Where are the world weather markets

1
Current Status Of Indian Weather Risk Market
Vivek Pawale Galileo Weather Risk Management
Ltd Marcel Stäheli Head Weather and Energy
Underwriting Environmental Commodity
Markets Swiss Reinsurance Company Anuj
Kumbhat Weather Risk Management Services,
Ltd Rupalee Ruchismita Head, Center for
Insurance and Risk Management Ltd
Weather Risk Management Association Conference
2007, Mumbai
2
Where are the world weather markets?
Active growing
Emerging
IN GENERAL WEATHER MARKET IS CONSTRAINED BY THE
AVAILABILITY AND QUALITY OF WEATHER DATA, WHICH
IS RAPIDLY IMPROVING
3
Who buys weather risk management products?

• Agriculture Crop yield, handling, storage, pests
• Construction Delays, incentive/disincentive
  clauses
• Energy Reduced and/or excessive demand
• Entertainment Postponements, reduced attendance
• Governments Budget overruns
• Insurance Increased claims, premium
  diversification
• Manufacturing Reduced demand, increased raw
  material costs
• Offshore Storm frequency/severity
• Retailing Reduced demand of weather-sensitive
  products
• Transportation Budget overruns, delays

4
What is the composition of end-user interest?
2005 Survey
2006 Survey
SOURCE 2006 WRMA SURVEY CONDUCTED BY PWC
DISTRIBUTION OF INQUIRIES ABOUT WEATHER RISK
INSTRUMENTS BY SECTOR OF POTENTIAL END-USER
5
What is the structure of the market?
End Users
Intermediaries
Primary
Secondary
Tertiary
Energy
Insurers Banks
Insurance Brokers Banks Inter-Dealer
Brokers Consultants
Investors
OTC CME
Energy Companies
6
Where is the weather market in its life cycle?
ANNUAL GROWTH
CURRENT MARKET POSITION
INFANCY
ADOLESCENCE
MATURITY
2004
2006
???
7
Thats how microfinance works
8
.. and thats how its defined

• It is the provision of financial services
  (whether loans, account savings, insurance or
  otherwise) to poor and low-income individuals and
  households.

Current Indian population by income groups Mio
Rich
Non-Poor
Low income
Vast majority of this people are working in
agricultural sector
Poor
Absolute Poverty
9
Agriculture in India

• High dependence on weather
• Up to 80 of variability in crop yields is
  attributable to weather
• Less than 40 of net sown area irrigated
• Most irrigation from non-perennial sources
• Affects adoption of improved crop production
  techniques because of high risks and low margins
• Extreme Weather Events in India (cold wave,
  drought, fog, heat wave, tropical cyclones,
  floods)
• Dwindling ground water resources

• India sustains 16 of the worlds population on
  2.4 of land resource
• Agriculture contributes 24 of the Indian GDP
• Livelihood support to two-thirds of the
  population
• Employment to 57 of work force
• Single largest private sector occupation
• Raw material source to large number of industries
  like (textiles, silk, sugar, rice, flour mills,
  milk products)

10
Crop Calendar and Rainfall Pattern
11
Deviation in Rainfall and Impact on Yield
12
Loss Payment through Weather Insurance
13
Swiss Res Initiatives in the Indian Markets

• First deal in 2004 with BASIX (microfinance
  institution) for Castor and Groundnut crop in
  Mehbubnagar, Andhra Pradesh against deficit
  rainfall covering 1,500 farmers
• Since then 33 fac R/I contracts closed reinsured
  over 260,000 policies
• Offers a viable alternative to the traditional
  crop insurance market and has the potential to
  extend beyond the agriculture sector up into the
  corporate end-user market
• Huge potential for Rural Micro Insurance

14
Indian Weather Market Customers

• Farmers
• Risk of Crop Loss on Account of Weather
• Impact of weather on dairy production
• Industries
• Production Risks Agro/Marine Chemicals, Seed,
  Agro-Processing, Lime-kiln, Hydro Power etc
• Market Risks Agri-input, FMCG, Tractor etc.
• Banking
• Covering exposure to both industries and farmer
• Development loans like Rainwater Harvesting
  Projects
• Government
• Subsidy Exposure on crop insurance
• Developmental projects like Rainwater Harvesting
  Projects

15
Indian Weather Market Issues

• Data Deficiency
• Delayed Current Data
• Lack of quality Historical Data

Delayed Compensation

• Product Inefficiency
• Improper Risk Assessment
• Regulatory Restrictions
• Historical yield / production / sales data
• Low Landholdings incase of agriculture

• Impacts Penetration Levels
• Inhibits Market Development

High Risk Transfer Cost

• Inefficient Outreach
• Weather Information
• Farm Management
• Inefficient Distribution

Lack of Product Knowledge

• Customer / Risk Profile
• Large share of Rainfall Risk
• Single side Risks
• Major buyer segment is uneducated and ignorant
  about weather

16
Indian Weather Market Opportunities

• Agriculture Growth Relevance to GDP
• 60 population living in rural area
• Primary rural occupation is agriculture
• 65 agriculture is totally rain dependent
• Weather dependent rural consumer demand
• Agriculture reforms increasing outreach induce
  corporate farming
• Importance of Secondary Weather Market
• Major agriculture commodity trading hubs
• Mumbai, Kolkata, Jaipur Indore
• Weather trading a natural extension to
  commodities trading
• Speculators and hedgers will provide liquidity
  for primary weather market
• Growing Commodity Market
• Fastest growing commodity market in the world
• Large portfolio of agri-commodity
• Power reforms
• To correct demand supply mismatch in the sector

17
What is Required to tap the Potential?

• Long-term perspective 5 years of
  infant-adolescence stage to address growth issues
  creating trading market
• Legislative approval to allow trading on weather
• Knowledge and understanding of processes and
  systems in agriculture in India
• Understanding of weather systems operating in
  India
• Time and resources required in concept education
  and development at ground level
• Creation of infrastructure for data measurement
  dissemination

18
What is Weather Risk doing?

• Tested applicability of weather insurance of
  various crops
• Paddy, Cotton, Groundnut, Wheat, Mustard, Potato,
  Lac
• Have structured some of the largest weather risk
  management deals in India
• Implemented innovative concept of providing free
  insurance with seed packet sale
• Working with Agrochem, plantation, seed and
  Hydro-Power companies for developing weather risk
  analysis and management system
• Has setup research and development centre in
  India premier engineering institution (IIT
  Kanpur) for developing weather risk management
  solutions
• Identified issues which are constraining
  development of weather market
• Systematically addressing issues hampering the
  progress of weather market in India
• Through partnership with developmental agencies,
  government, insurance companies and outreach
  agencies and banks
• Developed low cost indigenous weather sensors and
  Unmanned Aerial Vehicle
• Minimize Basis Risk Accurate Risk Assessment
• Develop Hybrid Risk Instruments like Aerial /
  satellite imagery, area-yield and weather
  insurance
• Attempting to integrate commodity market with the
  weather risk management to reduce the cost of
  risk transfer

19
The Space Vulnerable Populations
Primary
P O O R
Land Owner/ farmers
Rich
None
Data
Simple (Insurance)
Complex (Derivatives)
Product

• Weather phenomenon affects livelihoods of all
  poor
• Poor need access to risk products more than the
  affected rich
• In few geographies, primary land owners have
  access to agri-insurance
• To ensure comprehensive outreach, all will need
  to be covered, which requires
• Proving their insurability
• Evolving a weather derivatives market

20
Increasing Penetration
Weather Risk Products
Post Offices
Banks
Co-Ops
MFIs

• Ride on existing distribution channels that
  provide
• Low-cost outreach
• Cover against total information asymmetry
• Aggregation-based or a Bulk deal approach (for
  each cluster based on the portfolio of their end
  clients) due to
• High volumes
• Low ticket sizes

21
Innovative Product Approach
Addressing the Info Gap

• Unit based approach to product development
• Addressing information asymmetry directly, is
  unviable and infeasible
• Risk assessment on variations at a granular level
  not sustainable
• Product is offered in a base form Unit
• Client buys units as per own risk assessment
• Ability to pay acts as a worthy surrogate to
  information gap
• Client Signaling provides first-hand indicator
  for further product enrichment and enhancement

Product
Units
Geog-1
Product
Units
Product
Units
Geog-2
Product
Units
22
De-risking Rural Credit
Weather Hedging
Portfolio
Weather Risk
Portfolio
Weather Risk

• Ring fencing of rural portfolio of banking and
  financial institutions that has a weather risk
  component
• Effective risk hedging through weather
  derivatives will free up blocked capital
• Increased risk appetite coupled with weather
  derivatives will allow aggressive growth in rural
  portfolio extending credit to the vulnerable
  populations

23
The Efficient Market Disaster Management

• Institutionalizing a market should result in
• Reduced incidence / probability of risk event
• Reduced severity of impact given the risk event
• Reduced economic impact of the risk event
• Technology managerial interventions to plan,
  prepare and manage risk events
• An evolved market will be inclusive and ensure
  risk cover for the vulnerable populations
• Shift in approach to disaster management
  reactive to proactive (ref D Hoffman and P.
  Brukoff )
• Strategy has been to absorb risk within budgets
  or through relief and aid
• Alternate will be to plan, through risk
  instruments and disaster products
• Multi-drought
• Flood product