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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
Course Title
• 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
Course Title
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
Course Title
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
Course Title
THANK YOU !
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