May 24, 2005 - Governments, private sector from both rich and poor countries, and international organizations agreed at the 8th Annual Meeting of the International Task Force on Commodity Risk Management (ITF) to expand the use of innovative market mechanisms to reduce the risks to small-scale producers in developing countries through indexed-based commodity risk management tools and weather insurance systems. Jointly sponsored by the World Bank and the Swiss Secretariat for Economic Affairs (SECO), the ITF Annual Meeting held in Interlaken, Switzerland, May 18th and 19th, brought together over 70 experts to focus on managing risks in highly volatile commodity markets such as cacao, cotton, coffee, wheat, soybeans and corn, which remains one of the major threats to developing countries depending on these type of exports. The ITF agreed to expand capacity-building at the local level through local banks and expertise, and to pursue and expand on the creation of an international intermediary index-based mechanism that would pool risks to allow producers from developing countries access to international insurance markets. Recent breakthrough in India Ten-thousand farmers throughout seven Indian states will benefit from the announced expansion of a two-year World Bank pilot program that offered “rainfall” insurance to only farmers in the states of Andhra Pradesh in Southern India. Unlike public and usually subsidized national crop insurance which is based on time consuming crop damage assessments and which often doesn’t protect farmers from seasonal weather changes, private weather insurance is gauged by the amount of rainfall that has been collected at weather stations located close to the farmers Private insurance used a rainfall index said Ulrich Hess, Senior Economist, the World Bank. “A weather insurance product is based on a weather station measured rainfall index which means that if this rainfall index measured during a certain period shows a deficit or falls below a certain level, the farmer gets a payout.” More than 40 percent of farmers in developing countries face weather-related threats to their crops: adding up to US$429 billion per year in crop losses for farmers due to floods, drought and other weather-related conditions. “In India the biggest risk for agricultural activity is the shortfall in rain as in India about 70 percent of agriculture is dependent on rainfall,” said P. Sai Gunaranjan, Insurance Executive for BASIX in Hyderabad, India. Private weather insurance also offers faster payouts with insurance settlement after each of three crop growing phases allowing farmers to replant after a poor yield. “Private weather insurance is more transparent and it takes less time for payment – only 45 days. I can also check the level of rainfall at the weather station myself,” said N. Narsingamma Lingappa a local small farmer from Jajapur, Andrhra Pradesh, who received two payouts for his crops. The initial pilot project was run by an Indian insurance company, ICICI Lombard, which agreed to provide their services to BASIX, one of the leaders in micro-finance who then sold the policies to groundnut and castor farmers through local area Bank KSB in Maboobnagar, Andhra Pradesh. ICICI Lombard then reinsured this risk first with leading reinsurer. P. Sai Gunaranjan who oversaw the pilots said that the framers like the openness of the privately offered products, “There has been a lot of transparency as opposed to earlier products and the way the overall risks are assessed. In this particular case (in India), the farmers have access to the rainfall stations so they actively go out to the rainfall stations and measure the actual rainfall and if there is a deviation they know there is a payment due to them. This greatly enhances the farmers overall risk taking capacity to invest in crops and” he said. In 2004, BASIX re-designed the contracts with farmer feedback from the initial pilot, in conjunction with ICICI Lombard, and sold the farmer policies to 430 farmers in three districts in Andhra Pradesh for groundnut, castor, cotton and protection against excessive rainfall. BASIX and ICICI Lombard opted for a three-phase rainfall index, which means that each period had its own payout threshold. For example, in Narayanpet, Mahabobnagar, a groundnut farmer would receive a payout of 15 Rupees per mm of rainfall deficit below the threshold of 75mm up to a maximum of 3000 rupees during the crop establishment phase. The sum insured per acre for the next phase, the flowering stage, had a sum insured of 2000 Rupees and the final maturity stage had a sum insured of 1000 Rupees. The premium for this policy was Rupees 250 per acre. Farmers decided the number of policies to buy depending on how many acres they farmed. In 2004, groundnut farmers in Narayanpet who bought this policy received 3,258 Rupees per acre insured on 22nd September 2004, to compensate them for below average rainfall during the 2004 monsoon season. For the monsoon season in 2005, BASIX plans to offer this insurance through all of their office branches – in seven states throughout the country – targeting approximately ten thousand farmers The World Bank provided technical assistance on this project and is also providing technical assistance to other pilot programs in Ethiopia, Malawi, Nicaragua, Ukraine and Peru. |
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