The world is up against a growing population and increasing food prices.

The most affected people by these tandem phenomena are those who spend a great percentage of their disposable income on securing food.

While large aid programmes – geared towards donations of food, cash, and technology – have aimed to provide food assurance, governments have stepped in to try and provide price insurance.

Though these are attempts at part of the solution, little has been done to address a combination of this dual challenge, in the form of what I call “iAssurance.”

I will illustrate iAssurance using a case of a farmer in Mozambique.

The reason I choose this example is because Mozambique is an agrarian country where many farmers’ incomes rely on the production and prices of corn on which they have no control.

In addition, the farmers of Mozambique are relatively poorer than the world’s agricultural farmers, making them more vulnerable to price shocks.

Finally, income effect has a pronounced influence on these farmers’ budgetary choices for their own household consumption.

The farmer in my example has a food expense, an agricultural income and a few established dietary choices that can be quickly fit into a classical microeconomic context.

The food expense is the budget line, income is the available wealth, and dietary choices represent the utility curve.

This farmer goes about trying to maximise his consumption, trying to keep his dietary choices intact.

There are two challenging unknowns he must manage: a) quantum of food he chooses to consume; b) price he pays for the food he consumes.

These two challenges shape the concept of food quantum assurance vs food price insurance.

The goal is to optimise the balance between this assurance and insurance. In an ideal world, the farmer will choose to consume the most at the least price possible.

iAssurance aims to optimise the assurance vs insurance problem in order to help the farmer get close to the point to which he would aspire.

Reinsurance firms in the US have made attempts to focus on the producer side of the business to ensure farmers’ revenue streams are secured.

I see a focus on the consumer side to be a bigger opportunity both from revenue and an impact standpoint.

First, the iAssurance programme would ensure that a consumer doesn’t exceed his/her food budget.

Second, iAssurance would enable the ratio of food budget to disposable income to be constant or decreasing over time, restricting inflationary tendencies. Third, the distribution of this type of product could readily be facilitated at a retail level, piggybacking a retail-banking channel.

Fourth, the pricing of the iAssurance product is relatively simple, and the risk associated with the originator of the product can be efficiently offloaded in the market.

Fifth, the iAssurance product is a novel market solution, so originators should be incentivised to capture margins.

The challenges to the iAssurance product are two-fold: 1) regulatory barriers imposed by governmental agencies that can ultimately escalate costs; 2) potential moral hazard of overselling these products in the absence of a prudent watchdog.

As a trial run, I would encourage banking institutions to embed these iAssurance products in their loans to clients in emerging economies with an aim to back off and sell the risk associated to market participants in developed markets.

I strongly believe iAssurance is an innovative solution that may help consumers and producers alike – it can prevent their livelihoods from being closely tied to uncertainties in the global market place.

The writer is based in London and is the founder and Managing Director of OpalCrest (www.opalcrest.com).

Published on May 14, 2014