INSURANCE APPROACHES : INDEX BASED WEATHER INSURANCE SHADRECK MAPFUMO VICE PRESIDENT,CROP INSURANCE MICRO INSURANCE AGENCY HOLDINGS, LLC 3rd AFRICAN MICROFINANCE CONFERENCE KAMPALA

Malawi Project Partners CRMG- WORLD BANK (Certain Slides ) MRFC OIBM NASFAM Malawi MET IRI, Columbia University

PRESENTATION OVERVIEW Context How to Develop a Micro Level Weather Risk Management Program Timeline. Key Hurdles Conclusion

CONTEXT

Insurance only covers causes captured by index RISKS IN AGRICULTURE Weather Related: Drought Flood Frost Hail Cyclone Non Weather Related: Displacement Civil Strife Economic Decline Price Collapse Pests Insurance only covers causes captured by index

HOW FARMERS COPE WITH DROUGHT RISK Minimize investment: local seeds, little/no fertilizer Cover ground with straw to protect humidity (coffee) Irrigate Diversify: Plant Cassava as “drought insurance” Accumulate livestock as “bank” for times of stress Food emergency camps (unpredictable) Food aid – some migration Normal Yield Extra yield Soil (+asset) depletion Insurance Intervention 1 in 20 years 1 in 7 1 in 2 1 in 4 Frequency

TRADITIONAL VS. INDEX- BASED INSURANCE Index-Based Weather Insurance Use weather parameteras a proxy for damage Objective triggers and structured rules for payouts Improved correlation between need and provision Multi-peril Crop Insurance High Administrative Costs Moral Hazard Adverse Selection

CHALLENGE Design an alternative, efficient and cost-effective crop failure insurance program that can be easily reinsured and distributed to individual farmers: small, medium and large.

DEVELOPING A PROGRAM Identify significant farmer exposure to weather Quantify the impact of adverse weather on their revenues Structure a contract that pays out when adverse weather occurs Execute contract in optimal form to reinsure the risk in the international markets

DEVELOPING A PROGRAM Identify significant farmer exposure to weather Quantify the impact of adverse weather on their revenues Structure a contract that pays out when adverse weather occurs Execute contract in optimal form to reinsure the risk in the international markets

I.IDENTIFY THE RISK Location: Period: Index: Which regions are at risk to weather? What are the weighting for each region’s contribution to risk? Period: What is the critical period? Monthly, seasonal, annual, multi-year? Index: What weather measurement is the most accurate proxy for exposure? Temperature, Rainfall, Snow, Frost etc. Average, Minimum, Maximum Cumulative Event Combination or compound or several factors

CROP SENSITIVITY TO WEATHER *Maize yields are particularly sensitive to rainfall during the tasseling stage and the yield formation stage – rainfall during the latter phase determines the size of the maize grain 2% 2% 2% 2% 13% 13% 13% 13% 13% 13% 13% 1% 1% x Cumulative Rainfall in each decade = Maize Rainfall Index Weights and diagram taken from the FAO’s maize water requirement report*

DEVELOPING A PROGRAM Identify significant farmer exposure to weather Quantify the impact of adverse weather on their revenues Structure a contract that pays out when adverse weather occurs Execute contract in optimal form to reinsure the risk in the international markets

II.QUANTIFY THE EXPOSURE Unit Exposure: What is the farmer’s weather exposure per unit of the defined index? What is the yield volume lost per unit index? Best year/worst year analysis, yield regression etc. What is the $ value lost per unit index? Expected market value, input/production costs Limit: What is the total amount of protection required per risk period? This may be the starting point for determining the total sum insured What are the objectives of the pilot program?

DEVELOPING A PROGRAM Identify significant farmer exposure to weather Quantify the impact of adverse weather on their revenues Structure a contract that pays out when adverse weather occurs Execute contract in optimal form to reinsure the risk in the international markets

III. STRUCTURE THE PRODUCT IIIa. STRUCTURE A PROGRAM Type: Insurance at what level? Farmer stand-alone insurance products Weather-indexed loans or credit Crop Loan Portfolio Insurance Retention: Define the trigger index level where weather protection begins How much risk does the farmer want to retain? Key to pricing and transfer Premium: How much can a farmers afford ? Payment terms for coverage (upfront, periodic etc.) Subsidised by lenders or government?

A Standardized Approach To: Contract Design RECOMMENDED APPROACH TO CONTRACT DESIGN A Standardized Approach To: Contract Design Balance simplicity that farmers and stakeholders can understand, with the complex dynamics that characterize water stress impact on crop yields: Easy to communicate to farmers and stakeholders Performs well from agro-meteorological perspective Provides required protection for all stakeholders at an affordable level Captures local conditions and environment Simple to replicate to other locations and crops so that programs are scalable Local ownership, so programs are sustainable

EXAMPLE: LILONGWE CONTRACT, MAIZE 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 Deficit Rainfall (mm)  Payout ($)  PHASE 1 Sowing & Establishment PHASE 3 Yield Formation to Harvest Cropping Calendar  Sowing Window & Dynamic Start Date PHASE 2 Growth & Flowering Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts) 10th November – 10 January: 25 mm in 10 days

DEVELOPING A PROGRAM Identify significant farmer exposure to weather Quantify the impact of adverse weather on their revenues Structure a contract that pays out when adverse weather occurs Execute contract in optimal form to reinsure the risk in the international markets

A Standardized Approach To: Program Implementation A STANDARDIZED APPROACH : IMPLEMENTATION A Standardized Approach To: Program Implementation Data Reinsurance Company International Reinsurance treaty In-Country Insurance Company/Association Data Bulk weather insurance contract Product Retailer: Bank/MFI/Cooperative/Input Supplier Data Met Office (Bundled) weather insurance contract Farmer/Farmer Groups Data Clear, well-defined responsibilities, product accounting practices and communication between all in-country stakeholders

TIMELINE PRODUCT DESIGN PRODUCT MARKETING PROTECTION PERIOD SETTLEMENT Farmer Interviews Interviews with specialists. Interviews with key stakeholders. Data Procurement Index Design Product concept testing Product documentation Distribution Partners Product Education Product Feedback Weather Markets Product Execution ? months 3 months PROTECTION PERIOD Daily Monitoring X months SETTLEMENT Settlement Calculation Claims Paid 1 month

KEY HURDLES Weather infrastructure. Basis Risk or “How good is this insurance?” Mismatch between coverage and actual result How can it be minimised? Write contracts on stations near farmers Clever structuring Community-level risk pooling? Protection against catastrophic events Satellite data – NDVI, derived precipitation? Data or “Can we reinsure the risk?” Length of historical record - 30 years or more? Quality controlled, cleaned, enhanced? Reliable ongoing collection and reporting procedures? Third-party settlement data e.g. UKMO?

Weather insurance is not a panacea : CONCLUSION Weather insurance is not a panacea : It can only enhance existing agricultural supply chains and businesses, not create them It can help support expansion in rural finance and agriculture But must go hand in hand with investment in extension services, irrigation, strengthening of input and output markets etc.

THANK YOU !