Course Title

INSURANCE APPROACHES : INDEX BASED WEATHER INSURANCE

SHADRECK MAPFUMOVICE PRESIDENT,CROP INSURANCE

MICRO INSURANCE AGENCY HOLDINGS, LLC

3rd AFRICAN MICROFINANCE CONFERENCE

KAMPALA

Course Title

Malawi Project Partners

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

Course TitlePRESENTATION OVERVIEW

Context

How to Develop a Micro Level Weather Risk Management Program

Timeline.

Key Hurdles

Conclusion

Course Title

CONTEXT

Course Title

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

RISKS IN AGRICULTURE

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• 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

Food emergency camps (unpredictable) Food

aid – some migrationNormal Yield Extra yieldSoil (+asset)

depletion

1 in 20 years

1 in 7 1 in 2 1 in 4

Frequency1 in 4

Insurance Intervention

HOW FARMERS COPE WITH DROUGHT RISK

Course Title

Multi-peril Crop Insurance High

Administrative Costs

Moral Hazard Adverse Selection

Index-Based Weather Insurance Use weather

parameteras a proxy for damage

Objective triggers and structured rules for payouts

Improved correlation between need and provision

TRADITIONAL VS. INDEX- BASED INSURANCE

Course Title

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.

CHALLENGE

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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

DEVELOPING A PROGRAM

Course Title

DEVELOPING A PROGRAM

I. Identify significant farmer exposure to weather

II. Quantify the impact of adverse weather on their revenues

III. Structure a contract that pays out when adverse weather occurs

IV. Execute contract in optimal form to reinsure the risk in the international markets

Course Title

Location: Which regions are at risk to weather?

º What are the weighting for each region’s contribution to risk?

Period: What is the critical period?

º Monthly, seasonal, annual, multi-year?

Index: What weather measurement is the most accurate proxy

for exposure?º Temperature, Rainfall, Snow, Frost etc.º Average, Minimum, Maximumº Cumulative º Event º Combination or compound or several factors

I.IDENTIFY THE RISK

Course TitleCROP SENSITIVITY TO WEATHER

2% 13%2%2%2% 13%13% 13%13%13% 1%1%13%

*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

Weights and diagram taken from the FAO’s maize water requirement report*

x Cumulative Rainfall in each decade = Maize Rainfall Index

Course TitleDEVELOPING A PROGRAM

I. Identify significant farmer exposure to weather

II. Quantify the impact of adverse weather on their revenues

III. Structure a contract that pays out when adverse weather occurs

IV. Execute contract in optimal form to reinsure the risk in the international markets

Course Title

Unit Exposure: What is the farmer’s weather exposure per unit of the

defined index?º What is the yield volume lost per unit index?

Best year/worst year analysis, yield regression etc.º 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?º This may be the starting point for determining the total

sum insuredº What are the objectives of the pilot program?

II.QUANTIFY THE EXPOSURE

Course Title

DEVELOPING A PROGRAM

I. Identify significant farmer exposure to weather

II. Quantify the impact of adverse weather on their revenues

III. Structure a contract that pays out when adverse weather occurs

IV. Execute contract in optimal form to reinsure the risk in the international markets

Course Title

III. STRUCTURE THE PRODUCT

Type: Insurance at what level?

º Farmer stand-alone insurance productsº Weather-indexed loans or creditº Crop Loan Portfolio Insurance

Retention: Define the trigger index level where weather

protection beginsº How much risk does the farmer want to retain?º Key to pricing and transfer

Premium: How much can a farmers afford ? Payment terms for coverage (upfront, periodic etc.) Subsidised by lenders or government?

IIIa. STRUCTURE A PROGRAM

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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

A Standardized Approach To: Contract Design

RECOMMENDED APPROACH TO CONTRACT DESIGN

Course Title

EXAMPLE: LILONGWE CONTRACT, MAIZE

Deficit Rainfall (mm)

Payou

t ($

)

PHASE 1Sowing & Establishment

PHASE 3Yield Formation to Harvest

Deficit Rainfall (mm)

Payou

t ($

)

Deficit Rainfall (mm)

Payou

t ($

)

Cropping Calendar Sowing Window &

Dynamic Start Date

PHASE 2Growth & Flowering

Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts)

Phase 1: 50 daysTrigger Level: 40mmPayout per mm: 580 MKW/mmMaximum Payout: 5800 MKW

Phase 2: 30 daysTrigger Level: 130mmPayout per mm: 58 MKW/mmMaximum Payout: 5800 MKW

Phase 3: 40 daysTrigger Level: 25mmPayout per mm: 1160 MKW/mmMaximum Payout: 5800 MKW

10th November – 10 January:25 mm in 10 days

Course Title

DEVELOPING A PROGRAM

I. Identify significant farmer exposure to weather

II. Quantify the impact of adverse weather on their revenues

III. Structure a contract that pays out when adverse weather occurs

IV. Execute contract in optimal form to reinsure the risk in the international markets

Course TitleA Standardized Approach To: Program Implementation

Farmer/Farmer Groups

Insurance Company/Associatio

n

Reinsurance Company

(Bundled) weather insurance contract

Reinsurance treaty

In-Country

International

Product Retailer: Bank/MFI/Cooperative/Input Supplier

Bulk weather insurance contract

Met Office

Data

Data

Data

Data

Clear, well-defined responsibilities, product accounting practices and communication between all in-country

stakeholders

A STANDARDIZED APPROACH : IMPLEMENTATION

Course Title

TIMELINE

PRODUCT DESIGN

PRODUCT MARKETING

•Farmer Interviews

•Interviews with specialists.

•Interviews with key stakeholders.

•Data Procurement

•Index Design

• Product concept testing

• Product documentation

•Distribution Partners

•Product Education

•Product Feedback

•Weather Markets

•Product Execution

? months 3 months

PROTECTION PERIOD

•Daily Monitoring

X months

SETTLEMENT

•Settlement Calculation

•Claims Paid

1 month

Course TitleKEY 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?

Course Title

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.

CONCLUSION

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THANK YOU !