The Potential for Scale and Sustainability in Weather Index Insurance

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THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE FOR AGRICULTURE AND RURAL LIVELIHOODS the areas were evaluated and verified for accuracy. These data were used to determine a long-term average monthly rainfall. Long-term averages are reviewed on maps to determine any abnormal weather patterns or significant differences within an area. A historical rainfall average is available online for decision reference. Maximum daily and monthly rainfall caps are applied to the rainfall data, recognizing that the benefit of increased rainfall has a limit. The daily cap is 50 mm of rainfall, and the monthly cap is 125 per cent of the monthly historical average rainfall. Premium rates and subsidies The entire administrative cost and about 60 per cent of the premium (depending on the coverage option) are paid by government. Administrative costs of the Forage Rainfall Plan are split between the federal and Ontario governments on a 60/40 basis. In 2008, the producers’ share of the premium for the base plan, monthly weighting and three-month options was 40 per cent. The producers’ share of the bimonthly option was 40 per cent of the portion of the premium equal to the base option, and 67 per cent of the remaining portion. Forage Rainfall Plan premiums are tax-deductible. Table 16 shows basic premium rates charged to producers (net of subsidy). These premium rates are constant across rainfall-reporting stations. Payouts Insurance payments are made whenever rainfall is less than 80 per cent of the long-term average for the area. The payment is determined by the following formula: Claim payment = (80% – % rainfall) x coverage amount x value option factor The value option factor is always 2, because AgriCorp doubles the claim amount to account for the cost of transporting purchased replacement forage. Per cent rainfall equals the ratio of the sum of capped actual rainfall 45 to the sum of historical average rainfall multiplied by 100. Claims are paid approximately one month after the end of the rainfall collection period. Table 16: Premium rates (2007-2009) Monthly Year Base plan weighting Bimonthly Three-month 2007 3.23% 3.87% 10.08% 4.76% 2008 2.87% 3.62% 10.10% 4.72% 2009 2.61% 3.31% 9.18% 4.32% Source: AgriCorp. 45 For the monthly weighting coverage option, it is the sum of capped weighted rainfall. ANNEX 125
126 Assessment CASE STUDY 6 FORAGE RAINFALL PLAN IN ONTARIO, CANADA Performance Payouts The programme can make significant payouts to forage producers, as the large variation in the loss ratio shown in Table 17 demonstrates. In two of the past nine years, the programme had loss ratios greater than 3.0, paying out more than C$1.9 million in 2001 and C$8.7 million in 2005. In 2008, the Forage Rainfall Plan paid C$64,000 on 34 claims, compared with C$5.9 million on 909 claims in 2007, when 52 per cent of the programme participants across the province received an indemnity. Reception and adoption On the whole, the Forage Rainfall Plan provides producers with an affordable means of insuring forage crop losses against drought. It has been well received by Ontario producers because of its: • Convenience. Producers do not need to provide damage measures to make claims. • Predictability. Clients can monitor rainfall measures online throughout the season and calculate possible indemnities themselves. • Timely indemnity payments. Growers who use their own forage can purchase replacement forage quickly in the event of a loss and thus resume normal business. Programme participation has increased every year. The number of acres insured has increased from a mere 37,576 acres in 2000 to 448,794 acres in 2008. The number of contracts sold doubled in 2004 after the Forage Rainfall Plan became a permanent insurance programme in 2003. In 2008, the programme had almost 2,000 contracts, generating a total premium of C$4 million. About a quarter of Ontario’s pasture and hay lands were insured under the programme (Table 17). Table 17: Forage Rainfall Plan summary (2000-2008) Year Number of Acres Liability Total Total Claim rate Loss ratio contracts insured (C$) premiums claims Total claims/ Total claims/ (C$) (C$) liability total premiums 2000 151 37 576 4 051 455 287 653 18 022 0.44% 0.06 2001 235 52 824 5 806 151 412 237 1 965 670 33.85% 4.77 2002 545 131 675 12 317 760 985 421 1 293 857 10.50% 1.31 2003 730 186 485 16 614 263 1 462 055 395 441 2.38% 0.27 2004 1 504 314 735 29 788 866 2 650 764 62 834 0.21% 0.02 2005 1 648 376 344 32 679 512 2 647 041 8 766 055 26.82% 3.31 2006 1 727 400 572 37 818 488 3 661 694 2 447 931 6.47% 0.67 2007 1 751 418 749 40 023 984 3 693 971 5 910 193 14.77% 1.60 2008 1 945 448 794 47 685 454 4 178 968 64 084 0.13% 0.02 Source: AgriCorp.
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4 CONCLUSION 59 REFERENCES AND RESO
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6 Acronyms AIC Agriculture Insuranc
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22 CHAPTER 2 WEATHER INDEX-BASED IN
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62 REFERENCES AND RESOURCES McCarth
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