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UKRAINIAN AGRICULTURAL WEATHER RISK MANAGEMENT WORLD BANK COMMODITY RISK MANAGEMENT GROUP Ulrich...
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Transcript of UKRAINIAN AGRICULTURAL WEATHER RISK MANAGEMENT WORLD BANK COMMODITY RISK MANAGEMENT GROUP Ulrich...
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UKRAINIAN AGRICULTURAL WEATHER
RISK MANAGEMENT
WORLD BANK COMMODITY RISK MANAGEMENT GROUP
Ulrich HessJoanna Syroka PhD
January 20 2004
UKRAINIAN AGRICULTURAL WEATHER
RISK MANAGEMENT
WORLD BANK COMMODITY RISK MANAGEMENT GROUP
IFC PEP Ukraine
Ulrich HessJoanna Syroka PhD
January 22 2004
Risk Management & Agricultural Insurance
Insurance Association of MalawiOpportunity International Bank of Malawi
Malawi Rural Finance CorporationNational Smallholder Farmers Association of Malawi
Department of Climate Change & Meteorological ServicesMinistry of Agriculture and Food Security
World Bank
David Rohrbach, 26 October 2010
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DDR 26/10/10
Agricultural Insurance
Risk Alternative Types of Insurance
DroughtHailFloodsDiseaseFireTheftPrice
Named Peril Crop Insurance (e.g. hail)Multiple Peril Crop InsuranceLivestock InsuranceIndex-Based InsuranceIndex-Based Insurance(Price hedging)
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DDR 26/10/10
Challenges
Traditional crop and livestock insurance for smallholder economies is often not financially viable because
1. High administrative and monitoring costs2. Adverse selection due to asymmetric
information3. Moral hazard
Premiums are too expensive Systemic losses undermine insurance industry
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DDR 26/10/10
Objective
Design an efficient and cost-effective insurance program that can be distributed to individual smallholder farmers and easily reinsured.
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DDR 26/10/10
Rainfall Index-Based Crop Insurance
Allows payments against an independent indicator that is correlated with crop yield
so insurer does not have to inspect the cropnor visit each farmer
reduces transaction costs reduces adverse selection reduces moral hazard
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DDR 26/10/10
Malawi Case Insurance Supports Expanding
Agricultural Credit
Traditional credit supply systems for smallholders are also commonly undermined by drought
•High monitoring and administrative costs•Political interference
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DDR 26/10/10
Key Question
Can weather insurance be used to reduce lending risks to smallholder farmers?
Insure loan repayment in the event of crop failure
Strengthen commercial agricultural lending Strengthening agricultural insurance industry
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DDR 26/10/10
Malawi Weather Insurance Model
Weather index = rainfall x crop growth model
Trigger = decline in crop yield associated with:
i. Not enough rain for crop establishment
ii. Not enough (or too much) rain for crop growth and flowering
iii.Not enough (or too much) rain at yield formation (e.g. grain fill)
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Three-phase crop growth scenario calibrated to a simple crop water-balance model, cross-checked against historical yields, to minimize farmer Value-at-Risk
Deficit Rainfall (mm)
Payou
t ($
)
PHASE 1Sowing & Establishment
PHASE 3Yield Formation to Harvest
Deficit Rainfall (mm)
Payou
t ($
)
Deficit Rainfall (mm)
Payou
t ($
)
Cropping Calendar Sowing Window &
Dynamic Start Date
PHASE 2Growth & Flowering
Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts)
DEVELOPING A PROGRAMMALAWI WEATHER CONTRACT FEATURES
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DDR 26/10/10
Requirements for implementation (1)
Reliable weather stations with good enough historical data (e.g. 30 yrs) to evaluate rainfall risk Within +/- 20 km of each farm insured (ie high
density) With reliable daily data feed
Basis risk: model does not correctly estimate yield of individual farmer due to difference between rainfall at gauge vs on field
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DDR 26/10/10
Distribution of Rainfall stations in Malawi
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DDR 26/10/10
Requirements for implementation (2)
Well defined crop growth models based on water satisfaction index
Regulatory and legal system underlying the insurance contract
Sustainable links with reinsurance industry due to covariant risks (e.g. drought)
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DDR 26/10/10
Weather Insurance Portfolio in MalawiCrop Season # Farmers Sum Insured Crops
2005/06 892 $40,000 groundnut & maize
2006/07 1800 $110,000 groundnut & maize
2007/08 605 $308,000 Tobacco
2008/09 2606 $2,543,345 Tobacco & maize
2009/10 766 $712,521 Tobacco & maize
2010/11 (forecast)*
10,500 $4,500,000 Tobacco & maize, (soybean, paprika?)
* By Weather Insurance Task Force members
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DDR 26/10/10
Lessons Learned 1
There are 2 major risks to agricultural credit supply
Rainfall Avoidance of loan repayment (ie with side
marketing)
Success is more likely with a single channel marketing system encompassing stop orders on loan liabilities
Loan repayment was too low for groundnut and maize
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DDR 26/10/10
Lessons Learned 2
Portfolio insurance may be more practical than insuring each individual farmer
Tobacco companies and banks divide the premium cost
[though this remains subject to debate]
Tobacco companies and banks divide infrastructure investment cost
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DDR 26/10/10
Lessons Learned 3
It takes time to build the capacity for contract design in the insurance industry Close links are needed with crop modelers Develop capacity to define appropriate premiums Links with international reinsurance market Strong regulatory support
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DDR 26/10/10
Lessons Learned 4
Index insurance still needs to be linked with complementary strategies for reducing production and market risks– e.g. More efficient credit supply and monitoring
(e.g. biometrics, credit bureau)
Improved input/technology access
resilient agronomic practices
improved reliability of marketing chains
Complementary types of insurance: hail, fire, theft
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DDR 26/10/10
VISION FOR MALAWI: Next 5 YEARS (1)
Strengthen capacity of local insurance industry to:
Design contracts Evaluate and set appropriate premiums Manage reinsurance requirement
Review and strengthen capacity of regulatory systems
Expand coverage in the tobacco sector With more rainfall stations (to be purchased &
managed by?)
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DDR 26/10/10
VISION FOR MALAWI: Next 5 YEARS (2)
Expand coverage to additional crops Cotton, tea, coffee, sugar, maize...(Link with growing interest in contract farming?)
Reduce premiums or reduce interest rates on agricultural loans to account for lower risk
Expand market enough to be of competitive interest to reinsurers