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WEATHER BASED CROP
Dr. N. Sai Bhaskar Reddy
6th September 2013
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
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
Government assistance (e.g. government work
programs, drought assistance programs etc.).
Formal insurance arrangements
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.
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.
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
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.
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.
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
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.
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.
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.
Main characteristics of an index
Observable and easily measured
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
0% 20% 40% 60%
Drop in crop prices
0% 10% 20% 30%
Wait for rain before sow
Seek non-farm w ork
Sow substitute crops
Don't sow (fallow )
“What are the major
sources of risk
faced by your
“If it does not
rain, what do you
0% 10% 20% 30% 40% 50%
Need harvest income
Advice from progressive farmers
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
No castor, groundnut
Reasons for not purchasing insurance | meeting participation
Transparency LOW HIGH
Premium Highly Subsidized Market rate
Linked to credit? YES NO
Basis Risk LOW MEDIUM
Claim Settlement Between 6 to 24 months Less than 30 days
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 –
AGRICULTURE & CO-
Weather Based Crop Insurance Scheme
(WBCIS) – ANDHRA PRADESH
1. CROPS NOTIFIED: (include both
irrigated and Un-irrigated)
4. CULTIVATORS ELIGIBLE FOR
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,
including private commercial Banks, RRB‟s etc.,) for the Notified
Crops in a Reference
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.
High Probability, Low Consequence Risks Vs. Low Probability, High
this as their risk
Extremely low yields
Extremely low yields
events (excess rainfall
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*
period is also critical
• A rainfall index is normally split into 3 or more crop growth phases
• Objective: maximise the correlation between index and loss of crop yield
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
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
“High Risk” Pricing Zone
“Medium Risk” Pricing Zone
“Low Risk” Pricing Zone
Summary: Combining the Technology
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
FM: flood modelling. AMM: Agro-meteorological modelling.
EO: Earth observation. GIS: Geographical Information System.
ICICI LOMBARD / BASIX
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)
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.
Predictions about Takeup
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.
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 is suited for catastrophe hazards
The product is highly flexible and can multiply in
the insurance market
Reinsurers are interested to accept the risk