An avid follower of all insurtech startups and a critical thinker, he has also contributed several papers in organization wide technical paper contests.
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Most of us have heard about insurance and understand that it’s a contract that promises to pay for a financial loss of any non-speculative risk. This is a definition in most simple terms. Today, insurance gets applied to almost all aspects of life starting with old forms- hull insurance and fire insurance to the new segments – weather insurance and event insurance and one of the most penetrated insurance segment – life insurance. In this article we’ll talk about index based weather insurance
What is it:
Insuring for weather variables like rainfall in a season is not a simple concept. That’s primarily because of the complexity involved in managing claims in such a segment. The claims assessment there is mostly manual and has several drawbacks ultimately making the claim payments delayed. Index-based weather insurance provides a solution. This changes the trigger for payout by the insurance company based on the amount of rainfall measured in the local weather station by satellites. If the quantum of rain has been low than the set parameter in the contract, the insurance contract pays out, regardless of the impact seen at the farmer’s land. The flipside is that if the index parameters aren’t breached, there isn’t any payout no matter the damage to the farming. The weather variable that forms the underlying index must have certain properties like being objective and measurable, independently verifiable, consistent over time and have an experience over a large area.
It also becomes important to note that the product design for index based weather insurance is new to insurance companies as well as regulators so each will need technical inputs from international bodies. A book titled ‘Agriculture Insurance: A practical scheme suited to Indian Insurance Conditions’ by author J S Chakravarthy, had documented the concept of weather index insurance as far back as 1912 but since the idea was novel for the overall insurance market, it was never adopted. Today the same idea has been piloted in developing nations like Ukraine, Ethiopia, Malawi and has seen success.
World Bank funded Commodity Risk Management Group (CRMG) has been one such body to promote this concept around the world. India piloted this concept in 2003 with assistance from CRMG by selling the first set of policies to about 200 groundnut farmers in Andhra Pradesh. The policy was designed by ICICI Lombard Insurance.
Which weather variables can be insured Other than the most commonly insured weather hazard, rainfall deficit, there are other hazards that can be insured under index-based insurance. These are Excess rainfall, low temperatures (particularly for Rabi, the winter crop), high temperature (particularly for wheat crop), Pests and diseases (particularly for potato blight disease), wind speed and frost (particularly for mango), drought risk (for crops like Gwar, Bajra, maize, soybean and groundnut)
Global Experience The Weather index insurance has been popular in developed countries like the US as well, which have decades of weather-related data points available. Index based products like Crop yield insurance, crop revenue insurance have been pretty widely accepted across North America. African agricultural markets have also responded very well to index-based insurance products with Kenya, Uganda, Tanzania, Ethiopia and Malawi taking the lead in product design. Other novel product design ideas like Soil moisture index, Air moisture index and vegetation index have been in the design stage and are likely to be accepted well.
References:
- World Bank, Weather insurance index for Agriculture
- United Nations, Developing index-based insurance for agriculture in developing countries
- http://www.aicofindia.com/AICEng/Pages/default.aspx
