1. UKRAINIAN AGRICULTURAL WEATHER RISK MANAGEMENT RISK, VULNERABILITY
WORLD BANK COMMODITY RISK MANAGEMENT GROUP
Ulrich Hess
Joanna Syroka PhD
January
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

2. 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

3. The Development World Before

4. 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

5. BASIX Changes the World

6. 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

7. 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

8. 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

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

10. 1ST FARMER WEATHER INSURANCE POLICY
But in the beginning…
… there were groundnuts

11. FARMERS IN PAMIREDDYPALLY

12. … 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

13. 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

14. 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 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

15. 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

16. 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

17. 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!

18. 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

19. And what do we do?
… we spread the word

20. 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

21. BASIX Video

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

23. 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

24. The Future

25. 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

26. Thank You.