The Potential for Scale and Sustainability in Weather Index Insurance

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CASE STUDY 4
INDEX INSURANCE IN CHINA
Client understanding and trust
The majority of farmers interviewed either do not understand or lack awareness of the
product, and most have little trust in insurance companies. To improve on this, GAIC should
enhance trust by settling claims in a timely manner and identifying partner organizations
that farmers already trust. Using existing networks and programmes for rural development
– such as the farmer credit access programmes, contract farming and professional
cooperatives or associations – would also help reduce transaction costs and improve costeffectiveness
by facilitating marketing and promoting local ownership.
Sustainability of financial subsidies
Currently the Government only subsidizes the national MPCI programme, so GAIC
matched this percentage of subsidy for the index insurance pilot. Although subsidies can
help expand the market and encourage farmers to learn about and use the product, private
subsidies are unsustainable in the long term, and they may make weather insurance at full
cost less attractive to farmers in the future. However, it is equally questionable how long the
Government can continue heavily subsidizing MPCI.
Weather data structure and possibility of basis risk
While China’s weather data structure is relatively well developed, new weather stations are
needed for scaling up. Moreover, stations need ongoing maintenance, as well as skilled
staff to operate them.
In terms of this pilot, there are only 81 standard meteorological stations in Anhui Province
to cover its area of 139,000 km 2 . Historical burn analysis was used, but it has its limitations:
one or two major events can distort the probabilities, while any event that has not
happened in the historical record is not considered. In the future, analysis should be
complemented by rainfall modelling and simulation in order to improve the index design.
In addition, to help fill data gaps and enhance data availability, technologies should be
encouraged, including: remote sensing (of rainfall and vegetation), rainfall modelling and
simulation, seasonal forecasting, techniques for modelling risk over time and space,
modelling of long-term processes and trends, systematic communication tools, agricultural
systems modelling and water resource techniques.
For the potential waterlogging product in Huaiyuan, a better weather data structure is
needed to record rainfall. Waterlogging is often difficult to record, because a single highly
localized event may drive the bulk of the loss.
Weather data availability
The accessibility of data is one of the most challenging issues in China. Aside from the
160 weather stations that exchange their data globally through WMO, access to both
historical and real time data is considered confidential. 35 Awareness enhancement and
capacity-building could help solve this bottleneck for the future development of indices.
35 To develop accurate indices for this pilot, partners coordinated closely with the relevant Chinese offices and, for
monitoring data, had access to web reports.