Title: INSURANCE APPROACHES : INDEX BASED WEATHER INSURANCE
1INSURANCE APPROACHES INDEX BASED WEATHER
INSURANCE
- SHADRECK MAPFUMO
- VICE PRESIDENT,CROP INSURANCE
- MICRO INSURANCE AGENCY HOLDINGS, LLC
- 3rd AFRICAN MICROFINANCE CONFERENCE
- KAMPALA
2Malawi Project Partners
- CRMG- WORLD BANK (Certain Slides )
- MRFC
- OIBM
- NASFAM
- Malawi MET
- IRI, Columbia University
3PRESENTATION OVERVIEW
- Context
- How to Develop a Micro Level Weather Risk
Management Program - Timeline.
- Key Hurdles
- Conclusion
4CONTEXT
5RISKS 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
6HOW 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
7TRADITIONAL 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
8CHALLENGE
- 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.
9DEVELOPING 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
10DEVELOPING 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
11I.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
12CROP 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
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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
13DEVELOPING 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
14II.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?
15DEVELOPING 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
16III. 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?
17A 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
18EXAMPLE 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
19DEVELOPING 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
20A 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
21TIMELINE
22KEY 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?
23CONCLUSION
- 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. -
24THANK YOU !