Protecting Wealth @ the Bottom of the Pyramid A presentation by: Shailesh Naik , ITC Ltd – IBD

1. Weather Insurance/ Derivatives Marketing Protecting Wealth @ the Bottom of the Pyramid A presentation by: Shailesh Naik , ITC Ltd – IBD

2. BIODATA • Shailesh Naik • Head - ITC e choupal Financial services • Responsible for Insurance and investment products that are sold through ITC echoupal channel • Education Qualification • MBA + Bachelor in Mechanical Engineering • Year of experience • 10 + experience in sales and marketing in diverse industries like financial services , FMCG , Automobiles .

3. About ITC Ltd. • ITC is one of India's foremost private sector companies • Diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business, Packaged Foods & Confectionery, Branded Apparel, Greeting Cards and other FMCG products. • ITC's Agri-Business ( ITC -IBD) is one of India's largest exporters of agricultural products. • Supply Chain Initiative of this division – ITC e Choupal has transformed rural economy in MP , UP ,Rajasthan and Maharashtra • Better rates for farm produce ( eliminating Middleman ) • Access to better quality of FMCG , Non FMCG , consumer durables, agri inputs and financial services ( Direct assess @ right prices)

4. Background

5. Next big opportunity is rural India • Background: • Rural India accounts for 70% of India’s population • Rural market is set to reform • Rural non-agri sectors such as infrastructure (construction, electricity, gas & water supply), rural health, education, tourism, transport, communication are exhibiting high growth rates • Financial service providers such as banks, life, non-life insurance are aggressively looking at rural India, which is expected to revolutionize rural India in the coming future • But betting on rural economy is ….

6. …. A high risk game.. • Rural economy • Highly dependent on agriculture • Very few people have assured monthly income like their city counter parts • Any change in agriculture income has a multiplier effect on the economy • Agricultural Income is subjected to high risk • Production / Volume Risk • Weather , Pest , labour and process inefficiency • Out put Risk • Govt Policy Risk • National & international price risk

7. This risk presents …….. Opportunity No1 • Farmer’s Problem: Risk of Crop failure • “To increase my crop yields and incomes I need to adopt better inputs and practices which require higher investments. But who will protect me if my crop fails” • Despite knowledge and cash to invest in productivity techniques which enhances farm income, farmer adopts risk reduction strategy by reducing his input cost. • A Good risk mitigation tool will help rural economy by bringing higher investment and increasing productivity • ITC e choupal context : • The above risk is threat to e choupal business model • ITC e choupal business model is a based on • Procurement of Crop @ Best quality @ Fair Price • Distribution of FMCG , Consumer durables , Agri Inputs , financial services to Rural economy

8. How is it being addressed today • The government on its part tries to address output risk atleast for loanne farmers through subsidized Multi peril crop insurance • However, the effectiveness of crop insurance has been below expectation on account of following issues • High monitoring and administrative costs • Moral hazard • Adverse selection due to asymmetric information • High subsidies • Long claim settlement time ( often > 1 yr ) Hence irrelevant to small farmers During the period of 2000- 2004 NAIS collected Rs 1242 crores of insurance premium and settled claims worth Rs 4991 crores Despite this Retail sales of Crop Insurance is very low.

9. Weather Insurance/ derivative – a Better Alternative • An index insurance contract indemnifies based on the value of an “index”- not on losses measured in the field • An index is a variable that is highly correlated with losses and that cannot be influenced by the insured .Example indices: rainfall, temperature, regional yield, river levels Weather indexes can form the basis of an insurance contract that protects farmers from weather riskCausal analysis of agriculture losses complied by General insurance corporation’s crop insurance cell indicates 90% of crop losses are related to weather.

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

11. Converting concept into business proposition • Weather Insurance as a concept is great but globally it has failed to go beyond pilot stage for mitigating agriculture risk • Subsidies, bundling with loans and agri inputs etc have been tried by various countries • Yet repeat sales and pilot scale up has been an issue because of …..

12. Proposition Delivery Problems Farmer’s problem: Product is not relevant to my needs.. • In Dec 2005 weather insurance for wheat was designed to cover crop failure for excessive heat. However crops damage was on account of unseasonable rainfall in March 2006 • A relevant weather insurance product needs to • Maximise the correlation between index and loss of crop yield • Give choice to farmer to cover independently various weather risks that his crop can face. • Weather Station should be as close to farm as possible • Max 25 kms for Rain fall • Max 40 kms for Temp

13. Proposition Delivery Problems Insurance company’s problem: Lack of capability and high cost for product customization • Product customization requires • Information on local cropping pattern • Continuous monitoring of weather impact on crops. • This data is very costly to procure and needs to be regularly validated for accuracy. • Insurance companies hence have limited themselves to generic weather insurance covers or at most few crop / region specific designs. • This in turn has limited weather insurance’s market and repeat sales.

14. Proposition Delivery Problems • Insurance company’s problem: High Distribution cost • The spread and diversity of target customers make cost effective distribution a big challenge. • 37% of the urban population live in 23 cities • 35% of the rural population live in 100000 villages • General insurance companies who sell crop and weather insurance portfolio do not have good rural agent network like Life Insurance Company (LIC). • WI being a seasonal product has a very short sales window of around 10 – 20 days before risk commencement period. • Thus in an entire year sales force is engaged for just 40 days

15. Market opportunity • ITC echoupal is uniquely positioned to address these problems • ITC e Choupal had 6000 Sanchalaks (lead Farmers) with internet connectivity spread across 4 states giving field information and weather data to local farmers on regular basis . • Field Demonstration Plot officers /consultants who share best practices with farmers have immense knowledge to develop relevant products • Megatop Insurance services a associate company of ITC through its IRDA broker trained field force already selling Life Insurance through e Choupal provided cost effective distribution channel

16. Weather Insurance Converting opportunity in to business model

17. Market segmentation , Target & Positioning • Customer who has experienced the peril - • Position as Insurance Product • Customer who understand peril but has not experienced : • Position WI as cost effective necessary input for crop Rs 250

18. Market segmentation , Target & Positioning • Crop Specific WI • Offers more scientific solution patterned with crop growth cycle - but difficult to get complete historical data to structure products and hence limits districts where this product can be offered • Complex to understand and bit expensive • Target segment • Medium/Large Farmers( 8 acre +) • Generic WI • This is easier to develop for all districts as the normal rainfall and the seasonal rainfall figures are easily available, thus we can pan out to larger geographical area • Target segment • Small farmers( 3+ acre )

19. Value proposition :Product differentiation • Increasing product Relevance to farmers • Agri experts on its panel and Sanchalak ( lead farmer ) to design weather insurance product - Crop wise, district wise and phase wise • Three key inputs were focused on • The cropping pattern To indicate sales potential & prioritize sales effort • The peril identification for that crop & Weighted index setting for each phase of the crop  To improve relevance to customers • Pricing - To improve consumer affordability and product sustainability

20. Value proposition :Product differentiation • Increasing product Relevance to farmers • Step 1: Understand cropping pattern in a district. • Step 2: Interact with farmers on the perils they had faced in last few years which impacted their crop yields • Step 3: Along with the Insurance company and weather stations find if we have relevant weather data (for last 15-20 years) for that region. • Step 4 : Design relevant phase wise triggers along with agri experts • Step 5: Insurance companies quote premium for these products • Step 6: The best quote received is tested with field for affordability

21. Value proposition : Customer Service 1) Fortnight Weather Data to Consumers : • Farmers now understand weather impact on crops and when their claim is triggered. • With experience we have requested insurance companies to install weather stations at specific locations for better accuracy and faster data availability 2) Benchmark of Claim settlement within 45 days This all has ensured us repeat sales.

22. Creating Awareness • Sales kit: To enable internal staff and extended organization conduct village meetings • Films: In regional language that explains needs and benefits of Weather insurance • Visibility: POPs and Visuals that indicates Mausam Beema is as important as other inputs • Communication Pitch for each product is made and given in huge quantities.

23. Getting Cost advantage :Improving Productivity • Sales Planning: • Sales Planning a very critical step to improve sales force productivity. • The sales window is 10-20 days and hence we needed to cover crops that can engage people across the year. • Bundling with field demonstration plots : • ITC e Choupal Agri-Extension officers (AEO) are involved in spreading best practices in agriculture. • On these field demonstration plots of around 1 acre AEO guides farmers to use right quality inputs at right time and in right quantity. The yields at these farms have been 20% -100% more than normal. • Weather insurance propagation through this channel has increased awareness and provided us another cost effective distribution channel .

24. Value Creation for the Ecosystem Farmers Extended Organisation Partner Companies ITC

25. Value for key stakeholders • Farmers • Risk mitigation tool specifically designed to cover their risk • Timely claim settlement : • Settled claims worth 14 lacs in 2005-06 Rabi season and 30 lacs in 2006 Kharif season. • The claim settlement period has now crashed down from 90 days to less than 40 days as compared to over 360 days in Crop Insurance • Broker who represents them rather than a agent who represent Insurance company • Ajmer case wherein the data given by IMD Weather station was incorrect • ITC along with farmers took Insurance company to Weather station made to reevaluate the data and subsequently honour claim

26. Value for key stakeholders • Sanchalaks / Sanyojaks : Lead farmers in Village • Brokerage Income : • Around 1300 Sanchalaks - our extended organization have earned commission ranging from Rs 200 to Rs 20000 with just 10 days effort around kharif season • This income is around 1% to 25% of their annual income • Respect and honour • Claims settlement reinforced Sanchalak’s respect in village community as a “Friend in need is Friend indeed” • This goes a long way in reinforcing the value proposition of our other business too.

27. Value for key stakeholders • Partner Companies • Low cost distribution channel • Partner is designing more relevant product • Provide locations for future weather station for better recording & monitoring of weather data • We account for 25% of total Agriculture Insurance Company’s Weather Insurance overall sale and almost 100% sale in echoupal districts. • Additionally this sale is not “a free offer on Seeds or Fertilizers” or forced option for taking low interest loans. • All ITC e Choupal consumers buy weather insurance voluntarily after getting convinced about its benefits. This we believe is the real test of product sustainability in the market.

28. Value for key stakeholders • ITC – e choupal • De risk rural economy • ITC e choupal earns Rs 22000 million as revenue from rural market • Weather insurance sale protects this economy from weather shocks and improves sustainability of our earnings • ITC e Choupal brand Value enhanced • Timely claim settlement and sensitivity to farmers has improved ITC e choupal brand value • Improves viability for extended organisation • Sanchalak earning in this business adds to total revenue he earns from his choupal • Revenue Earned • Commission from WI adds to ITC e choupal bottom line

29. Way forward to increase business • External • Improving Infrastructure : • Increase number of Weather stations to reduce basis risk • Timely and Correct data • Sensitivity to Consumers • A pool to protect farmers in case crop failure is across the region and weather risk fail to map / solve the same • Regulation change / Government support • Market Development support fee for organization that is working hard to develop the market • Government endorsement for this product and support through advertising • Product subsidy • Internal • ITC is convinced about the product and its potential • Right Segmentation – leading to better design – With Sales force Motivation will drive the volumes in years to come ….

30. Thank You