The Potential for Scale and Sustainability in Weather Index Insurance

THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE
FOR AGRICULTURE AND RURAL LIVELIHOODS
Assessment
Performance
The results for the first season (kharif 2007) of index insurance through PepsiCo showed a
significant difference between the level of basis risk and actual risk. The weather index of
some locations showed 85 per cent loss when actual losses were roughly 50 per cent; and
some locations received payouts without suffering any loss. In other regions, however, the
loss recorded (45 per cent) was less than the actual damage (50-60 per cent). In response,
more weather stations were installed near farm locations for the following season.
Basis risk results in rabi 2007 were slightly better, but they were still not optimal. Payouts
matched two damaged locations, but recorded less than actual losses for another two.
Reception and adoption
In Punjab, only 145 out of 282 potato farmers under contract farming with PepsiCo bought
index insurance coverage. This result stems from two important conditions. First, since Punjab
had suffered relatively less damage than other regions, fewer farmers were inclined to purchase
the insurance. Second, some farmers who did not purchase insurance were new to the
contract farming programme and, as such, were still testing the credibility of the PepsiCo
programme. Once they became acquainted with it, more farmers bought the insurance.
The kharif season of 2008 showed satisfactory results, primarily due to a further increase
in the number of weather stations. The product was also adjusted to trigger payout for
losses only beyond the break-even level. Small losses would not receive any indemnification,
an aspect that was hard to explain to farmers, but necessary to reduce the premium.
Additionally, the estimated loss of yield (33 per cent) matched the expected payout.
Despite the challenges in its implementation, surveys conducted by WRMS indicated
that farmers trusted the programme for its capacity to reflect actual losses and provide for
timely claim settlement. Farmers seemed to have a good grasp of the quantitative impact
of weather on yields. In many locations, farmers had calculated claims and expected the
forthcoming indemnification, which allowed them to plan future investments accordingly.
Lessons learned
Barriers to scaling up
Currently, IMD has 500 weather stations in India, of which only 25 per cent have good
historical data, and hail, cyclone and wind data are almost non-existent. In addition, the
recording frequency in most stations varies from once every three hours to once per day,
making consistent daily data collection and consolidation nearly impossible. Moreover,
weather stations are rarely located in poor rural areas. Similarly, the distance between
farmers and weather stations needs to be reduced. WRMS plans to install new stations to
cover the regions in PepsiCo’s contract farming programme, though significant levels of
investment in infrastructure would also be required to offer index insurance in regions where
PepsiCo does not operate. WRMS estimates that an additional 10,000 weather stations are
required in India, which would imply an investment of US$5-6 million.
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