UKRAINIAN AGRICULTURAL WEATHER RISK MANAGEMENT RISK, VULNERABILITY WORLD BANK COMMODITY RISK MANAGEMENT GROUP Ulrich Hess Joanna Syroka PhD January 20 2004 RISK, VULNERABILITY & DEVELOPMENT Or Why BASIX Changed The World WORLD BANK COMMODITY RISK MANAGEMENT GROUP BASIX Quarterly Review & Insurance Meeting Hyderabad, 21st October 2005 Ulrich Hess Joanna Syroka

OUTLINE DEVELOPMENT WORLD BEFORE: BASIX CHANGED THE WORLD TWICE: Risk and Vulnerability trap people in poverty …and hamper rural development BASIX CHANGED THE WORLD TWICE: Index-based Insurance and Livelihood promotion CRMG SPREADS THE WORD: Products, transactions and access to risk capital India – product evolution Ethiopia, Nicaragua, Malawi, Ukraine…. GIIF FUTURE WORLD: Livelihood safety nets plus commercial insurance for farmers

The Development World Before

NO GOOD ANSWERS TO RISK AND VULNERABILITY Natural disasters: Push households into poverty Drain fiscal resources Impact on agriculture: 1.3 billion people live on less than $1 per day Three-fourths depend on agriculture for their livelihood Agricultural development clears the way for overall economic development Strong link between weather, livelihoods and development No ex ante solutions for weather risks in developing countries: Governments and donor community exposed to natural disaster risk use ex post responses such as: Financial bailouts Debt forgiveness Emergency response Responses fail to provide an effective safety net for the poor: Inequitable Untimely Create a dependency

BASIX Changes the World

Index Insurance Response Systemic Risk in Agriculture hampers access to finance and technology Risks in Rural Areas Need for risk transfer Traditional Response Traditional Crop Insurance unsustainable Need for ex-ante, predictable market based risk transfer Index Insurance Response BASIX: Weather Index Insurance for farmers

EXPERIENCE WITH PUBLIC CROP INSURANCE Financial performance of crop insurance Condition for sustainability: (A+I)/P < 1 Where: A = average administrative cost I = average indemnities paid P = average premiums paid Country Period (A+I)/P Brazil 75-81 4.57 Costa Rica 70-89 2.80 Japan 85-89 2.60 Mexico 80-89 3.65 Philippines 81-89 5.74 USA 2.42 Source: Hazell

TRADITIONAL CROP INSURANCE Not sustainable: Loss adjustment and farm level data Moral hazard Adverse selection due to asymmetric information High monitoring and administrative costs Need an alternative for smallholder farmers

CHALLENGE Design an alternative, efficient and cost-effective crop failure insurance program that facilitates risk transfer and can be easily distributed to farmers

1ST FARMER WEATHER INSURANCE POLICY But in the beginning… … there were groundnuts

FARMERS IN PAMIREDDYPALLY

… AND THE WEATHER MARKET First weather derivative transaction in U.S. 1997 Deregulation of the energy industry Market has rapidly grown - Global estimated worth $4.6 billion (PWC Survey 2004) Non-energy applications New participants Global development Broader product offering Key Players: (Re)insurers Investment Banks Energy Companies Hedge Funds $21B Transacted to Date

WEATHER INSURANCE PILOT 2003 Definition: Loss adjustment and claims settlement is based on a scientific Weather Index Rainfall-based Specific Weighted Time Periods, crop-model based Farmer eligibility based on land-holding size Crops: Groundnut, Castor Farmers selected: BUA members in villages Kodur, Pamireddypally, Utkoor & Ippalapally SHG Velugu groups Weather Station: Mahabubnagar IMD District Station Four parallel weather stations maintained in BUA villages 230 farmers insured : 76 Castor farmers, 154 Groundnut crop farmers insured Total 1730 farmers insured in 2003

WEATHER INSURANCE PILOT 2004 Expansion to six more locations and two new districts: Anantapur and Khammam New contracts for Groundnut & Castor designed with from farmer feedback: Three separate rainfall windows: sowing, vegetative growth and flowering/ripening More weight to sowing period Maximum payout Rs. 6000 per hectare insured New contract on cotton and harvest contract for excess rainfall Contracts written on local rain gauges No limit - farmers can buy as many hectares as desired 640 farmers insured: borrowers, non-borrowers, SHG groups plus repeat customers Total 20,000 farmers insured by three insurance companies in 2004 including NAIC

2004 BASIX PORTFOLIO HEDGE BASIX insured its crop lending portfolio against extreme weather shocks with Indian insurer backed by reinsurance into international market Three business units in three districts Six-figure sum insured to protect against losses due to drought Thanks to this weather hedge BASIX will not withdraw from two drought-prone “risky” districts Improves the quality of the BASIX portfolio

WEATHER INSURANCE PILOT 2005 Expansion to all business units, 36 locations in 6 states New area-specific contracts for all rain-fed crops: Livelihood protection contracts, not crop specific! New features: Three Phases, generic contract Designed per agro-climatic region covering principle crops Dynamic start date Minimum and Maximum Daily rainfall thresholds Rabi crops Standardized administration process reducing transaction costs: Automate information processing Simplify premium routing process CSA Productivity, critical mass of trained staff Installation of automated rainfall measuring stations 7,685 policies sold to 6,703 farmers through 2 insurance companies Total 150,000 farmers insured countrywide in 2005

Need for ex-ante, predictable market based risk transfer Systemic Risk in Agriculture hampers access to finance and technology Risks in Rural Areas Need for risk transfer Traditional Response Traditional Crop Insurance unsustainable Need for ex-ante, predictable market based risk transfer BASIX: Weather Based LIVELIHOOD Insurance for farmers Index Insurance Response Livelihood promotion complemented by weather insurance!

PUSHING THE FRONTIER AT BASIX Improves BASIX viability and stakeholder value and access to finance for farmers Scalable: 2006 farmer insurance expansion plans More insurance company partners Replicable: 150,000 farmers bought weather insurance in 2005 in 10 states from four insurance companies Sustainable: Weather station network must be improved Satellite data? The future? Livelihood monsoon insurance for all Packaged with other livelihood enhancement products Link to financing, monsoon-indexed loans Portfolio risk management for BASIX

And what do we do? … we spread the word

CRMG FACILITATES Market-based Products Transactions New Applications Weather index-based insurance Satellite observation supported Weather Insurance Transactions Ethiopia, Nicaragua, Malawi, Ukraine… New Applications Disaster risk management Safety nets Access to risk capital Global Index Insurance Facility (GIIF) Knowledge Transfer & Education Distance Learning Course

BASIX Video

CRMG GLOBAL ACTIVITIES 2005 2002 2004 2006 2001 2003 Feasibility Study Pilot Design Pilot Implementation

Index Insurance Responses Disasters affect especially the poorest and most vulnerable Safety Nets: Part of the population is chronically insecure Systemic Risk in Agriculture hampers access to finance and technology Risks in Rural Areas Need for risk transfer Traditional Response Disaster Risk Management Social Protection: safety nets are shock sensitive Traditional Crop Insurance ex-post + ad hoc unsustainable Need for ex-ante, predictable market based risk transfer Index weather sensitivity of safety nets for contingent scale-up funding Index Insurance Responses Index disaster risk and transfer to global market Weather index Insurance for farmers

The Future

Need for ex-ante, predictable market based risk transfer Disasters affect especially the poorest and most vulnerable Safety Nets: Part of the population is chronically insecure Systemic Risk in Agriculture hampers access to finance and technology Risks in Rural Areas Need for risk transfer Traditional Response Disaster Risk Management Social Protection: safety nets are shock sensitive Traditional Crop Insurance ex-post + ad hoc unsustainable Need for ex-ante, predictable market based risk transfer Index weather sensitivity of safety nets for contingent scale-up funding Index Insurance Responses Index disaster risk and transfer to global market Weather index Insurance for farmers Livelihood safety net complemented by commercial weather insurance! Future

Thank You. www.itf-commrisk.org