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6/1/2014 1:49 AM1 USING INDEX-BASED WEATHER INSURANCE-THE MALAWI EXPERIENCE By Gift Livata Opportunity Bank-Malawi Expert Meeting on Risk Management for.

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Presentation on theme: "6/1/2014 1:49 AM1 USING INDEX-BASED WEATHER INSURANCE-THE MALAWI EXPERIENCE By Gift Livata Opportunity Bank-Malawi Expert Meeting on Risk Management for."— Presentation transcript:

1 6/1/2014 1:49 AM1 USING INDEX-BASED WEATHER INSURANCE-THE MALAWI EXPERIENCE By Gift Livata Opportunity Bank-Malawi Expert Meeting on Risk Management for Financing to the Agric value chain in Africa. Johannesburg 1-3 April, 2009

2 6/1/2014 1:49 AM2 Malawis Socio-Economical Background A small county in central south eastern Africa with a population of 13 Million 85% of the population live in rural and agriculture is their main livelihood 1% of the total population has access to credit The majority of the population is not insured GDP is $180 per capita per annum Agriculture contributes 37.8 % to the countrys GDP 90% of the foreign earnings come from agriculture

3 6/1/2014 1:49 AM3 Opportunity International Bank Of Malawi A microfinance Bank which started in Malawi in 2003 A member of Opportunity International network operating in 45 countries Asset base $40M Has a client base of over 203,000 customers 38,800 Borrowers ($30M) 6,500 agriculture borrowers (2009) $7m agric loan portfolio Over 12,000 lives are covered with weather insurance

4 6/1/2014 1:49 AM4 Agriculture and Rural Finance in Malawi Not many players in the smallholder agriculture and rural sectors. Only 150,000 smallholder farmers have access to agriculture credit out of estimated 3,000,000 farmers Why? Weak and inefficient linkages between players in the agricultural value chain High transaction cost Lack of technology and instruments that can adequately manage risks

5 6/1/2014 1:49 AM5 Major Risks Associated With Agric Microfinance RiskFactorsEffects WeatherAdverse Weather, pests and diseases Low yields and loss of income PriceMarket Forces (demand and Supply) Lower prices and income FinancialHigher than anticipated input costs. Length of production cycle linked to inflation risk. High cost of credit Cash flow problems. Uncertain cash flow RegulatoryRegulatory changes affect cost of production Changes in inputs costs

6 6/1/2014 1:49 AM6 Malawian Farmer Major Challenges Farmer Weather -drought -flood Inputs/ Finance Extension Services/ Technical Expertise Market -prices

7 6/1/2014 1:49 AM7 Strategic Links The Rural Model OUTPUT MARKET Contract / Auction / Trader Market Information Systems Infrastructure Communications Power Roads Water Extension Services Technical Support Research & Development Input Supplier/s Seeds/Tools/Ferts/ Chems Microfinance Savings / Loans / Transfer Insurance products Farmer Farmers Groups 7

8 6/1/2014 1:49 AM8 Weather Risk Weather is one of the biggest peril Weather risk has the most significant impact on the incomes of agricultural producers Weather related risks negatively impact individual house holds and local economy

9 6/1/2014 1:49 AM9 What Is Weather Index Insurance? Financial protection based on the performance of a specified index in relation to a specified trigger. This is a product designed to provide compensation to farmers when the rainfall during a crop growing cycle is insufficient or too much for farmers to grow and optimize their yields Weather insurance does not measure changes in yields instead it measures changes in rainfall assuming that if rainfall is bad farmers yields will be poor Offers protection against uncertain costs or revenues that result from volume volatility –Farmers are compensated against unfavorable weather fluctuations that impact physical volumes produced –Objective & timely

10 6/1/2014 1:49 AM10 How does Weather Index Insurance work? Drought/Excess rain is not measured by what happens in a farmers field, it is determined by measuring the amount of rain that was received. It is impossible to do measurement on each individual farmers plot instead weather insurance measures the amount of rain recorded at Weather Station. It is believed that farmers experience similar weather conditions within a radius of 20 km

11 6/1/2014 1:49 AM11 Weather Insurance in Malawi Started a pilot in 2005 No individual insurance companies was ready to underwrite policies Insurance Association accepted to test the pilot and spread the risk among its members Historical yield data for the past 40yrs were provided for five weather stations For the pilot to work agric value chain organisations were identified and roles and responsibility were shared in accordance with line of mandate i.e OIBM,MRFC, NASFAM, MET Dept and Insurance Association of Malawi.. Over the passage of time Malawi has been able to pilot weather index project at micro, meso and macro

12 6/1/2014 1:49 AM12 Example: Lilongwe Contract, Maize Deficit Rainfall (mm) Payout ($) PHASE 1 Sowing & Establishment PHASE 3 Yield Formation to Harvest Deficit Rainfall (mm) Payout ($) Deficit Rainfall (mm) Payout ($) Cropping Calendar Sowing Window & Dynamic Start Date PHASE 2 Growth & Flowering Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts) Phase 1: 50 days Trigger Level: 40mm Payout per mm: 580 MKW/mm Maximum Payout: 5800 MKW Phase 2: 30 days Trigger Level: 130mm Payout per mm: 58 MKW/mm Maximum Payout: 5800 MKW Phase 3: 40 days Trigger Level: 25mm Payout per mm: 1160 MKW/mm Maximum Payout: 5800 MKW 10 th November – 10 January: 25 mm in 10 days

13 6/1/2014 1:49 AM13 Weather Index Insurance Pilot Programs In Malawi The pilot programs started in Malawi in 2005 with groundnuts farmers under NASFAM 892 farmers were recruited for the project. Two micro-finance institutions participated: Opportunity International Bank of Malawi (OIBM) and Malawi Rural Finance Company (MRFC) with a total sum of USD25,000 and USD12,000 respectively. The results well not satisfactory as many farmers side sold the groundnuts

14 6/1/2014 1:49 AM14 2006/2007 Season 2006/2007 Season The number of farmers increased to 1800 farmers growing both maize and chalimbana 2000 groundnuts. Sums insured increased to USD80,000.00 against a premium of USD7100 OIBM policy and a sum insured of USD22,000 against a premium of USD1620 MRFC. Farmers bought the premiums because it was a bundled product. Payout of USD850 under OIBM and USD395 under MRFC policy were made to the farmers Side selling was still an issue

15 6/1/2014 1:49 AM15 2007/2008 Season Changed the lending model to a tripartite to address side selling issues. Tobacco was preferred to g/nuts because of its well established market structure This included 425 farmers growing tobacco and maize. Participation of Swiss-Re (50%) and Paris-Re (30%). The index was modified to provide cover against both deficit and excessive rainfall OIBM changed the approach from farmer level to portfolio cover Sum insured of USD310,000 against premium of USD13,500 No pay out

16 6/1/2014 1:49 AM16 2008/09 Growing Season This year we insured 2189 Burley Tobacco farmers and 344 flue cured tobacco farmers, making a total of 2533 farmers. The total sum insured this year USD2,402,804 Changed from three phase to multi phase contracts (2 weeks period) No payout

17 6/1/2014 1:49 AM17 11.5 11 11110.75 1 W 11.5 111111111 W Example: Bi-Weekly phase Weighted Cumulative Weekly Deficit, D Sum (W * max(0, 25 – Weekly Cumulative Rainfall)) e.g. 1 * 2 + 1 * 10 + 1 * 15 + 1 * 10 = 37 80mm 25mm 15mm 10mm 15mm 23mm 85mm 90mm 85mm 87mm 95mm 83mm Weighted Cumulative Weekly Excess, E Sum (W *max(0, Weekly Cumulative Rainfall – 80)) e.g. 1.5 * 5 + 1.5 * 10 + 1.5 * 5 + 1 * 7 + 1 * 15 + 1 * 3 = 55 15 Nov – 20 Dec Transplanting Window & Dynamic Start Date Total Contract Payout = max(0, D – 85)*375 + max(0, E – 110)*375 Max Payout 231,000 MKW per hectare

18 6/1/2014 1:49 AM18 1.Non-homogeneity in rainfall patterns 2.Limited number of automated weather stations 3.Lack of local capacity in terms of expertise necessary to design and price the contracts. 4.Lack of diversity in crops and space 5.Lack of historical weather data 6.Difficult for the farmers to understand Challenges

19 6/1/2014 1:49 AM19 Lessons Learnt Farmers need practical solutions for their problems Weather index insurance gives a safety net to both the farmer and the bank It provides cover for the specified index only weather insurance is best sold when bundled with credit and not as a stand alone product weather index insurance provide a win-win situation to all the players. With weather index no physical presence is required to assess the damage Weather Insurance is not the final solution for challenges that farmers face it is part of the solution.

20 6/1/2014 1:49 AM20 Weather Stations and OIBM network Current weather data allowed OIBM to cover 35% of 2008-9 Agric loans with Weather Index Insurance. It is envisaging that by 2009 the bank will be able to cover 100 of the agric portfolio with weather index if weather stations are automated.

21 6/1/2014 1:49 AM21 THANK YOU FOR YOUR ATTENTION Gift Livata Agricultural Microfinance Coordinator Opportunity International Bank Malawi Email: Alt email: Cell:+265 99 9 200 108

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