Crop Insurance as a Risk Management Strategy in Bangladesh

- identifying the time period during which risk is prevalent; and
- identifying the weather index providing the best proxy for the weather exposure.
This last step is the most critical in designing an index-based weather risk management
strategy. Rather than measuring the actual impact on crop yields - or related fluctuations in
demand, supply, or profitability - the index acts as a proxy for the loss experienced due to
weather and is constructed from actual observations of weather at one or more specific
weather stations.
Location and Duration
All weather contracts are based on the actual observations of weather variables at one or
more specific weather stations. Transactions can be based on observations from a single
station or a basket of several stations or on a weighted combination of readings from multiple
stations like;
- If an individual farmer is interested in purchasing weather protection for his particular
crop, the index-based weather contract must be written on the weather station nearest
the farmer’s land to provide the best possible coverage for the farmer client.
- A larger grower, with several production regions, may be more interested in
purchasing a weather contract based on several weather stations to reflect the weather
conditions in all areas covered by the business. The grower’s risk management
strategy can be either to purchase a weather contract on each of the identified weather
stations or to purchase a single contract on a weighted average of several stations.
All contracts have a defined start and end date to limit the period over which the underlying
index is calculated. This calculation period describes the effective dates of the risk protection
period during which relevant weather parameters are measured at the specified weather
stations. For agricultural end users, the duration of the weather contracts will be determined
by the specific requirements of their business. Contract duration has the flexibility to address
individual end-user business exposures; which can be weekly, monthly, seasonal, and even
multi-annual.
Final settlement of the weather contracts typically occurs up to forty days after the end of the
calculation period, once the collected weather data have been cross-checked and quality
controlled by the relevant data-collecting body, usually the National Meteorological Service.
Underlying Indexes
A weather index can be constructed using any combination of measurable weather variables
and any number of weather stations that best represent the risk of the agricultural end user.
Common variables include temperature and rainfall, although transactions on snowfall, wind,
sunshine hours, river flow, relative humidity, and storm/hurricane location and strength are
also possible but used to be more complex.
The normal process for designing an index-based weather insurance contract for an
agricultural grower, for example, involves identifying a measurable weather index strongly
correlated to crop yield. After gathering the weather data, an index can be designed by
- Looking at how the weather variables have or have not influenced yield over time.
- Discussing key weather factors with experts, such as agro-meteorologists and farmers;
and/or
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