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INSURANCE APPROACHES : INDEX BASED WEATHER INSURANCE

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Title: INSURANCE APPROACHES : INDEX BASED WEATHER INSURANCE


1
INSURANCE APPROACHES INDEX BASED WEATHER
INSURANCE
  • SHADRECK MAPFUMO
  • VICE PRESIDENT,CROP INSURANCE
  • MICRO INSURANCE AGENCY HOLDINGS, LLC
  • 3rd AFRICAN MICROFINANCE CONFERENCE
  • KAMPALA

2
Malawi Project Partners
  • CRMG- WORLD BANK (Certain Slides )
  • MRFC
  • OIBM
  • NASFAM
  • Malawi MET
  • IRI, Columbia University

3
PRESENTATION OVERVIEW
  • Context
  • How to Develop a Micro Level Weather Risk
    Management Program
  • Timeline.
  • Key Hurdles
  • Conclusion

4
CONTEXT
5
RISKS IN AGRICULTURE
  • Weather Related
  • Drought
  • Flood
  • Frost
  • Hail
  • Cyclone
  • Non Weather Related
  • Displacement
  • Civil Strife
  • Economic Decline
  • Price Collapse
  • Pests

Insurance only covers causes captured by index
6
HOW FARMERS COPE WITH DROUGHT RISK
  • Minimize investment local seeds, little/no
    fertilizer
  • Cover ground with straw to protect humidity
    (coffee)
  • Irrigate
  • Diversify Plant Cassava as drought
    insurance
  • Accumulate livestock as bank for times of
    stress

7
TRADITIONAL VS. INDEX- BASED INSURANCE
  • Index-Based Weather Insurance
  • Use weather parameteras a proxy for damage
  • Objective triggers and structured rules for
    payouts
  • Improved correlation between need and provision
  • Multi-peril Crop Insurance
  • High Administrative Costs
  • Moral Hazard
  • Adverse Selection

8
CHALLENGE
  • Design an alternative, efficient and
    cost-effective crop failure insurance program
    that can be easily reinsured and distributed to
    individual farmers small, medium and large.

9
DEVELOPING A PROGRAM
  • Identify significant farmer exposure to weather
  • Quantify the impact of adverse weather on their
    revenues
  • Structure a contract that pays out when adverse
    weather occurs
  • Execute contract in optimal form to reinsure the
    risk in the international markets

10
DEVELOPING A PROGRAM
  1. Identify significant farmer exposure to weather
  2. Quantify the impact of adverse weather on their
    revenues
  3. Structure a contract that pays out when adverse
    weather occurs
  4. Execute contract in optimal form to reinsure the
    risk in the international markets

11
I.IDENTIFY THE RISK
  • Location
  • Which regions are at risk to weather?
  • What are the weighting for each regions
    contribution to risk?
  • Period
  • What is the critical period?
  • Monthly, seasonal, annual, multi-year?
  • Index
  • What weather measurement is the most accurate
    proxy for exposure?
  • Temperature, Rainfall, Snow, Frost etc.
  • Average, Minimum, Maximum
  • Cumulative
  • Event
  • Combination or compound or several factors

12
CROP SENSITIVITY TO WEATHER
Maize yields are particularly sensitive to
rainfall during the tasseling stage and the
yield formation stage rainfall during the
latter phase determines the size of the maize
grain
2
13
2
2
2
13
13
13
13
13
1
1
13
x Cumulative Rainfall in each decade Maize
Rainfall Index
Weights and diagram taken from the FAOs maize
water requirement report
13
DEVELOPING A PROGRAM
  1. Identify significant farmer exposure to weather
  2. Quantify the impact of adverse weather on their
    revenues
  3. Structure a contract that pays out when adverse
    weather occurs
  4. Execute contract in optimal form to reinsure the
    risk in the international markets

14
II.QUANTIFY THE EXPOSURE
  • Unit Exposure
  • What is the farmers weather exposure per unit of
    the defined index?
  • What is the yield volume lost per unit index?
  • Best year/worst year analysis, yield regression
    etc.
  • What is the value lost per unit index?
  • Expected market value, input/production costs
  • Limit
  • What is the total amount of protection required
    per risk period?
  • This may be the starting point for determining
    the total sum insured
  • What are the objectives of the pilot program?

15
DEVELOPING A PROGRAM
  1. Identify significant farmer exposure to weather
  2. Quantify the impact of adverse weather on their
    revenues
  3. Structure a contract that pays out when adverse
    weather occurs
  4. Execute contract in optimal form to reinsure the
    risk in the international markets

16
III. STRUCTURE THE PRODUCT
IIIa. STRUCTURE A PROGRAM
  • Type
  • Insurance at what level?
  • Farmer stand-alone insurance products
  • Weather-indexed loans or credit
  • Crop Loan Portfolio Insurance
  • Retention
  • Define the trigger index level where weather
    protection begins
  • How much risk does the farmer want to retain?
  • Key to pricing and transfer
  • Premium
  • How much can a farmers afford ?
  • Payment terms for coverage (upfront, periodic
    etc.)
  • Subsidised by lenders or government?

17
A Standardized Approach To
Contract Design
RECOMMENDED APPROACH TO CONTRACT DESIGN
  • Balance simplicity that farmers and
    stakeholders can understand, with the complex
    dynamics that characterize water stress impact on
    crop yields
  • Easy to communicate to farmers and stakeholders
  • Performs well from agro-meteorological
    perspective
  • Provides required protection for all stakeholders
    at an affordable level
  • Captures local conditions and environment
  • Simple to replicate to other locations and crops
    so that programs are scalable
  • Local ownership, so programs are sustainable

18
EXAMPLE LILONGWE CONTRACT, MAIZE
Phase 1 50 days Trigger Level
40mm Payout per mm 580 MKW/mm Maximum
Payout 5800 MKW
Phase 2 30 days Trigger Level
130mm Payout per mm 58 MKW/mm Maximum
Payout 5800 MKW
Phase 3 40 days Trigger Level
25mm Payout per mm 1160 MKW/mm Maximum
Payout 5800 MKW
10th November 10 January 25 mm in 10 days
19
DEVELOPING A PROGRAM
  1. Identify significant farmer exposure to weather
  2. Quantify the impact of adverse weather on their
    revenues
  3. Structure a contract that pays out when adverse
    weather occurs
  4. Execute contract in optimal form to reinsure the
    risk in the international markets

20
A Standardized Approach To
Program Implementation
A STANDARDIZED APPROACH IMPLEMENTATION
Data
Reinsurance Company
Reinsurance treaty
International
In-Country
Insurance Company/Association
Data
Bulk weather insurance contract
Product Retailer Bank/MFI/Cooperative/Input
Supplier
Data
Met Office
(Bundled) weather insurance contract
Farmer/Farmer Groups
Data
  • Clear, well-defined responsibilities, product
    accounting practices and communication between
    all in-country stakeholders

21
TIMELINE
22
KEY HURDLES
  • Weather infrastructure.
  • Basis Risk or How good is this insurance?
  • Mismatch between coverage and actual result
  • How can it be minimised?
  • Write contracts on stations near farmers
  • Clever structuring
  • Community-level risk pooling?
  • Protection against catastrophic events
  • Satellite data NDVI, derived precipitation?
  • Data or Can we reinsure the risk?
  • Length of historical record - 30 years or more?
  • Quality controlled, cleaned, enhanced?
  • Reliable ongoing collection and reporting
    procedures?
  • Third-party settlement data e.g. UKMO?

23
CONCLUSION
  • Weather insurance is not a panacea
  • It can only enhance existing agricultural supply
    chains and businesses, not create them
  • It can help support expansion in rural finance
    and agriculture
  • But must go hand in hand with investment in
    extension services, irrigation, strengthening of
    input and output markets etc.

24
THANK YOU !
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