Shu-Ling Chen - APEC Typhoon Chen.pdf · Shu-Ling Chen Department of Finance and Cooperative Management, NTPU Taiwan Typhoon and Flood Research Institute, NARLABS 2016 ACTS Workshop,

Shu-Ling ChenDepartment of Finance and Cooperative Management, NTPU

Taiwan Typhoon and Flood Research Institute, NARLABS

2016 ACTS Workshop, October 17-18, 2016 2

Source: https://tw.images.search.yahoo.com/



2016 ACTS Workshop, October 17-18, 2016

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Classified by the payoff measurement Indemnity-based insurance Parametric/Index-based contract

Classified by the nature of the intended policyholder and the uses in risk management strategies Micro (individual) insurance Meso insurance Macro insurance


Indemnity-Based

• Pay-off depends on the principle of indemnity• Losses are measured in the individual yield either after the loss event or

through yield measurement at harvest time

Index-Based

• Pay-off is determined by an objective and independent parameter that serves as a proxy for significant losses to crop, livestock, or other property

• The index must be highly correlated with losses and cannot be influenced by the insured

• An index can be based on a verifiable variable with a long and consistent history that will allow the contract to be accurately rated


Indemnity-Based Insurance

pay-off depends on the actual amount of losses

problems of asymmetric information and systemic risks

high administrative cost

high loss-adjustment cost

high political influence

Weather Index-Based Contract

pay-off depends on the values of a weather index, not verifiable losses

eliminate moral hazard and adverse selection

low administrative and monitoring costs

require reliable, timely, and high quality data at weather station networks

uncertain access to weather data

existence of basis risk



Thailand Disaster Declarations

Source: Sapra, 3rd Asia Agricultural Insurance Conference, 2016

Loss assessment monitoring

Government wants payouts for political gain

Indemnity-Based Insurance

pay-off depends on the actual amount of losses

problems of asymmetric information and systemic risks

high administrative cost

high loss-adjustment cost

high political influence

Weather Index-Based Contract

pay-off depends on the values of a weather index, not verifiable losses

eliminate moral hazard and adverse selection

low administrative and monitoring costs

require reliable, timely, and high quality data at weather station networks

uncertain access to weather data

existence of basis risk


Source: J-PAL, CEGA, and ATAI Policy Bulletin, 2016.


• Held by individuals/farmers to manage individual-level production or financial risks

MICRO-Products

• Held by businesses/corporations that provide financial intermediation to large groups of individuals or farmers (e.g., banks, input suppliers, processors & cooperatives)

MESO-Products

• Used primarily by national governments, regional administrative agencies, and non-governmental relief organizations

MACRO-Products


Source: J-PAL, CEGA, and ATAI Policy Bulletin, 2016.



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Source: World Bank, 2012


Crop Groundnut

Participants National Smallholder Farmers Association of Malawi(NASFAM) members

Peril Covered Drought

Proxy to Peril Rainfall Deficiency

Weather Station Chitedze Research Station

Term One crop cycle (three stages)

Trigger 60 mm (in establishment and vegetative growth stage)160 mm (in flowering and pod formation stage)100 mm (in pod filling and maturity phase)

Maximum Payout Loan given by bank

Source: Syroka, 2007


Source: Syroka, 2007


Catastrophic rain and floods are single greatest risk endured in

Piura, Peru’s richest agricultural region. associated with major El Niños

caused by sea-surface temperature.

During severe El Niños, rains increase in intensity, duration and geographic scope – rainfall can reach levels more than 40 times normal.


The risk of El Niño constrains access to agricultural credit in northwest Peru.

With support from USAID, a financial risk transfer product was developed to help microfinance institutions (MFIs) in Piura, Peru protect their agricultural and rural loan portfolios against the adverse effects of catastrophic El Niño weather events.


Contract that indemnifies when sea-surface temperatures (SST) are high would allow agricultural banks in Piura to transfer El Niño risk to international reinsurers.

Contract triggers when SST in the ENSO 1.2 zone(0-10S, 90W-80W) measured and reported by NOAA Climate Prediction for November and December exceeds 24 degree Celsius.

ENSO Index = (Nov ENSO 1.2 + Dec ENSO 1.2)/2

Insured bank receives maximum indemnity if ENSO index exceeds a stop loss point, say 27 degree Celsius.

Indemnities between the trigger and stop loss are proportionate.

Premium rates depend on distributional model of El Niño Southern Oscillation index, adjusted for administrative cost.


Contract indemnifies before losses due to catastrophic flooding would be incurred.

Average ENSO 1.2 measures for November and December predicts extreme flooding events in February through April with a high confidence level.


Source: Skees and Murphy, 2009

More than 80% of electricity in Uruguay is generated from hydropower plans.

Administración Nacional de Usinas y Trasmisiones Eléctricas (UTE), Uruguay’s state –owned public electric company, exposed to the risk of drought and high oil prices when rainfall and/or accumulated water reserves is low.

On December 18, 2013, the World Bank executed a $450 million weather and oil price insurance transaction for UTE for the next 18 months.

Daily rainfall data is collected at 39 weather stations spreading throughout the two river basins: the Rio Negro and the Rio Uruguay, where UTE’s hydropower is dependent on.


Type of Contract Hydropower energy index-lined weather derivative

Maximum Payout US$ 450 million (cumulative)

Term 18 months from Jan 1, 2014 to June 30, 2015

Weather Index Uruguay Potential Hydropower Energy Index (“UPHEI”)

Strike Specified units of the UPHEI index

Settlement Dates Semi-annual (for a total of 3 semesters)



UTE receives a payout from the World Bank when the weather index is below the pre-determined trigger.

The trigger was selected by UTE, based on coverage and cost considerations.

The amount of the payout depends on the level of the rainfall index and market oil prices at that time.

The World Bank entered into a mirroring agreement with Nephila/Allianz and Swiss Re and effectively transferred the risk onto these entities.




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Source: Gao, 3rd Asia Agricultural Insurance Conference, 2016


• Growing phases and stages are sensitive to timing

• Growing season differs by crops and by regions


Source: Shynkarenko, 3rd Asia Agricultural Insurance Conference, 2016












Risk financing is as important as risk prevention and risk reduction.

With the growth of capital market and technology advanced, weather risk becomes insurable. Risk financing techniques, such as index insurance or non-insurance transfer contract, serve as alternative risk transfers for weather risk management.



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Project leads PepsiCo, WRMS, ICICI LombardClient Potato farmers participating in PepsiCo contract

farming programmeInsurer ICICI Lombard (insurer) and WRMS (technical and

infrastructure support)Weather data provider Weather Risk Management Services (WRMS)Crops Potatoes Risks Late blight diseaseIndex Humidity and temperaturePremium US$30/acre

PepsiCo offers an incentive in the buy-back price of RS 0,15/kg (US$ 0,002/kg) with purchase of index insurance

Resource: AgroInsurance.com

Documents

Shu-Ling Chen - APEC Typhoon Chen.pdf · Shu-Ling Chen Department of Finance and Cooperative Management, NTPU Taiwan Typhoon and Flood Research Institute, NARLABS 2016 ACTS Workshop,