OTHERS? EXPLAIN.

8.5 TARGET STEREOTYPE AND TRIAL POTENTIAL

IN YOUR OPINION, WHAT KIND OF PERSON WOULD BUY THIS PRODUCT? GENDER, AGE, MARITAL STATUS, LIFESTYLE, FINANCIAL SITUATION ETC? WHY THESE

PERSONS? WHAT MOTIVATES THESE PERSONS TO BUY IT?

WHO WOULD NOT BE TEMPTED TO BUY IT? WHY DO YOU SAY SO?

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- distinctiveness - stereotype user - trial potential - improvement areas

WHAT ABOUT YOU? WOULD YOU BE TEMPTED TO GET INSURED? WHY DO YOU

SAY SO? EXPLAIN. 8.6 IMPROVEMENT AREAS

IS THERE ANYTHING YOU WOULD CHANGE/ADD/ IMPROVE ABOUT THIS

INSURANCE PRODUCT? WHAT? WHY?

YOU NEED TO WRITE A SEPARATE REPORT FOR EACH FG DISCUSSION, IDENTIFYING THE DATE, LOCATION, TIME AND NAME OF THE PARTICIPANTS

9.1 PRODUCT CONCEPT: INDEX BASED WEATHER INSURANCE INTERVIEWER: Please read the concepts products one at a time. After each concept ask the ques-tions and complete the questionnaire below before moving on to the next concept.

INT. READ:I would like to talk to you about Indexed Weather Insurance. Buying this insurance is one way to protect yourself and your

family against financial shocks related to loss of crop or crop failure. I would first read the concept of Index Based Weather Insurance and then ask your some questions about it. READ OUT THE CONCEPT LOUDLY TO THE RESPONDENT.

A2. Would you like to buy Index-based Weather Insurance?

Yes No Hard to say

(do not read) 1 2 99

A2. Which crop would you like to insure:

Yes No Hard to say

(do not read) A. Rice 1 2 99 B. Maize 1 2 99 C. Potatoes D. Vegetables E. Fruits

1 1 1

2 2 2

99 99 99

A3. Which risk would you like to insure:

Yes No Hard to say

(do not read) A. Lack of timely adequate rain 1 2 99 B. Excess rain 1 2 99 C. Storm C. Hailstorm

1 1

2 2

99 99

A4. ASK ONLY THOSE NOT WILLING TO BUY

Why are you not willing to buy?

INT.: READ ANSWERS ONE AT A TIME; THEY MIGHT NEED

PROBING. THERE MAY BE MULTIPLE ANSWERS.

1. I do not need any insurance 2. I had bad experience with insurance 3. I do not trust insurers 4. I am not satisfied with the benefit (amount) 5. I find the premium too high OTHER: …………………....

99. hard to say (do not read)

A4. ASK ONLY THOSE WHO MENTION PRICE AS A REASON

If you think the price is too high, if the premium is lowered would you buy the product?

0 – it will not change my decision

1 –I might reconsider my decision

2 – I would be willing to buy it

99 – hard to say (do not read)

A5.ASK ONLY THOSE FOUND THE PRICE TOO HIGH

How much would you be prepared to pay for this insurance?

The price is [_____________] per month

One form is to be used for each FGD. There is no scope for recording individual answers. Please put down the answer of the majority in the group.

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Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia)

This forms part of the Qualitative Survey Questionnaire)

PRODUCT CONCEPT TEST

Index Based Rainfall Insurance

Index-based Weather Insurance covers anticipated shortfall in crop yield or crop failure on account of adverse

rainfall. Farmers can cover themselves against losses due to lack of timely rainfall or excess of rainfall, storm and hailstorms by taking insurance under this scheme. It is voluntary insurance for all classes of farmers.

Coverage Options: Lack of timely rainfall; Excess Rainfall; Storms; Hailstorms.

Crops covered: Rice, Maize, Vegetables and Fruits.

Period of insurance

According to crop season.

Insurance Buying Period

Prior to crop sowing season or replanting season or flowering season (in case of fruits) – depending on the crop.

Insurance cover period

Insurance cover period is from the date insurance bought until the harvest of the crop insured, but not including harvesting cost.

How Claims become Payable

The claims become payable if the risk covered takes place.

Sum insured

Sum insured is the pre-specified in-put cost; maximum sum insurable NPR 50,000 depending on the crop.

Premium

The premium is 5% of the sum insured.

Time Schedule and Procedure of Claims Payment

The procedure for working out Claims is automated, and there shall be no necessity for submission of loss infor-mation or ‘Claims Intimation’ by insured farmer. Normally Claims are paid on the basis of Actual rainfall Data within 45 days from the end of Indemnity Period.

Restrictions

You have to be a member of a MFI, NGO, CU/CBO, Cooperative Association or a Village group.

Frequency of premium payment:

Premium is payable annually but the insurance company will allow you to pay by 12 equal monthly installments. The insurance company will charge you 5% extra for this facility.

Proximity:

The policy would be available through the Insurance Company, MFI, NGO, CU, Cooperative Association or a Religious group that you belong to.

Provider:

The insurance will be provided by a well-known insurance company in Nepal.

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APPENDIX 2: LIST OF ORGANISATIONS VISITED

1 SUPPLY SIDE

1. Shikhar Insurance Co. Ltd 2. NLG Insurance Company Limited 3. NEPAL INSURANCE CO. LTD

2 DISTRIBUTION SIDE

1. AGRICULTURAL DEVELOPMENT ORGANISATION Centre For Environmental And Agricultural Policy Research, Extension and Development

2. DEVELOPMENT BANK Sana Kisan Bikas Bank Ltd

3. NON-BANKING FINANCIAL INSTITUTION Nirdhan Utthan Bank Limited

4. FERTILISER SUPPLIER Agriculture Inputs Corporation Limited

5. VETERENIRARY MEDICINE SUPPLIER Sungava Vet Pharma & Lotus Vet International Trade Link (P) Ltd

3 REGULATORS AND POLICY-MAKERS

1. Beema Samiti 2. Nepal Rastra Bank 3. Ministry of Finance 4. Ministry of Agriculture 5. Deposit & Credit Guarantee Corporation 6. Department of Agriculture Development 7. Agriculture Market Research And Statistical Programme Office 8. Kaski District Agriculture Development Office 9. Directorate of Hydrology And Meteorology 10. Weather Station – Pokhara Airport

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APPENDIX 3: CATTLE, BIRD AND CROP INSURANCE

Insurance Subject Matter of Insurance Maximum Age limit Insured Perils Exclusions Maximum Premium Remarks

Type Sum Insured Claim payable Rate

Cattle Cow Calf [Female] up to 1 year 30,000 All Risks covered except those mentioned in Policy Exclusions.

Missing, Theft, Death 90% Maximum cost of installation Calf [Female] above 1 year 75,000 Death not reported within 3 days PTD 50% 5 % Of Identification Tag is Rs. 75. Milch Cow 150,000 2 – 10 years Non -payment of premium or PTD Permanent

Buffalo Cal [Female] up to 1½ year 30,000 Not renewed within 7 days of expiry. Total Disablement. Documents required Calf [Female] above 1½ year 60,000 Identification Tag not found in Proposal Form by Insured Milch Buffalo 125,000 3 - 12years The body of dead animal, Health Declaration Form to Yak Calf [Female] 12,000 Not informed immediately on Be filled and signed by Heifer 25,000 Missing of Identification Tag. Proposer and Concerned Milch Yak 50,000 Accident beyond 5 km of the Stable. Veterinary Doctor. Adult Yak 80,000 Insured cattle being used for

Sheet for Meat production 8,000 3 months other purpose.

Goat for Breading Purpose 10,000 till ready for sale.

Pig

Stud Bull / Stud Buffalo 70,000 3 - 7years

Castrated Bull / Castrated Buffalo 40,000 3 -12 years

Birds Broiler for meat production, 400 Depending on Fire, Lightning, Earthquake, Death caused by carelessness, Up to 90% Documents required Layers for Egg production, 700 health condition Flood, Inundation, Entertainment or malicious acts, Commercial Hatchery for chicken production, 1,200 and Landslide, Subsidence, Death caused by highly 6 % Proposal Form Insured Duck for Egg production, 700 productivity. Storm, Hailstorm, communicable disease "Bird flu"

Duck for meat production, 600 Snowfall, Frost, in case of destruction by the order Domestic Sum Insured fixation form External Accidental reasons, of government, 5 % Insured, concerned caused by illness/disease, Missing, Theft, Group or cooperative and Caused by accident as below: Technical person. Beyond 50 m for commercial and Beyond 1 km for domestic purpose. Health declaration form Death up to 5% insured birds for commer-

cial purpose and 1 bird for domestic pur-pose.

Insured and Technical person.

Change of ownership by sale,

War, act of foreign enemy, etc.

Nuclear arms, radiation, waste,

Radioactive reasons etc.

Wilful misconduct by the insured,

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Potato Potato Farming Cost of Fire, Lightning, Earthquake, Damage caused by carelessness, Minimum land required for Farming Input only Flood/Inundation, entertainment or malicious acts, up to 90% 5 % insurance for the Landslide, Subsidence, in case of destruction by the order Hilly area 2,738 sq. ft. entire Storm, Hailstorm, of government, Plain area 3,560 sq. ft. period. Snowfall, Frost, Theft,

External Accidental reasons, In case of sale of land, Documents required caused by illness/disease and War, act of foreign enemy, etc. Proposal form Insured insects, Nuclear arms, radiation, waste, and Certificate from Radioactive reasons etc. Technical Person on value Wilful misconduct by the insured, and crop.

Paddy Paddy Farming Cost of Fire, Lightning, Earthquake, Damage caused by carelessness, Minimum land required for Vegetable Vegetable Farming Input only Flood/Inundation, entertainment or malicious acts, up to 90% 5 % insurance Fruits Fruits Farming for the Landslide, Subsidence, In case of destruction by the order Hilly area 2,738 sq. ft. Farming entire Storm, Hailstorm, of government, Plain area 3,560 sq. ft. period. Snowfall, Frost, Theft,

External Accidental reasons, in case of sale of land, Documents required caused by illness/disease and War, act of foreign enemy, etc. Proposal form Insured insects, Nuclear arms, radiation, waste, and Certificate from radioactive reasons etc. Technical Person on value Wilful misconduct by the insured, and crop.

Fish Various types of Fishes Fire, Lightning, Earthquake, Damage caused by carelessness, Minimum land required for Farming vrs. vrs. Flood/Inundation, Entertainment or malicious acts, up to 90% 2 % insurance As per the Landslide, subsidence, in case of destruction by the order Hilly area 2,738 sq. ft. Directive Storm, Hailstorm, of government, Plain area 3,560 sq. ft. of Snowfall, Frost, Theft, Sale of land,

Beema caused by illness/disease In case of sale of insured fish, Documents required Samiti caused by lack of oxygen, War, act of foreign enemy, etc. Proposal form Insured caused by Ammonia, Nuclear arms, radiation, waste, and Certificate from death caused by poisonous Radioactive reasons etc. Technical Person on value materials. Wilful misconduct by the insured, and crop.

Note:

a) The above rates are tariff rates as per the Directive of Beema Samiti [Insurance Board]. As Nepal Govt. has given half subsidy in premium, the net rate to client will be half.

b) However, there will be additional cost of Rs. 5 for one insurance policy and VAT [Value Added Tax] as applicable.

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APPENDIX 4: PROPOSED DESIGN FOR PROTOTYPE PRODUCTS

SINGLE PERIL INDEMNITY-BASED CROP INSURANCE

POLICYHOLDER Policyholder must be between 18 – 65 years of age at the time of taking out the policy or renerwing it. He/she must be a farmer culti-vating the crop being insured as the owner, tenant or a sharecropper on the land.

CROP The crops insured are rice, maize and wheat. Only one crop named in the policy will be covered.

PERIL The perils covered are rainfall (includes both high and low), high wind and hailstorm. Only one peril name in the policy will be covered.

INSURED UNIT Half hectare of land or multiples of half hectare. Yield per half hec-tare would be determined from MOAD’s declared yield for that distrcit in the previous crop season and market value of the crop would be taken at the MOAD’s declared value for that district in the previous crop season.

COVERAGE Partial or total damage to the sowed plant or crop from the usual sowing date of the crop to the date of the harvest due to the single peril named in the policy.

PLAN Rice Maize Wheat

Insurance period June to October May to September December to April

Premium 5% 5% 5%

Insurance buying period

Upto 15 June Upto 15 May Upto 15 December

COMPENSATION 1. 90% of the damage as assessed by the insurer’s loss adjuster 2. Yield would be as per the MOAD’s declared crop yield for that dis-trict. 3. The market value of the crop would be as per the MOAD’s de-clared crop price for that district.

EXCLUSIONS Crop damage due any causes other than the peril named in the poli-cy document.

CONDITIONS 1. The farmer must notify of any damage within 24 hours to the com-pany’s Damage Reporting Office by telephone using the company’s hotline number given in the policy document. 3. The coverage is only for the period named in the policy and any damage suffered outside that period is not covered.

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MULTIPLE PERIL INDEMNITY-BASED CROP INSURANCE


CROP The crops insured are rice, maize and wheat. Only one crop named in the policy will be covered.

PERIL The perils covered are rainfall (includes both high and low), high wind and hailstorm. All three perils named will be covered.

INSURED UNIT Half hectare of land or multiples of half hectare. Yield per half hec-tare would be determined from MOAD’s declared yield for that distrcit in the previous harvest crop season and market value of the crop would be taken at the MOAD’s declared value for that district in the previous crop season.

COVERAGE Partial or total damage to the sowed plant or crop from the usual sowing date of the crop to the date of the harvest due to any one or more of the perils named in the policy.



Premium 10% 10% 10%



COMPENSATION 1. 90% of the damage as assessed by the insurer’s loss adjuster 2. Yield would be as per the MOAD’s declared crop yield for that dis-trict. 3. The market value of the crop would be as per the MOAD’s de-clared crop price for that district.

EXCLUSIONS Crop damage due any causes other than the perils named in the policy document.

CONDITIONS 1. The farmer must notify of any damage within 24 hours to the com-pany’s Damage Reporting Office by telephone using the company’s hotline number given in the policy document. 2. The coverage is only for the period named in the policy and any damage suffered outside that period is not covered.

54

AREA-YIELD INDEX BASED CROP INSURANCE


CROP The crops insured are rice, maize and wheat. A farmer can buy sep-arate insurance coverage for one or more crops and pay separate premium for each policy for each half hectare of his/her farm.

INDEX Average area yield for each half hectare for that crop for the Insured Unit (IU) as declared by the District Agriculture Development Office.

INSURED YIELD 90% of the historical average yield per half hectare or multiple of half hectare in the geographical region in which the farmer’s land is lo-cated.

COVERAGE The amount by which the actual average yield falls below the index.



Premium 5% 5% 5%



COMPENSATION 1. The amount by which the actual average yield falls short of the index. 2. The market value of the crop would be as per the MOAD’s de-clared crop price for that district.

EXCLUSIONS Any drop in yield at farm level if there has not been a drop iin the historical average yield for that Insured Unit will not be conpensated.

CONDITIONS The farmer must notify notify the insurer if there has been drop in the yield for his Insured Unit compared to the index.

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CROP RAINFALL-INDEXED INSURANCE


CROP The crop insured is rice. A farmer can buy separate insurance cover-age for one or more periods and pay separate premium for each pol-icy for each half hectare of his/her farm.

PERIL The peril insured is rainfall in excess or below the rainfall index.

RAINFALL INDEX Sowing 15 Jun to 15 Jul 60 mm to 70 mm

Flowering & Growth 16 Jul to 31 Aug

150 mm to 160 mm

Pod formation & maturity 1 Sep to 15 Oct

90 mm to 100 mm

INSURED YIELD 90% of the historical average yield per half hectare or multiple of half hectare in the region in which the farmer’s land is located.

COVERAGE Historical average yield for rice for each half hectare for the area in which the farmer’s land is located.

PLAN Sowing Flowering & Growth Pod formation & maturity

Insurance period 15 Jun to 15 Jul 16 Jul to 31 Aug 1 Sep to 15 Oct

Premium 2.5% 2.5% 2.5%


Upto 14 June Upto 15 Jul Upto 31 Aug

Trigger index Rainfall below 60 mm or higher than 70 mm

Rainfall below 150 mm or higher than 160 mm

Rainfall below 90 mm or higher than 100 mm

COMPENSATION 1. Compensation will be paid in case the rainfall is above or below the trigger index for the given stage. 2. In case of total loss, 90% of the historical average yield for the area in which the farmer’s land is located. 3. In case of partial loss, a proporion of 90% of the historial average yield for the area in which the farmer’s land is located. 4. The market value of the crop would be as per the MOAD’s de-clared crop price for that district.

EXCLUSIONS Any loss or damage to crop due any resaons other than deviation from the indexed rainfall at the refernce weather station.

CLAIMS PROCEDURE

The claim will be automatic based on the announcement from the reference weather station. There is no need to make a claim but the farmer should contact the local insurance office.

CONDITIONS The farm must be located with 10 km radius of the reference weather station.

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Access to Insurance Initiative – Toolkit IV; 2013; South Africa

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Central Bureau of Statistics, National Planning Commission Secretariat, 2012; National Pop-ulation and Housing Census 2011 (National Report), Kathmandu, Nepal

Dr Joachim Herbold, 2010; Crop Insurance in Developing Economies – the Insurers’ and Reinsurers’ Perspective, Munich Reinsurance Company, Munich, Germany

FAO; 2011; Agricultural Insurance in Asia and the Pacific Region. Food and Agriculture Or-ganization of the United Nations Regional Office for Asia and the Pacific. Bangkok

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Mahendra Adhikari, Micro Insurance Business in Nepal, Kathmandu, Nepal

Mahul, O. and Stutley; 2010; Government Support to Agricultural Insurance: Challenges and Options for Developing Countries. The World Bank. Washington, DC

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Nepal Economic Survey; 2011/2012

PlaNet Finance, 2013; Insights into Microinsurance in Nepal, Kathmandu, Nepal

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Ramindra Ghimere, 2013; Crops and Livestock Insurance Practices in Nepal, Kathmandu, Nepal

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Web-site of Chitwon District Development Committee; 2014

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