1. MALAWI’S EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEMEBy
Gray Munthali
Meteorological Services
P.O. Box 1808
Blantyre
Tel:
Fax:
Website:
African Ministerial Conference on the Environment (AMCEN), Nairobi, Kenya 25 – 29 May 2009

2. Purpose of the Insurance Scheme
The purpose of this Insurance scheme is to use an index-based weather derivative contract to transfer the financial risk of severe and catastrophic national drought that adversely impacts the Government’s budget to the international risk markets.
It will also provide micro weather insurance for farmers and agribusinesses in Malawi

3. WEATHER AND CLIMATE CHANGE RISK SECTORS INCLUDE:
Agriculture
Water Resources
Health
Energy
Infrastructure
Social Protection
Livestock
Tourism
Construction Industry
Gender

4. Weather Risk Management
What is it?
Financial protection against adverse weather conditions that result in losses or additional costs
Contracts can be structured as insurance or derivatives
Based on the performance of a specified weather index
Payouts are made if the index crosses a specified threshold at the end of the contract period
Objective and timely
Malawi context at the national level:
GoM is concerned about the impact of rainfall on maize production
Can provide payouts in the event of contractually specified shortfalls in rainfall during growing season
Essentially “budget insurance” for GoM
Timely access to cash in times of crisis, reducing reliance on international appeals

5. Prerequisites for a Risk Transfer Program
An index that captures national drought risk in Malawi
Government’s Maize Yield Assessment Model
Rainfall-based FAO model used since 1992 to forecast maize production
High quality historical weather data and reliable real-time communication is key for risk transfer
Malawi Met Office data reliable: stations with over 40 years, few gaps
Can provide real-time data required by market
Premium:
DFID supported initial premium cost in piloting phase starting 2008
International market wants to diversify and grow their portfolios, wants new risks

6. Why Climate Change Insurance Scheme?
In 2004, the National Smallholder Farmers Association of Malawi (NASFAM) wanted to expand its operations and grow the Malawi groundnut market domestically and for export
Greater output potential for farmers, profit; reliable yields; lower risk of disease; will receive training by NASFAM; access to high quality seed; export potential
Farmers needed financing to purchase quality seed from NASFAM
Perceived high risks from drought and high loan default rates deterring financing institutions from providing loans
2004/2005 drought led to recovery rates for lenders in the range 50-70%
Major government and donor lending program was discontinued
Two microfinance institutions stopped lending to agriculture, many reduced activities

7. Pilot Details,
Loans to cover seed, insurance premium and interest:
Opportunity International Bank of Malawi
Malawi Rural Finance Corporation
Program linked to larger NASFAM sensitization program on groundnut
Policies:
Insurance Association of Malawi (seven companies pooled the risk)
Premium: 6-7%, Max Payout per farmer: Loan Size given by bank
Seed & Product Distributor:
NASFAM: Groundnut in 2005, Groundnut & Hybrid Maize in 2006
Participants:
Farmers all members of NASFAM clubs
2005: 900 farmers, 4 weather stations, sum insured $35,000
2006: 1710 farmers, 5 weather stations, sum insured $110,000
Insurance Payout Payment details:
Payout: channeled from insurance company directly to the bank;
No Payout: farmers benefit from selling the higher value production

8. Pilot Results Major Achievements:
Unlocking credit facilities for smallholder farmers
Access to high yielding seeds and fertilizers
Generated high-level of interest from banking sector
But…
program discontinued in 2007
Groundnuts market prone to side-selling, leading to non-weather related defaults
Emerging agricultural supply chain with many problems greater than weather
Banks stopped lending to groundnuts in 2007, so no need for insurance
Other lessons learned:
Stand alone product had no takers
Premiums will always have to be pre-financed through loans
Distributor channel operational capacity critical

9. …Malawi: 2007 Onwards
Focus on established agricultural supply chains, e.g. tobacco
70% of current loan portfolios, has a maize loan component
Economies of scale and critical diversification for insurers
Tie-in with emerging contract farming relationships in Malawi
Since 2007:
Working with 3 banks and 2 contract farming companies, more interested
2600 farmers insured in 2008, portfolio size of $3 million
Currently limited expansion due to lack of local weather stations
Access to reinsurance market since 2007
Working at farmer and risk-aggregator (bank) level
Developing off-the-shelf products for other to support emerging supply chains and contract farming relationships
Cotton, tea, soybeans, paprika, other upcoming crops in need of finance
Banks and agri-businesses see this as a product for both themselves and farmers

10. Who is the client and why?
1. FARMERS
Gives farmers the ability to mitigate drought risk
Secure access to finance and inputs for improved production
Possibly improve long-term production and revenues
2. AGRIBUSINESSES
Weather risk management can also serve to enhance the efficiency of agricultural supply chains
Increased use of ag technology and inputs
New product offerings and services
3. BANKS
Protects both producer and loan provider from weather-related production risks
Allowing banks to expand their lending portfolios in a managed way
Managing weather risk can influence outreach, quantity, and cost of lending
Helps financial institutions in determining their exposure to weather risk– adding value even without insurance
4. INSURERS
Gives insurers the opportunity to re-enter rural markets
Agricultural markets are relatively untapped 10

13. STATION NETWORK PLANNING LISTNO
STATION
ADD
STATUS
OTHER AUTO-GAUGE STATIONS
REMARKS 1
CHITIPA
Karonga
Full Automatic
Misuku
Nthalire 2
KARONGA
(AIRPORT)
Vinthukutu
Lupembe
Baka
Baka is under Agricultural
Research (AR) 3
RUMPHI
Mzuzu
Bolero
Bwengu
Livingstonia
Nchenachena
Nchenachena and Bolero
are under Agricultural
Research 4
MZIMBA
Zombwe
Chikangawa
Mbalachanda
Emfeni
Euthini
Embangweni
Mbawa
Mbawa is under
Agricultural Research 5
MZUZU
Kavuzi
Ekwendeni 6
LUNYANGWA
Under Agricultural 7
NKHATA BAY
Chintheche, Mkondezi
Mkondezi is under AR

14. Tembwe fully operational and was supported by World BankNO
STATION
ADD
STATUS
OTHER AUTO-GAUGE STATIONS
REMARKS 8
LIKOMA ISLAND
Mzuzu
Full Automatic 9
KASUNGU
Kasungu
Mwimba
KFCTA 10
DOWA
Madisi 11
Mponela 12
NTCHISI
Malomo 13
MCHINJI (TEMBWE)
Mchinji Boma
Tembwe fully operational and was supported by World Bank 14
NKHOTAKOTA
Salima
Dwangwa 15
SALIMA
Chitala
Lifuwu
Both auto-gauge stations are under Agricultural Research 16
LILONGWE (KIA)
Lilongwe
Kasiya, Nathenje
Kamuzu Dam
Dzalanyama, Capital Hill
KIA already automatic

15. NO
STATION
ADD
STATUS
OTHER AUTO-GAUGE STATIONS
REMARKS 17
CHITEDZE
Lilongwe
Full Automatic
Under Agricultural Research 18
DEDZA
Mtakataka
Thiwi 19
NTCHEU
Bwanje
Mlangeni 20
BALAKA
Machinga
Toleza
Phalula
Balaka fully operational and was supported by World Bank 21
MACHINGA
Chikweo
Ntaja
Liwonde 22
MANGOCHI
Monkey Bay
Namiasi
Namwera 23
ZOMBA
Makoka
Chingale
Domasi
Makoka under Agricultural Research 24
NENO
Blantyre
Tsangano
Tsangano is under Agricultural Research 25
MWANZA 26
BLANTYRE (CHICHIRI)
Mpemba

16. BLANTYRE (CHILEKA AIRPORT) Blantyre Full Automatic Already automaticNO
STATION
ADD
STATUS
OTHER AUTO-GAUGE STATIONS
REMARKS 27
BLANTYRE (CHILEKA AIRPORT)
Blantyre
Full Automatic
Already automatic 28
CHIRADZULU
Mombezi 29
THYOLO
Luchenza 30
THYOLO (BVUMBWE)
Under Agricultural Research 31
PHALOMBE
Naminjiwa
Migowi 32
MULANJE
Thuchila
Mimosa
Masambanjati 33
CHIKWAWA
Shire Valley
Ngabu
Kasinthula
Both auto-gauge stations under Agricultural Research 34
NSANJE
Makhanga

17. COMMUNICATION CHALLENGES
Communication link at national and regional levels not satisfactory
Idea is to migrate from old costly communication technology to relatively low cost technologies
Observed that number of stations reporting on regular basis has dropped
In 2006/07 for example no data was received from Misuku, Mbalachanda, Embangweni in the North; Dzalanyama, Kasiya, Sinyala, Thiwi in the Centre; Masambanjati, Mwanza, Chikwawa, Phalula and Luchenza in the South.
Global Satellite Mobile (GSM) communication and internet are promising options.

18. PERCENTILE MAPS FOR 1948/49 SEASON

19. PERCENTILE MAPS FOR 1991/92 SEASON