Weather Index Crop Insurance

2.6 billion people (40% of the world’s population) live on $2 or less per day. Rural areas account for three in every four people living on less than $1 a day. According to the World Bank, GDP growth originating in agriculture is at least twice as effective in reducing poverty as GDP growth originating outside agriculture.

In the growing season of 2005-2006 MicroEnsure introduced its first Weather Index Crop Insurance pilot in Malawi. This revolutionary product provided protection against crop failure caused by drought or excess rain and enabled farmers to access credit in order to purchase quality seeds and fertilisers in order to maximise output. By linking farms to local weather stations and introducing an automatic payout process farmers were not required to file a claim or go through an expensive loss verification process in the event of crop failure.

Following a successful pilot scheme Weather Index Crop Insurance was extended to cover farmers across Africa in Tanzania and Rwanda and Asia in India and the Philippines. Harry Kafakalunda a smallholder farmer in Malawi explains, “Before I joined the scheme I wasn’t able to access loans and farming wasn’t a profitable business. Now, every year I see improvements in my farming because I am able to buy better farm inputs. From struggling to survive and support my family, I am now planting two hectares of maize as well as cash crops - two hectares of tobacco and half a hectare of groundnuts. I am also going to plant cabbage and onions as extra cash crops, and I’m looking forward to being able to introduce irrigation to extend the growing season. The benefits for me are a better living standard, better food, I have been able to build a better house, and I have bought an ox cart from last year’s earnings. This would not have been possible before.”

Dry Day Weather Index Insurance

MicroEnsure’s ‘Dry Day Concept’ has been developed as drought is not primarily measured by how much rain has fallen in total, but by how many days crops have not been replenished by rain. Because it isn’t possible to take measurements on each individual farm, rainfall levels are taken at local meteorological stations. Participating farmers within a 20 kilometre radius of a station are assumed to have received the same amount of rainfall and to be affected in a similar manner. In the case of severe drought, all farmers will receive compensation.

Table one shows an example of 'dry day' weather microinsurance product in India. In the first period, a farmer receives an increasing level of payment for each dry day over the lower threshold of 22 days up to the maximum value of the sum insured for 30 days or more.
Should crop failure occur before the beginning of the second risk period, it is likely that a farmer will be able to replant the crop and achieve a reasonable harvest. After this date the crop is also covered by a second deficit rainfall product that allows a payout should the cumulative rainfall fail to reach the threshold levels.

Lack of Weather Stations

The key challenge to dry day weather microinsurance is the lack of weather stations. Past historical data is vital for actuaries to design the most appropriate product whilst the claims process relies on current data in order to function. The lack of ground based weather stations is a global problem in the developing world that has been recognised by a number of United Nations agencies including The World Meteorological Organisation (WMO). An alternative solution to ground based weather stations is the use of data from weather satellites (Meteosat & others) and MicroEnsure is actively cooperating with a number of key players in this field including The Consultative Group on International Agricultural Research (CGIAR) and the Food Early Solutions for Africa (FESA). However, a usable satellite solution may still be 3 to 5 years away. Weather Index Crop Insurance programmes would still significantly benefit from ground based weather stations, and ultimately a hybrid solution (combination of satellite and ground based weather stations) may be the best long term solution.

Addressing Food Security

During focus group meetings with small scale farmers in Tanzania, three specific opportunities were identified to improve the food security of small scale farmers, and a summary of each has been detailed:

1. Increase in size of crop harvest:
Many small scale farmers are unable to secure access to loans required to purchase appropriate agricultural inputs at the time of planting. This lack of access to credit is the primary factor preventing small scale farmers from significantly improving their food security situation. The example in Table 2 is common throughout all focus groups and demonstrates the potential that can be unlocked by providing access to agricultural credit.
   
   

   Table 2 - Example of Planting 1 Acre of Maize in Tanzania
   	Without Acess To Credit	With Access to Credit
   Inputs	Planting of seed left over from the previous harvest	200,000 TZS of inputs per acre (seed, herbicide, and insecticide)
   Harvest	5 bags of maize per acre (@ 20,000 TZS per bag)	20 bags of maize per acre (@ 20,000 TZS per bag)
   Net Harvest Value (Less Inputs)	100,000 TZS per acre (approx $67)	360,000 TZS per acre (approx $240)

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   It can been seen from this simple example that facilitating access to an appropriate level of credit for small scale farmers has the potential to raise their net income per acre by over 300%.
2. Increase in land under cultivation:
 Most farming families own between two and four acres, but due to a lack of access to agricultural credit at the start of the growing season, they typically plant just one or two acres or just 50% of their available acreage. As such, facilitating access to an appropriate level of credit to purchase inputs for all of their available acreage also has the potential to raise net income by up to a further 200%. 
3. Increase in selling price achieved at harvest:
 The majority of farmers are forced to sell most of their crop at harvest time when prices are very low. In February 2009 the price for a 100kg bag of maize ranged between 20,000 and 23,000 TZS. However, small scale farmers confirmed that traders from Dar es Salam who bought at 20,000 TZS were selling in Dar es Salam the same week for 40,000 TZS and that the market price later in the year rose to 60,000 TZS. As such, facilitating access to an appropriate warehouse / receipt mechanism would allow small scale farmers to sell their harvest at an appropriate and fair market price thus further raising their net income by between 100 and 200%.

The focus group meetings in Tanzania were managed by Steve Coffey, Vice-President, Strategic Relations. For further information please email steve.coffey@microensure.com

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