The Potential for Scale and Sustainability in Weather Index Insurance

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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.