Transcript Structure Example

Managing Risk in Financing Agriculture - Expert Meeting
Index Based Weather Insurance
William Dick
Commodity Risk Management Group
Agriculture and Rural Development Department
World Bank
Johannesburg, April 2009
ALL ACP AGRICULTURAL COMMODITIES PROGRAMME
EUROPEAN DEVELOPMENT FUND
ACP GROUP OF STATES
Global agricultural insurance market
Source: Paris Re, 2008
Rural insurance constraints in developing countries
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Highly challenging environment for insurers
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Clients
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Insurers lack rural networks, expertise, data
Technically complex to insure crops and livestock
Catastrophe risk exposures
High transaction and loss assessment costs
More profitable opportunities exist in commercial and urban areas
Small size, geographically spread
Lack insurance awareness
Lack capacity or willingness to pay premiums
Lack incentives to insure if there is government disaster assistance
Inadequate data and infrastructure
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Poor statistical base (crop production, risks, losses)
Poor rural services including credit
Difficult to establish distribution channels and linkages
Agricultural insurance – product range
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Traditional crop and livestock indemnity products
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Index-based products
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Named peril crop insurance (e.g. hail)
Multiple peril crop insurance (yield guarantee)
Revenue insurance (yield and some price protection)
Livestock mortality insurance
Weather index products
Area yield index products
Livestock index products
Rural insurance products
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Health, life, property, motor…
Microinsurance - a growing sector enabling rural households to
access simplified policies
Risk assessment
Senegal: Causes of Loss in Rain-fed and Irrigated Crops
Rainfed Crops: Causes of Crop Losses
Other
Locusts 4%
Flood
5%
5%
Wind
Theft 1%
2%
Fire
1%
Drought
29%
Bird attack
6%
Irrigated Crops: Causes of Crop Loss
Commercial Locusts
risks
3%
Theft
4%
Lack Irrigation 5%
water
7%
Wind
1%
Unseasonal
rainfall
16%
Bird attack
7%
Unseasonal
rainfall
9%
Animals
9%
Disease
13%
Insects (excl.
locusts)
16%
Insects (excl.
locusts)
Irrigation
7%
equipment
breakdown
10%
Animals
12%
Flood
13%
Disease
15%
Philippines - Rice Crop Insured Causes of Loss
1981 to 2006 (26 years) (P.Pesos ’000)
Diseases
241,642
12%
Others
28,738
1%
Pest
365,004
19%
Drought
255,869
13%
Typhoon &
Flood
1,046,097
55%
Total: P1,937,350
Source: Philippines Crop Insurance
Corporation (Multi-Peril Crop Insurance)
What are index insurance contracts ?
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An index insurance contract pays out based on the value of an “index”,
not on losses measured in the field
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An index is a variable that is highly correlated with losses and that
cannot be influenced by the insured
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Example indexes - rainfall, temperature, regional yield, river levels
etc.
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Key strengths
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Index insurance overcome most of the supply side problems of MPCI
Objective and transparent
Provides timely payout
Reduce administrative costs
Facilitates international reinsurance
Constraints
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Basis risk – the potential mismatch between losses and payouts
Provides single-risk protection
High inputs required during development phase
Weather data and networks
Requires local adaptation – slows the scaling up
Simple Index Insurance Contract
Deficit Rainfall (mm) 
Payout ($) 
Payout ($) 
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Three-phase deficit rainfall weather insurance contract, indexed to a weather
station
Pioneered by Indian insurance company ICICI Lombard in 2004 and subsequently in
many CRMG pilots around the world (Malawi, Central America, Thailand)
Payout ($) 
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Deficit Rainfall (mm) 
Deficit Rainfall (mm) 
PHASE 1
PHASE 2
PHASE 3
Sowing & Establishment
Growth & Flowering
Yield Formation to Harvest
Sowing Window &
Dynamic Start Date
Dekadal Cropping Calendar* 
* Cumulative rainfall per dekad is capped to prevent excessive rainfall impacting the phase-wise total
Motivation/Benefits
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Traditional crop insurance for smallholder economies is extremely
challenging
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Agricultural production suffers from covariant risks (e.g. drought)
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Many constraints for traditional products based on individual loss
assessments
Needs reinsurance
Risk management products adapted to developing countries could
increase access to, and reduce cost of, agricultural credit
Index-based weather insurance:
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Avoids the need for loss assessments
Lowers programme costs and technical complexity
Objective and timely
Works well for spatially correlated risks
Reinsurable
Product Limitations
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Addresses only one aspect of production risk – deficit rainfall,
excess rainfall, low temperatures etc. – amongst many – pests,
poor inputs, farm management…
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“Basis Risk”, the potential mismatch of insurance payouts and
actual losses on a farmer’s field, has two forms:
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The inability of an index to faithfully capture the risk in question as
effectively as individual field inspections
“Perceived” basis risk, another peril impacts a farmer’s crop
production
New product, therefore training and capacity building required
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Similar to “named peril” insurance, but for systemic risk
For insurance sector, insured parties and distribution channels
Needs regulatory approval, adjustment to framework
Like all insurance, it is a commercial product
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Presents limitations when dealing with non-commercial
clients
Index Based Products
Area Yield Index Insurance
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Assess loss based on estimates of
the area yield.
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Threshold is established less than
the expected district yield
Indemnities paid when area
average yield is < than threshold.
Requires sound official yield
sampling
Products date to the 1950s
(Sweden) and has since been
offered in Canada (since 1977)
and the US (since 1992).
India’s national crop insurance
program (NAIS) is area yield
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Mixed social and market goals
Actuarial performance is quite
poor
Weather Index Insurance
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Assess loss based on the changes
in a weather index over a prespecified period of time at a
particular weather station.
Appropriate for highly correlated
weather risks
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excess and deficit rainfall
excess and deficit temperature.
Strong, quantifiable relationship,
must exist between weather risk
and yield loss in order to establish
the index on which the contract
will be based.
Relatively low administrative
costs and does not face moral
hazard issues.
Applications and experience
Micro level
Weather-indexed insurance for smallholder farmers,
intermediated through institutions with rural outreach
Ex. India, Nicaragua, Malawi, Ukraine, Thailand
Meso level
Weather-indexed portfolio hedge for rural financial
institutions that lend to poor farmers
Ex. India
Macro level
Weather insurance or weather-indexed contingent
credit line for governments or international
organizations that provide safety nets for the poor
Ex. Ethiopia, Malawi, Mexico
Index insurance experience to date
 Main application has been for drought risk at Micro level
 Pilot scale implementation in several countries
 Private sector scale-up of micro level only in India
 Research to expand to other risks: flood, ENSO, cyclone
Index insurance structures and entry points
Micro level insurance program
Meso/Macro insurance program
Insurer
Insurer
Policies, premiums,
claims
Distributor
Policies, premiums,
claims
Policyholder is
Aggregator (e.g.
processor, bank)
Policies, premiums,
claims
Policyholder is
Farmer
Clear,
Aggregator sets the
payout rules
Farmers
well-defined, responsibilities are needed for stakeholders
Aggregator/Distributor is critical link
Stakeholders in rural insurance
Category
Potential stakeholders
Role
Insurers
Insurance companies
Insurance association
Underwriting of the risk
Reinsurers
Reinsurance companies
Acceptance of transferred risks
Delivery Channels
Agricultural banks
Rural Service organizations
NGO’s
MFI ’s
Input suppliers
Distribution channel of insurance to farmers
Farmer education and extension
Farmers
Farmer Association
Co-operatives
Representing farmers, as buyers and beneficiaries
Government
Departments
Meteorological Service
Regulator of Insurance
Ministry of Finance
Ministry of Agriculture
Planning Ministries
Representation of government organizations at
policy, research or operational level.
Possible subsidy and/or ongoing support to the
program.
Donors
Technical assistance
Support (financial and/or consultancy) mainly
during design and implementation phases
Scope, limitations and lessons
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Opportunity to embed weather insurance into larger development
projects and lending
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Climate adaptation and role of insurance
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An integrated approach is needed linked to other rural services
Natural linkage to improved availability of agricultural credit
Insurance plays a supportive but not a leading role
Insurance is not a substitute for climate adaptation measures
Increased risk from climate change is a challenge to insurers
Lessons learned in agricultural insurance
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Technically demanding and sometimes infeasible or costly
There is no universal insurance product
Public-private partnerships are needed for agricultural insurance
Devil is in the detail
Insurance is only one component of risk management
Insurance is not a panacea
Practice may differ from theory
Some issues for workshop consideration
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Assessing the risks facing lenders
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Understanding of reasons for loan performance
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Risks – type, frequency, severity, client vulnerability
External, structural or political constraints in agricultural economy
Willingness and ability to repay
Systemic versus independent risk exposure
Insurance as collateral
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Does index insurance meet lender requirements
• Basis risk
• Can risks not covered by an index be retained or managed elsewhere
• Can index insurance be scaled up
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Smart structuring and delivery options
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Role of traditional versus index insurance
Role of credit guarantees
Improving entry points into the agri value chain
Meso versus micro solutions
Bundling/packaging
Public/private sector roles and donor involvement