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

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

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

4. CONTEXT

5. 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

6. 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

7. 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

8. 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.

9. 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

10. 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

11. 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

12. 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*

13. 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

14. 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?

15. 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

16. 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?

17. 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

18. EXAMPLE: LILONGWE CONTRACT, MAIZE
Phase 1: days
Trigger Level: mm
Payout per mm: MKW/mm
Maximum Payout: MKW
Phase 2: days
Trigger Level: mm
Payout per mm: MKW/mm
Maximum Payout: MKW
Phase 3: days
Trigger Level: mm
Payout per mm: MKW/mm
Maximum Payout: 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 Payouts)
10th November – 10 January:
25 mm in 10 days

19. 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

20. 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

21. 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

22. 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?

23. 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.

24. THANK YOU !