Weather Insurance for Small and Medium Farmers: Building a Weather Risk Market in Central America

1. Weather Insurance for Small and Medium Farmers:Building a Weather Risk Market in Central America Joanna Syroka, World Bank WRMA Annual Meeting, Miami, May 2007

2. Project Partners 2006-2009 • Co-Financiers: • Inter-American Development Bank (IADB) • Central American Bank for Economic Integration (CABEI) • World Bank (CRMG) • Implementers: • Latin American Federation of Insurance Companies (FIDES) • Associations of Insurance Companies: AGIS (Guatemala), ANAPRI (Nicaragua), CADEH (Honduras) • Local Counterparts: • National Meteorological Services • Government regulators • Local banks • Central American research institutions

3. Project Background • Increase financial services and investments in agriculture • Pressure from financial intermediaries for improved risk management on commercial basis and improve prospects for business expansion • Current subsidies to traditional agricultural insurance not sustainable • Clarify roles of public and private sector • Take advantage of opportunities • Support market development for agricultural insurance • Established network of 48 insurance companies

4. Other Risks Farmers’ Risk Perception: 14% Climatic Risks 56% 33% Pests Source: Davis & Murgai (2000) Agriculture & Weather Risks • Only 7 out of 48 insurers are active in agriculture • Agriculture portfolio represents only 2 % of total premiums • 17 insurers in 3 countries have signed up to project • In first year working with 6: • Nicaragua • INSIER, LAFISE • Honduras • Equidad, Atlántida • Guatemala • La Ceiba, Columna

5. CRMG Lessons Learnt • CRMG piloting has shown that weather insurance for farmers in developing countries is feasible • Sustainability and scalability will not be achieved unless product development is owned locally and data limitations can be overcome • Successful weather risk markets can be created by: • Strong local partners and local ownership • A “win-win” strategy for all stakeholders • Applying piloting best-practices in a systematic manner • Robust product delivery channels to farmers • Linkages to finance or supply chain • Standardized approach to contract design • Investment in data and weather infrastructure • Strong and favourable regulatory framework • Capacity building and technology transfer • Reinsurance support from international market

6. Payout ($)  Payout ($)  Payout ($)  Deficit Rainfall (mm)  Deficit Rainfall (mm)  Deficit Rainfall (mm)  PHASE 1 Sowing & Establishment PHASE 2 Growth & Flowering PHASE 3 Yield Formation to Harvest Dekadal Cropping Calendar  Sowing Window & Dynamic Start Date Example: Standardized Contract Design • Given a target premium and set pricing guidelines,and a required maximum payout per phase, red dots are calibrated to a simple crop water-balance model, cross-checked against historical yields and local experts (blue dots) to minimize farmer income Value-at-Risk and maximize payout correlation to yields

7. Required Market Structure Data Reinsurance Company International Reinsurance treaty In-Country Insurance Company/Association Data Master weather insurance contract Product Retailer: Bank/MFI/Cooperative/Input Supplier Data Met Office (Bundled) weather insurance contract Farmer/Farmer Groups Data

8. Project Agenda • Objective to stimulate the agricultural insurance market in Central America: • Target small and medium farmers • Develop index-based weather risk management instruments for agriculture, where possible linked to agricultural finance • Focus on risk transfer to the international markets to enable market growth • Strategy is initial piloting within a greater programme of: • Training for local insurance companies to design index-based weather insurance contracts for farmers • Building a database platform and tools for index instruments • Improving regulatory framework to enable transparency and industry sustainability

9. Project Agenda • Training: • Comprehensive CRMG training programme for all stakeholders in the product supply chain • Focus for insurers is on contract design, pricing, portfolio management and dealing with seasonal forecasts • Developing tools with Columbia University and Zamorano Agircultural School to design standardized contracts for rain-fed grain crops to be retailed to farmers • Weather Databases: • There is need for a public goods approach: investments in weather databases or updating meteorological stations instead of subsidizing premiums in captive markets • Focus on data inventory, cleaning and management platform • Regulation: • The legal framework represents a bottleneck for approval of innovative products by regulatory authorities • Earlyinvolvement in pilots design is critical to stimulate a risk management culture • Working closely will all regulators to adapt current legislation to regulate index instruments

10. Role for Weather Market • Key role for the weather reinsurance market throughout Central America project: • Risk Transfer: • Current insurance industry has limited capacity to retain high levels of risks • Reinsurance capacity will be critical to grow the market • Training: • Experience and interaction with market will compliment TA for insurers on pricing and portfolio management • Regulation: • Regulators are looking to reinsurance market for guidance • International market becomes a key element in designing pilot projects if agricultural insurance is to be scaled up and a sustainable framework created