Weather Index Insurance in Agriculture: Guidance for Development Practitioners The following paper is a distillation of the findings of the work undertaken by the World Bank. It is deliberately not a collation of case studies, but rather a practical overview of the subject. The purpose of this paper is to introduce task managers and development professionals, who are not insurance sector specialists, to weather index insurance.
Traditional vs. index-based insurance - options for developing countries Traditional insurance relies on the principle of indemnity, where actual losses are measured in the field either after a specific event (named peril crop insurance), or through yield measurement at harvest (multiple peril crop insurance, or MPCI). In the case of named peril insurance, the claim is calculated by measuring the percentage damage in the field, soon after the damage occurs, through an on-farm assessment by a loss adjustor.
Index insurance for agriculture in developing countries: moving beyond pilots Weather is one of the most pervasive production risks to agriculture, impacting all aspects of the agricultural supply chain. In developing country economies, where a significant proportion of the population are reliant on rain-fed agriculture, weather risk remains one of the major constraints limiting commercialization and development of the agricultural sector. Agricultural technology such as new crop varieties, inputs, production techniques and management practices can in some cases minimize production risks; however, farmers will continue to be affected by many uncontrollable, weather related events – including excessive/insufficient rainfall and extreme temperatures – that can severely impact the quality and level of yields produced.
Weather Index-based Crop Insurance in Malawi Traditional crop insurance is difficult to deliver in smallholder economies as it involves costly individual loss assessments and is prone to moral hazard and adverse selection. Index-based crop insurance, on the other hand, uses weather observations as proxies for losses in production or quality and does not require loss assessments. Index-based crop insurance systems have lower administrative costs and are less technically complex than traditional crop insurance, but are exposed to basis risk (that is, mismatch between actual loss and insurance indemnity) and only cover selected perils.
India – Weather index insurance product for potato contract farmers As the third largest producer of potatoes in the world, India grows approximately 25 million tons of potatoes annually, or about 8 per cent of total worldwide production. To secure its supply of processing potatoes, used for potato chips, PepsiCo started a contract farming programme for potatoes in India in 1995. In 2008, it contracted with approximately 10,000 potato farmers across the country in Punjab, Uttar Pradesh, Bihar, West Bengal, Himachal Pradesh, Maharashtra, Tamil Nadu and Karnataka. PepsiCo planned to increase the total number of potato contract farmers to 12,000-15,000 by the end of 2009.
Use of index insurance to transfer Mexico’s catastrophic agricultural risks to the financial markets The government-owned AGROASEMEX designed and implemented this index insurance product in order to transfer Mexico’s catastrophic agricultural risks to the financial market. AGROASEMEX still manages the programme, is responsible for commercialization of the product, and transfers the risk to the international reinsurance market.
Index Insurance Applied to Agriculture: The Mexican Case The private sector’s limited participation in agricultural insurance in Mexico has been oriented toward large or very well organized producers. Low-income agricultural producers do not have access to insurance, but rather rely on monetary transfers from the government in the wake of extreme weather events. The systemic risk present in agriculture discourages private sector insurers from entering this market. The risk is catastrophic in nature, and insurers face high financial costs in building up sufficient reserves to cover sustained losses. In addition, much of the rural agricultural sector is characterized by low profitability and highly fragmented possession of land that is subject to extreme weather risks. Operating costs for insurers are also high because of the sociodemographic and geographic characteristics of Mexican agriculture.
Agricultural Insurance in Nicaragua: From Concept to Pilots to Mainstreaming Nicaragua’s economy is heavily based on agriculture and the performance of this sector strongly influences progress in poverty reduction. Reductions in extreme poverty have been associated with the decline in relative prices of key food staples that constitute approximately one‐third of the diet of the extremely poor. Weather risk exposure and price volatility for agriculture commodities, coupled with high inequality in incomes and assets, has led financial institutions to concentrate their agricultural lending on large farmers that can guarantee credit with sufficient collateral. The absence of ex‐ante initiatives to manage weather-related risks has further constrained agricultural lending.
Providing Weather Index and Indemnity Insurance in Ethiopia Agriculture in Ethiopia is almost entirely rainfed and highly prone to droughts and floods. Given that 85 percent of the population depends on smallholder agriculture, these weather shocks severely affect many Ethiopians. The high covariance of climatic risks, coupled with the lack of property to be attached as collateral, makes it difficult for cooperatives, microfinance organizations, or banks to provide financial services to smallholder farmers unless they have some insurance/reinsurance against this weather risk. These conditions in turn keep farming at a subsistence level, with low use of improved technology, low productivity, and low risk. Nyala insurance has experienced considerable success in designing innovative weather insurance products that protect a range of farmers. Public investments in institutions such as cooperatives that can retail these products to farmers and automated weather station infrastructure can help scale up these products.
The Promise of Index Insurance Index-based insurance is an innovative financial product, which has been introduced in recent years in countries as diverse as India, Mongolia, Malawi and Thailand. It allows individual smallholder farmers to hedge against agricultural production risk, such as drought or flood. The product pays out in events that are triggered by a publicly observable index, such as rainfall recorded on a local rain gauge. Advocates argue that index insurance is transparent and inexpensive to administer, enables quick payouts, and minimizes moral hazard and adverse selection problems associated with other risk-coping mechanisms and traditional insurance programs.
07.02.2012 1-2 March 2012 - International Conference - CIS SUGAR MARKET 2012 Russia and neighbouring countries took the global sugar market by surprise in the second half of 2011 when it became apparent that the CIS region would produce a record sugar beet crop reducing dramatically import demand for sugar from the world market. 30.10.2011 Where the margin is 2012 - conference in Moscow The Conference "Where the margin is" will be held on January 31, 2012, in MOscow in the Radisson Slavianskaya Hotel. The conference is meant for agricultural producers, inputs manufacturers, dealers and distributors, financiers, insurers, agribusiness investors, policy makers.
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