1. The document discusses weather-based crop insurance and describes various risks faced by farmers like droughts and floods. It also discusses different formal and informal risk management strategies. 2. Formal insurance programs are described, including a weather index insurance product offered by ICICI Lombard and BASIX to insure farmers against deficient rainfall. The program divides the monsoon season into growth phases and provides payouts if rainfall is below a trigger level. 3. Challenges in developing weather index insurance are also outlined, such as basis risk. But the product is seen as well-suited for catastrophe risks with simple design and low costs.

1. WEATHER BASED CROP
INSURANCE
Dr. N. Sai Bhaskar Reddy
saibhaskarnakka@gmail.com
6th September 2013

2. Insurance
 Insurance is the equitable transfer of the risk
of a loss, from one entity to another in
exchange for payment.
 Individual entities can also self-insure through
saving money for possible future losses

3. Floods

4. Drought

5. The Insurance Industry
Insurance Group
Agency Company Agents

6. The Insurance Industry
Reinsurer
Insurance
Companies
Insurance Group
Investment
Companies

7. Drought
Environmental Risks

8. Risk reduction measures
 Drawing on accumulated savings of liquid assets (e.g.
cash, bank account balances etc.).
 Selling other assets (e.g. jewelry, land, livestock etc.).
 Borrowing from moneylenders, microfinance institutions
(MFIs), banks or other financial institutions.
 Informal risk-sharing arrangements with
neighbors, friends, family etc. (For example, if the
household suffers an adverse shock, there may be an
increase in remittance income sent by family members
living abroad, or financial assistance provided by other
households living in the same village, at least to the
extent that those households are not also affected by the
same shock).
 Government assistance (e.g. government work
programs, drought assistance programs etc.).
 Formal insurance arrangements

9. Understanding
 Natural catastrophes, especially weather related events, are increasing in
number and magnitude especially in Asia.
 There is more and more scientific evidence for causal links between climate
change and increasing frequencies and intensities of natural catastrophes.
 Global warming is real.
 We have to mitigate global warming and adapt to the changing risks in respect to
the regionally specific risk patterns.
 In Copenhagen ambitious CO2-reduction targets should be fixed to avoid
dangerous, unmanageable climate change.
 The insurance industry supports climate change mitigation and adaptation
measures by sharing its knowledge with the public and providing custom made
covers for innovative technologies.
 The Copenhagen outcome should provide adaptation funds for developing and
emerging countries, including new insurance solutions.

10. India is considered to be the second most disaster-
prone country in the world.
 With a large and growing population, densely
populated and low-lying coastline and an economy
that is closely tied to its natural resource
base, India is highly vulnerable to climate change.
 Disaster insurance cover, however, is low
compared to international standards and plays only a
complementary role. Disaster risk
management, including financing relief and
reconstruction, is primarily the responsibility of
governments, which provide actual assistance, or
communities through informal risk sharing.

11.  Frequently governments and communities do not
have sufficient resources, and households lacking
insurance typically turn to moneylenders, selling
assets, reducing inputs in farming, or
diversifying their activities. Another strategy is to
send family members to work elsewhere and remit
payments.

12.  Low insurance penetration in India can be traced to
a number of demand and supply side factors. On the
demand side, the foremost difficulty is the
unaffordability of insurance for low-income high-
risk regions. Other hurdles include public myopia
and low awareness among the public about
insurance and risk management.

13.  The experience of major insurance companies
shows that following a major catastrophe there is
a rush for insurance cover, particularly for life and
assets. But this interest is short lived, and in a
majority of cases these policies are not renewed.
Finally, large sections of the Indian economy operate
outside the formal economy – not just small
businesses, but also housing.

14.  On the supply side, easy access to insurance
products is still an issue. The problem of scaling up
small-scale schemes to encompass large rural areas
is the biggest hurdle in enhancing overall penetration
rates.
 The poor in many rural areas have higher
disaster risk exposure and also suffer more vis-à-
vis their urban counterparts (World Bank, 2003).
 More specifically, their vulnerability to climate-
change risks is increased on two counts: their
inability and/or unwillingness to involve in high-
risk activities (for instance growing cash crops)
that promise higher returns, and their inability to
reside in disaster safe locations.

15. Article 4.8 of the United Nations Framework
Convention on Climate Change (UNFCCC) and the
supporting Article 3.14 of the Kyoto Protocol call
upon developed countries to consider
actions, including insurance, to meet the specific
needs and concerns of developing countries in
adapting to climate change.
Communities at risk, governments, international
organizations, industry, and NGOs worldwide are
seeking solutions for preventing and adapting to
the rapidly multiplying impacts of climate change
and weather-related disasters.

16. The Munich Climate Insurance Initiative (MCII) was
formed in 2005 by NGOs insurers and
reinsurers, climate-change experts and policy
researchers to provide a forum for examining
insurance-related options that assist with adaptation
to the risks posed by climate change.
www.slf.ch/drf and www.iiasa.ac.at/Research/RMS.

17. Main characteristics of an index
 Observable and easily measured
 Objective
 Transparent
 Independently verifiable
 Able to be reported in a timely manner
 Stable and sustainable over time
Weather indexes can form the basis of an insurance
contract that protects farmers from weather risk

18. 0% 20% 40% 60%
Drought
Crop Failure
Crop Disease
Drop in crop prices
Bad investment
0% 10% 20% 30%
Wait for rain before sow
Seek non-farm w ork
Sow less
Sow substitute crops
Don't sow (fallow )
Weighted self-
reports:
“What are the major
sources of risk
faced by your
household?
Weighted self-
reports:
“If it does not
rain, what do you
do?”

19. 0% 10% 20% 30% 40% 50%
Security/risk reduction
Need harvest income
Advice from progressive farmers
High payout
Trusted farmers bought
Reasons for purchasing insurance | meeting participation
0% 10% 20% 30%
Do not understand product
No cash/credit to pay premium
Rain gauge too far aw ay
Too expensive
No castor, groundnut
Reasons for not purchasing insurance | meeting participation

20. Formal Responses
GOVT CROP
INSURANCE
WEATHER INSURANCE
Adverse
Selection and
moral hazard
YES NO
Transparency LOW HIGH
Premium Highly Subsidized Market rate
Linked to credit? YES NO
Basis Risk LOW MEDIUM
Administration
Costs
HIGH LOW
Claim Settlement Between 6 to 24 months Less than 30 days

21.  AGRICULTURE – Weather
Based Crop Insurance
Scheme (WBCIS) –
Kharif2013 – Notification for
Groundnut, Cotton, Red
Chilly, Oil Palm, Sweet Lime
and Tomato Crops in certain
Districts for implementation of
the Scheme - Orders –
Issued.
 AGRICULTURE & CO-
OPERATION (FP.II.)
Weather Based Crop Insurance Scheme
(WBCIS) – ANDHRA PRADESH

22. 1. CROPS NOTIFIED: (include both
irrigated and Un-irrigated)

24. 4. CULTIVATORS ELIGIBLE FOR
COVERAGE:
 All the cultivators (including sharecroppers and tenant cultivators)
growing the Notified Crops either Irrigated or Unirrigated in any of
the Reference Unit Areas shall be eligible for
coverage. The Scheme shall be:
 Compulsory: For all LOANEE APPLICANT CULTIVATORS i.e.
those who have
 Sanctioned Credit Limit from Financial Institutions (Co.op Banks,
Commercial Banks
 including private commercial Banks, RRB‟s etc.,) for the Notified
Crops in a Reference
 Unit Area.
 Voluntary: For NON-LOANEE CULTIVATORS i.e. those who do not
have Sanctioned Credit
 Limit from any Financial Institution for the Notified Crops in a
Reference Unit Area.

37. High Probability, Low Consequence Risks Vs. Low Probability, High
Consequence Risks
High probability
Low Consequence
Reduced yields
The producers
generally perceive
this as their risk
Normal weather
Low probability
High Consequence
Extremely low yields
Low probability
High Consequence
Extremely low yields
Extreme weather
events (excess rainfall
or flood)
Extreme weather
events (droughts)

38. The cropping calendar
*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
Diagram taken from the FAO’s maize water requirement report*
Sowing and
establishment
period is also critical
crop survival
• A rainfall index is normally split into 3 or more crop growth phases
• Objective: maximise the correlation between index and loss of crop yield

42. Flood insurance concept
Design a flood index which can proxy losses
caused to crop
 Rice is the strategic crop most exposed to flood
 Flood impact is dependent on variety, time of
occurrence, depth, speed and duration of flood
water
 Harness technology to support insurance
underwriting and operations
 2 key components for index design phase
 Flood modelling (FM)
 Agro meteorological modelling (AMM)
 2 key components for operational phase
 Geographical information system

43. Pasak
River
LA4
LA2
LA3
LA1
LA5
“High Risk” Pricing Zone
“Medium Risk” Pricing Zone
“Low Risk” Pricing Zone

44. Summary: Combining the Technology
Components
FM + AMM Design a flood index that
proxies crop loss
FM+EO+GIS Define flood risk zones and
pricing the contract
EO+ GIS Loss adjustment for payout
determination according to
the index
FM: flood modelling. AMM: Agro-meteorological modelling.
EO: Earth observation. GIS: Geographical Information System.

45. ICICI LOMBARD / BASIX
INSURANCE
 Designed by ICICI Lombard, sold to farmers by
BASIX, a microfinance institution (MFI).
 Goal: Insure against deficient rainfall during primary
monsoon season (~ June - September).
 Rain gauges report daily rain at the mandal (county)
level.
 Payout promised <30 days of verification of rainfall data.
 Survey villages average 10.6km (6.6 miles) from gauge.
 Contract divides monsoon into three phases:
 (i) sowing; (ii) podding; (iii) harvesting
 Phase payout based on rainfall relative to trigger level.
Includes payouts for excessive rain during harvest.

46. Predictions about Takeup
Patterns
Other predictions outside formal model:
 Product is new, and may not be well understood
by farmers. Suggests insurance takeup may be:
 higher for households who trust the insurance
provider (BASIX), such as current customers.
 higher for households with lower cost of
understanding, experimenting with product:
 younger, more educated households.
 „early adopters‟: members of local council, and self
identified progressive households.
 Informally, have in mind a model of limited
cognition or limited information.

47. Weather index insurance - summary
 The product is simple and weather measurements
can be understood by farmers
 Basis risk can be reduced by increasing the
density of low cost weather stations
 Low cost of distribution and loss adjustment
 Less specialist knowledge needed to underwrite
the product
 The product is suited for catastrophe hazards
 The product is highly flexible and can multiply in
the insurance market
 Reinsurers are interested to accept the risk

48. Ref: http://.......