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 Insurance Programme Table 21: Programme basics Programme Index insurance pilot in Ukraine Project leads International Finance Corporation (IFC) Agribusiness Development project and World Bank Commodity Risk Management Group (CRMG) Client Producers of winter wheat in Kherson Oblast Insurer Insurance Company Credo-Classic Weather data provider Ukrainian Hydrometeorological Institute (UHMI) Regulatory body State Commission for Regulation of Non-banking Finance Sector Crops Winter wheat Risks Drought and high temperatures Index Rainfall and temperature Farmers insured 2 in 2005 History An index insurance pilot implemented in Ukraine during 2003-2005 aimed to address the disparity between the traditional insurance coverage offered and the production risks faced by farmers. The purpose of the pilot programme was to provide an innovative instrument to mitigate weather risks in southern Ukraine, especially the risk of drought. The pilot was initiated by the International Finance Corporation (IFC) Agribusiness Development project, and jointly implemented by Insurance Company Credo-Classic and the Commodity Risk Management Group (CRMG) of the World Bank. The team identified considerable need in Kherson Oblast. This region is a key producer of agricultural commodities for the country, and producers here have regularly suffered from both winter and summer risks. The pilot development team understood that three technical steps were essential in developing a successful index insurance programme: • Identification of the weather exposure of crops and farmers; • Quantification of the financial impact of adverse weather conditions on farmers’ revenues and their input and production costs; and • Development of an insurance contract structure that pays out when adverse weather conditions occur and that can be reinsured in international markets. The pilot was launched in partnership with Credo-Classic, the only insurance company willing to undertake the complexities of designing and launching an index insurance product. A traditional risk insurance company with good standing in the market, Credo- Classic has a diverse portfolio, including motor, health, property, liability and agricultural insurance. In 2005 the company had offices in 13 oblasts. The project team conducted consultations with farmers, local officials and scientists. The selection of reference weather stations was based on the regional risk profile and the interest displayed by the farmers interviewed. The efforts concentrated on index structures for winter wheat, the most important crop in the region. This crop occupied the largest area, ANNEX 139
140 CASE STUDY 8 INDEX INSURANCE PILOT IN UKRAINE represented considerable value at risk and was mostly cultivated without irrigation. The critical factor for high yields of winter wheat in Kherson Oblast was moisture, so index structures designed for the region captured drought risk from mid-April to mid-June. Product information Weather data and infrastructure To develop the indices for the pilot contracts, the team used weather data and an analytical report on agriculture from the Ukrainian Hydrometeorological Institute (UHMI), a government agency. The agency maintained a weather database on 187 weather stations in Ukraine and could provide weather data for over 30 years, but only in hard copy. UHMI also provided vegetation and risk-sensitivity reports for grain crops (wheat, rye and barley). These explained and clarified the vegetation cycle of winter wheat, exposed major risks during each phase, and determined the critical weather parameters for which existing computer simulation models were applied to decipher the optimum parameters for coverage. Weather indices Initially, the project team designed several trial index structures, although in the end, only moisture (lack of rainfall) and temperature stress structures were offered. Contracts covered the period from 15 April to 15 June to capture low rainfall (less than 70 per cent of the normal 80 mm) and the impact of high temperatures (over 30°C or excessive accumulated temperatures). This coverage was consistent with producers’ concerns: they wanted coverage for the period from 1 May to mid-June, when winter wheat was at significant risk due to high temperatures and/or lack of rainfall. Premium rates and subsidies For the pilot, the insurance sum was established by taking into account production costs and the revenue per crop hectare. Ukrainian farmers can be divided into three groups of producers with minimum, medium and higher technological levels. During interviews it was established that farmers were interested in insuring sums in the range of US$100-$300 per hectare. Insurers could establish higher insured amounts, provided this amount did not supersede the average selling price of the yield per hectare. Regulation The State Commission for Regulation of the Non-banking Finance Sector was trained by the IFC Agribusiness Development project in the basics of index insurance. By 2005 Ukrainian companies had already registered insurance regulations that included provisions for index insurance. Assessment Performance In the end, only two ‘cumulative rainfall index’ contracts were sold in 2005, both for deficit rainfall coverage. However, to put this in perspective, it should also be noted that the company managed to sell only six MPCI contracts in the 2005 spring season. This poor performance had multiple causes.
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The Potential for Scale and Sustainability in Weather Index Insurance

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