Presentation on theme: "MALAWI’S EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME"— Presentation transcript:
1 MALAWI’S EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME ByGray MunthaliMeteorological ServicesP.O. Box 1808BlantyreTel:Fax:Website:www.metmalawi.comAfrican 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
4 Weather Risk Management What is it?Financial protection against adverse weather conditions that result in losses or additional costsContracts can be structured as insurance or derivativesBased on the performance of a specified weather indexPayouts are made if the index crosses a specified threshold at the end of the contract periodObjective and timelyMalawi context at the national level:GoM is concerned about the impact of rainfall on maize productionCan provide payouts in the event of contractually specified shortfalls in rainfall during growing seasonEssentially “budget insurance” for GoMTimely 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 MalawiGovernment’s Maize Yield Assessment ModelRainfall-based FAO model used since 1992 to forecast maize productionHigh quality historical weather data and reliable real-time communication is key for risk transferMalawi Met Office data reliable: stations with over 40 years, few gapsCan provide real-time data required by marketPremium:DFID supported initial premium cost in piloting phase starting 2008International 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 exportGreater output potential for farmers, profit; reliable yields; lower risk of disease; will receive training by NASFAM; access to high quality seed; export potentialFarmers needed financing to purchase quality seed from NASFAMPerceived high risks from drought and high loan default rates deterring financing institutions from providing loans2004/2005 drought led to recovery rates for lenders in the range 50-70%Major government and donor lending program was discontinuedTwo microfinance institutions stopped lending to agriculture, many reduced activities
7 Pilot Details,Loans to cover seed, insurance premium and interest:Opportunity International Bank of MalawiMalawi Rural Finance CorporationProgram linked to larger NASFAM sensitization program on groundnutPolicies:Insurance Association of Malawi (seven companies pooled the risk)Premium: 6-7%, Max Payout per farmer: Loan Size given by bankSeed & Product Distributor:NASFAM: Groundnut in 2005, Groundnut & Hybrid Maize in 2006Participants:Farmers all members of NASFAM clubs2005: 900 farmers, 4 weather stations, sum insured $35,0002006: 1710 farmers, 5 weather stations, sum insured $110,000Insurance 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 farmersAccess to high yielding seeds and fertilizersGenerated high-level of interest from banking sectorBut…program discontinued in 2007Groundnuts market prone to side-selling, leading to non-weather related defaultsEmerging agricultural supply chain with many problems greater than weatherBanks stopped lending to groundnuts in 2007, so no need for insuranceOther lessons learned:Stand alone product had no takersPremiums will always have to be pre-financed through loansDistributor channel operational capacity critical
9 …Malawi: 2007 OnwardsFocus on established agricultural supply chains, e.g. tobacco70% of current loan portfolios, has a maize loan componentEconomies of scale and critical diversification for insurersTie-in with emerging contract farming relationships in MalawiSince 2007:Working with 3 banks and 2 contract farming companies, more interested2600 farmers insured in 2008, portfolio size of $3 millionCurrently limited expansion due to lack of local weather stationsAccess to reinsurance market since 2007Working at farmer and risk-aggregator (bank) levelDeveloping off-the-shelf products for other to support emerging supply chains and contract farming relationshipsCotton, tea, soybeans, paprika, other upcoming crops in need of financeBanks and agri-businesses see this as a product for both themselves and farmers
10 Who is the client and why? 1. FARMERSGives farmers the ability to mitigate drought riskSecure access to finance and inputs for improved productionPossibly improve long-term production and revenues2. AGRIBUSINESSESWeather risk management can also serve to enhance the efficiency of agricultural supply chainsIncreased use of ag technology and inputsNew product offerings and services3. BANKSProtects both producer and loan provider from weather-related production risksAllowing banks to expand their lending portfolios in a managed wayManaging weather risk can influence outreach, quantity, and cost of lendingHelps financial institutions in determining their exposure to weather risk– adding value even without insurance4. INSURERSGives insurers the opportunity to re-enter rural marketsAgricultural markets are relatively untapped10
13 STATION NETWORK PLANNING LIST NOSTATIONADDSTATUSOTHER AUTO-GAUGE STATIONSREMARKS1CHITIPAKarongaFull AutomaticMisukuNthalire2KARONGA(AIRPORT)VinthukutuLupembeBakaBaka is under AgriculturalResearch (AR)3RUMPHIMzuzuBoleroBwenguLivingstoniaNchenachenaNchenachena and Boleroare under AgriculturalResearch4MZIMBAZombweChikangawaMbalachandaEmfeniEuthiniEmbangweniMbawaMbawa is underAgricultural Research5MZUZUKavuziEkwendeni6LUNYANGWAUnder Agricultural7NKHATA BAYChintheche, MkondeziMkondezi is under AR
14 Tembwe fully operational and was supported by World Bank NOSTATIONADDSTATUSOTHER AUTO-GAUGE STATIONSREMARKS8LIKOMA ISLANDMzuzuFull Automatic9KASUNGUKasunguMwimbaKFCTA10DOWAMadisi11Mponela12NTCHISIMalomo13MCHINJI (TEMBWE)Mchinji BomaTembwe fully operational and was supported by World Bank14NKHOTAKOTASalimaDwangwa15SALIMAChitalaLifuwuBoth auto-gauge stations are under Agricultural Research16LILONGWE (KIA)LilongweKasiya, NathenjeKamuzu DamDzalanyama, Capital HillKIA already automatic
15 NOSTATIONADDSTATUSOTHER AUTO-GAUGE STATIONSREMARKS17CHITEDZELilongweFull AutomaticUnder Agricultural Research18DEDZAMtakatakaThiwi19NTCHEUBwanjeMlangeni20BALAKAMachingaTolezaPhalulaBalaka fully operational and was supported by World Bank21MACHINGAChikweoNtajaLiwonde22MANGOCHIMonkey BayNamiasiNamwera23ZOMBAMakokaChingaleDomasiMakoka under Agricultural Research24NENOBlantyreTsanganoTsangano is under Agricultural Research25MWANZA26BLANTYRE (CHICHIRI)Mpemba
17 COMMUNICATION CHALLENGES Communication link at national and regional levels not satisfactoryIdea is to migrate from old costly communication technology to relatively low cost technologiesObserved that number of stations reporting on regular basis has droppedIn 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.
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