Crop Insurance as a Risk Management Strategy in Bangladesh

data, for example, can establish an empirical relationship between seasonal cumulative
rainfall and yield. The distribution of rainfall during the growing season or at specific stages
of a plant’s development is often more important than total rainfall, however, and customized
indexes must be developed to capture this risk (Stoppa and Hess 2003). Such indexes may
also include other weather parameters, such as temperature and relative humidity. Other
factors like availability of irrigation water can be embedded into a more complex index. Crop
growth models or historical yield data can be used to infer the empirical relationship between
rainfall amounts and yield/quality for specific soil and crop types.
A number of alternative rainfall contracts is possible to develop. One of them, the
proportional contract simply pays in percentage terms for levels of rainfall below a wellspecified
strike or threshold. For example, if the median rainfall in a given area is 300 mm
from November to March, one might begin payments anytime rainfall is below 250 mm.
These payments would be based on the level below the strike of 250 mm. The percentage
calculation would be performed as follows:
If rainfall from November to March < 250 mm, then
Payment percentage = (250 - actual rain) / 250
For example, if the rainfall is 200 mm, the payment percentage would be 50/250 or 20
percent. Those at risk (farmers, agribusinesses, farmer organizations, banks, etc.) would
purchase contracts at some specific value, say 1,000 MAD. If the payment rate is 20 percent
and the insured purchased 10 units of the 1,000 MAD, the actual payment would equal .20 x
10 x 1000 = 2000 MAD. The contract could also simply be sold in any MAD unit value. The
principles are the same:
Indemnity = payment percentage x total MAD value or liability.
Figure 7.3 Precipitation variations along Bangladesh
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