Weather index insurance for agriculture and rural areas in lower-income countries.

Experience with weather index insurance in middle and lower income countries is both too limited and too recent to draw conclusions about its long-run sustainability. Table 1 lists some middle- and lower-income countries where weather index insurance has been sold to date. However, except for Mexico and India, sales have occurred within pilot programs; so the volume of business has been marginal. In addition, weather index insurance products are currently being developed in several countries (table 2).

Among middle- and lower-income countries, Mexico and India currently have the most developed weather index insurance programs. In both countries the products offered focus primarily on rainfall deficiency (drought). Also, in both countries technical support, provided by international organizations, facilitated the offering of weather index insurance products.

Mexico

The Mexican public reinsurance company Agroasemex has been providing weather index insurance since 2001. Most of the policies are based on rainfall, but some have been based on temperature and wind speed. The policies are marketed primarily to state governments in Mexico to protect against calamities (mainly drought) in the states and are linked to the social program Fondo Nacional para Desastres Naturales (Natural Disasters Fund--FONDEN). In 2005, 1.16 million hectares in eighteen states were covered by the contracts. In 2006, 2.3 million hectares were covered. This represents 28% of the dry-land (nonirrigated) crop area in Mexico. The main limiting factor to providing wider coverage is a lack of rainfall data and weather stations.

India

Agriculture accounts for around 23% of India's gross domestic product. An estimated 65 % of the population is engaged in agriculture and associated activities. Most of the agricultural production is small-scale. Of the more than 120 million landowners, 80 % own parcels of less than 2 hectares. Weather risk is a major concern to agricultural producers and agribusinesses alike. It is estimated that rainfall variability accounts for more than 50% of the variability in crop yields.

Weather index insurance was first introduced in India in 2003. In collaboration with the microfinance institution BASIX, ICICI Lombard General Insurance Company began selling a rainfall index insurance product. BASIX holds no risk on the insurance policies but instead acts as an intermediary that receives commissions from selling the index insurance to its customers. Between June 2003 and March 2006, BASIX sold a total of 7,653 rainfall index insurance policies in six Indian states.

The parastatal agriculture insurance company AICI introduced a weather index insurance product in 2004. In 2005-06, AICI sold weather index insurance policies to more than 125,000 farmers. Most (98%) were sold to farmers in the State of Maharashtra. The World Bank has provided technical assistance to the Government of India and AICI in the development of weather index insurance. This assistance has focused on product design, rating, and large scale implementation.

Conclusion

Effective mechanisms for transferring risk can catalyze investment and economic growth, thus contributing to poverty reduction in rural areas of lower income countries. Weather index insurance is a relatively simple concept that under certain circumstances can effectively transfer spatially covariate weather risks. While experience to date is too limited and too recent to draw general conclusions about the long-run sustainability of weather index insurance, the experience in Mexico and India suggests that at least in some areas, these products may prove to be a valuable risk transfer mechanism for the rural poor.

Innovations in Risk Transfer for Natural Disasters in Lower-Income Countries (Jerry Skees, University of Kentucky and Barry Barnett, University of Georgia, Organizers)

References

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Barry Barnett is Associate Professor in the Department of Agricultural Economics at Mississippi State University. Olivier Mahul is Senior Insurance Specialist and Program Manager, Insurance for the Poor Unit, Financial and Private Development Vice Presidency of the World Bank.

This article was written when Barnett was Associate Professor in the Department of Agricultural and Applied Economics at the University of Georgia.

This article was presented in a principal paper session at the AAEA annual meeting (Portland, OR, July 2007). The articles in these sessions are not subjected to the journal's standard refereeing process. Table 1. Weather Index Insurance Policies Sold in Middle- and Lower-Income Countries Country Product(s) Clients Mexico Drought index insurance State governments India Drought index insurance for Small farmers serviced

main crops (rice, through direct agents or

groundnut) rural financial

institutions Ukraine Drought index insurance Large farms Malawi Drought index insurance for Small borrowing farmers

groundnut Ethiopia Drought index insurance World Food Program China Drought index insurance for Borrowing farmers

vegetables Country Comments Mexico 1.2 million hectares covered;

premium volume of US$17

million India 250,000 policies sold in

2005-06; premium volume

of about US$20 million. Ukraine Only 2 contracts sold in 2005 Malawi 2,500 policies sold in 2006.

Premium volume of

US$7,000 Ethiopia US$7 million coverage. China Small-scale pilot in Shanghai. Table 2. Weather Index Insurance Policies under Development in Middle- and Lower-Income Countries Country Product(s) Clients Tanzania Drought index insurance Small borrowing farmers

for maize Nicaragua Drought index insurance Small farmers Thailand Drought index insurance Small borrowing farmers Kazakhstan Drought index insurance Medium and large farms Senegal Drought index insurance Small borrowing farmers

for peanuts Morocco Drought index insurance Borrowing farmers

for major crops Bangladesh Drought index insurance Small borrowing farmers

for rice Bangladesh Flood index insurance Natural disaster fund Vietnam Flood index insurance Small borrowing farmers Caribbean Drought index insurance Cash crop farmers

Islands and hurricane index

insurance Country Comments Tanzania Dry run launched in 2007.

Full implementation in

late 2007. Nicaragua Under implementation Thailand To be implemented in 2007 Kazakhstan Complements compulsory

multiple peril crop

insurance. Senegal Possible link with an area

yield insurance scheme. Morocco Complements the

indemnity-based

drought insurance

scheme. Bangladesh To be piloted in 2008 Bangladesh Work in progress Vietnam Work in progress Caribbean Newly established

Islands Caribbean Catastrophe

Risk Insurance Facility