Bau Space cross-sells parametric agricultural insurance with cellular data. This reduces the complexity of insurance policies and lowers the barriers to entry into the insurance market. In piggybacking off an existing initiative to expand cellular networks Bau Space is able to permeate hitherto unreachable rural communities that have cell phones, or are in the process of getting them. As the presence of cell phones in rural communities increases so will the consumer base of this insurance product.
Western insurance practices are too complex to be applied to developing countries. Insurance products available in those regions, specifically agricultural insurance, are often out of reach to rural communities, and where they are accessible they have a difficult time permeating the consumer base.
But farmers of developing countries are often dependent on specific weather and irrigation systems to grow and sell their crops. Climate change, in the form of unexpected rainfall or drought, can adversely impact their ability to provide for their families..
Parametric Insurance
A parametric insurance policy states that if an index, say water level or precipitation, rises or falls past a certain point all holders of that policy get paid. Either rainfall exceeds a certain amount or it does not. Linking claim payout to an index means that farmers either receive claim money, or they do not, depending on the index they were assigned given their geographical location. Parametric insurance minimizes the risk of fraud, moral hazard , and claim verification costs
Associations
Associations of five to eight farmers form to purchase agricultural insurance through their cellular data plans. Modeled after groups formed by microloan institutions these associations serve as a way of integrating existing insurance practices. Associations are self policing. While farmers in associations have individual insurance contracts, they hold each other accountable for the reporting of quantity of crops grown. It is the responsibility of the association to ensure that insurance purchased does not exceed potential crops grown. To diversify risk to reinsurers, associations in different geographical areas are paired together into Blocks (detailed below).
Associations are necessary, in part, because members help one anotoher offset the price oof the initial premium. As associations, and individuals, continue to purchase insurance, cost would be distributed and economies of scale would be achieved, allowing premiums to decrease. Should an association or individual cease paying for a certain time premiums would rise again. Similar to existing insurance practices in rural communities (detailed below), a portion of paid premiums are placed in funds that could help offset the cost of future premiums, and should something happen, it would help tide farmers over until claims can be paid out.
Reinsurance
Existing Insurance Practices
Who Runs It Day-to-Day
How It works
Bau Space is proposing a form of micro reinsurance. This works as follows.
Associations are grouped into Blocks. Blocks contain two associations from opposite climate regions that have bought a similar amount of insurance. For instance one association from an area with a high chance of drought, and the other from an area with a high chance of flooding, both insured for fifty dollars. The Block would then be worth one hundred dollars. Micro reinsurance would allow ten to twenty percent of that to be sold as reinsurance.
Reinsurance groups, or ReGroups, are made up of individuals who have successfully built businesses through micro-loan schemes. These ReGroups have the option of purchasing part of Block, which effectively transfers some of the risk from Bau Space. ReGroups receive a proportional amount of the premium as they have purchased of the block.
Existing insurance schemes in rural communities have members voluntarily contribute money to funds that would provide financial support in case and adverse climate, health, or property event should occur. Support received in these cases is tied to the contributions an individual has made. This system excludes the poorest in the community and provides no guarantee of payout.
Part of Bau Space’s priority to integrate existing insurance practices includes formalizing this type of insurance. This is partly achieved through the associations which formalize the communities. But it also means creating documents that clearly explain what and who is covered. This is important because Bau Space does not want to impose its ideas of insurance on communities but rather work within existing structures to create relevant and sought after insurance products. The formalization process is detailed in the “who runs it day-to-day” section.
Bau Space itself has a three-tier structure, with an external fourth tier.
First, the national offices. These offices coordinate among policy members, monitor indices, create transparent rules that can be understood by the private and financial sectors that would later purchase reinsurance. National offices also develop programs to incentivize the formalization of insurance in rural areas. To that end, national offices would be responsible for shortening western policy documents, and simplifying language as well as monitoring indexes and developing ways to incorporate informal insurance.
Facilitating this inclusion is part of the role of reginal offices, the second tier of Bau Space. They are responsible for monitoring cellular data usage in their regions as well as looking for areas to expand into. Regional offices confer with one another to discuss their products might be improved, as well as share processed data. Most importantly regional offices liaise between national offices and local managers on the development of new insurance products. Including consumers in the design of an insurance product is the best way to create market driven demand, which is essential to increasing participation in an area where education and trust in insurance is limited. Regional offices hear from local managers on what the sentiment in the region is and relay this to national offices.
Local managers are intermediaries between the association and farmers therein, and the corporate side of Bau Space. As the largest customer facing body at Bau Space they are responsible for community education and trust building. Insurance is not a wide spread concept in rural communities, so managers develop programs to help customers increase their risk literacy. Additionally, insurance is commonly sold through a complex and impersonal distribution chain furthering distrust of insurance. It is a Bau Space manager’s job to cultivate personal relationships and trust with each of the members of their association. This minimizes fraud risk, and augments the customer experience, which makes them more likely to recommend the service to others. In a market based on word of mouth, this trust is the foundation for growth.
Every month managers visit the associations in their villages to top up their cellular data, take stock of the agricultural situation, collect data ( customers profiles, weather events, effects of insurance on the community, and the monetary value of trust in the product, etc.), and gauge what kind of insurance is desired, and how the system could be improved. The fourth, and external, tier is the that of the associations, outlined above.
These tiers are designed to expand to include other forms of insurance Bau Space would one day like to provide such as property insurance, life insurance, and health insurance.
A set amount of cellular data insures a set amount of crops. Should farmers wish to insure more of their crops, they can purchase more data.
Insurance is available seasonally. For Instance: drought and flood insurnace for summer and monsoon and hail insurance foor winter. There is a predetermined date when one season switches for another, and insurance may only be purchased for the current season. Insurance is valid as long as the cellular data remains. Once the data is used the the insurance policy is void at which point more data and by extension more insurance can be purchased.
The concept that under pins this notion is that the best way to build a insurance scheme in an area where education and trust in insurance is minimal is to create “market driven demand” which is essentially word of mouth. This requires building products that are relevant and usable by consumers, not just enticing to investors.