2. Payout Value and Distribution
Questions
🌾 a. How much of the money farmers pay is expected to be paid out?
This question can be verified through a simple calculator.
Calculator
To get started, simply follow the steps below to input data, explore the results, and verify the visualization. The example uses dummy data to illustrate the process.
Step 1: Input the Contract and Relevant Historical Data
a. Proposed Insurance Contract
Input the following in the yellow cells under the left table:
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Proposed premium rate
- If the premium is given as a %, enter it directly [No 8]
- If it’s in a $ amount [No 7], make sure to also enter the maximum liability [No 6] so the calculator can compute the rate.
b. Relevant Historical Values
Make sure these values come from insurance products of the same type and coverage as your proposed contract! For example, if your product is weather index-based, the historical data should also be weather index-based.
Input these in the yellow cells of the right-hand table:
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Total value of maximum liability [No 1]
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Total value of gross premiums [No 2]
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Number of insurance contracts or farmers [No 3]
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Total value of payouts [No 4]
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Number of payouts [No 5]
Note: The grey cells will auto-calculate outputs like percentages and ratios using built-in formulas.
Step 2: Calculate Key Metrics nad Ratio
After entering the data, the calculator will show important indicators:
- Burning rate – shows how much has been paid out compared to the maximum liability.
- Expected Loss Ratio (ELR) – calculated as burning rate ÷ premium rate. This shows how much of the premium is expected to go back to farmers over time.
Reminder: This is a simplified estimate. Actual insurance pricing may include more advanced methods or assumptions.
Step 3: Define a Reasonable Expected Loss Ratio Range
In the yellow cells in [Row 26], define your preferred range for ELR—this initial example is 50% to 80%, as a perhaps overly wide and forgiving range. This range will likely be an intense negotiation for your project.
- This range gives you a benchmark for what’s considered fair and sustainable.
- It helps compare different contracts consistently.
- Easier to interpret the result
Step 4: Visual Check – Does it add up?
The dashboard will show:
- A blue area = the reasonable range you defined.
- An orange area = Further discussion and questions should be asked to insurance company
- A yellow diamond = the calculated ELR (Step 2).
Interpretation
- If it falls within the blue band → Looks okay.
- If it’s below → Premium might be too high → Farmers may be overpaying.
- If it’s above → Insurer might be underfunded → Risk to sustainability.
🔗 Illustrative Verification Sheet
📊 b. What is the expected size and frequency of payouts?
This section looks at how much payouts typically are and how often they occur - payout distribution is matters! The following method can be used to visualize this.
Source of data: The example uses data from Ethiopia's Genete village collected by the Columbia Climate School, spanning the years 1983 - 2020.
Visualizer
Step 1: Input Index Would-be Payout
The first step is to identify what what payouts would have been given a chosen weather-based index and assign to it to historical years. This can be done using a formula. For more details on the step-by-step process of arriving at the Index Would-be Payout, see the third assessment section on 'Alignment with Farmer Losses.'
Step 2: Visualize the Payout Distribution
This table can then be visualized through a bar graph. The bars indicate payouts as a % of maximum liability.
Interpretation
The optimal average index payout and frequency can be assessed based on the expectations and needs of the insurance contracting entity and the farmers they will serve.
- Too frequent = higher admin costs for the insurer.
- Too rare = not helpful for farmers.
Ideally, one would aim for a balanced pattern with moderate timing and size of payouts.