WEATHER RISK INSURANCE FOR SMALL FARMERS IN MALAWI

1. By Adams Chavula MINISTRY OFNATURAL RESOURCES, ENERGY AND ENVIRONMENT DEPARTMENT OF CLIMATE CHANGE AND METEOROLOGICAL SERVICES PO BOX 1808 BLANTYRE MALAWI Tel: +265 1 822014 (o) Mobile: +265 888 877784 Fax: +265 1 822215 Email: adamschavula@metmalawi.com WEATHER RISK INSURANCE FOR SMALL FARMERS IN MALAWI

2. Outline of Presentation • Introduction to Malawi • Weather infrastructure in Malawi • Challenges for smallholder farmers in Malawi • Definition of weather risk insurance • Standardised Contract Design • Applications of Weather Risk Insurance in Malawi • Achievements of Weather Risk Insurance in Malawi • Challenges, Opportunities and Recommendations

3. Introduction to Malawi • Malawi is a landlocked country • Population: 13.1 million of which • 65% live in rural areas • 80% of its people engaged in farming • The vast majority of farmers are smallholders, cultivating areas of 1 Ha or less • Population living in poverty: 52% • HIV prevalence: 12% • Agricultural sector: • 85% of the labour force • 35% of GDP • 90% of foreign export earnings The Warm Heart of Africa 3

4. Introduction to Malawi – Cont. • Over 90% of crop production in Malawi is rain-fed, taking place during a single rainy season lasting from November to April • Rainfall during this period tends to be highly erratic and • Drought is a recurrent problem, often causing widespread crop failure which affects livelihoods of farmers • The dependency on rain-fed agriculture exposes the smallholder farmers to weather related risks which negatively impact smallholder farmers household income and food security • High levels of poverty and lack of assets, rendered majority of farmers not credit worthy and hence they could not access normal loans to purchase farm inputs

5. Weather Infrastructure in Malawi NO DATA – NO DEAL FOR WEATHER RISK INSURANCE The Department of Climate Change and Meteorological Services (DCCMS) has excellent data: over 30 years, few gaps, 21 primary synoptic stations (red) In addition over 200 rain gauges around the country which can be leverage. The World Bank and DCCMS piloted the installation of automatic weather stations (green) DCCMS with assistance from the World Bank and Govt of Norwayhas started a modernization program to expand the network of weather stations and install automatic weather stations (AWS) and automated rainfall loggers countrywide Over 75 weather stations are planned to be automated by 2011

6. Challenges for Smallholder farmers • Unreliable rainfall patterns • Limited access to credit and high interest rates • Unaffordable prices for agricultural inputs • Limited access to inputs, particularly certified quality seed • Weak bargaining power and low product prices • Lack of access to markets • Insufficient access to technology, equipment and knowledge • Weak institutional linkages and extension structures • Lack of voice to defend smallholder political and economic interests 6

7. Standardized Contract Design For farmers and stakeholders to easily understand the contract: Balance simplicity with the complex dynamics that characterize water stress impact on crop yields Communicate rainfall (mm) surplus or deficit at each crop phase instead of computed Index Performs well from agro-meteorological perspective Provides required protection for all stakeholders at an affordable level Methodology should be simple to replicate to other locations and crops so that programs are scalable Local ownership, so programs are sustainable Given a target premium and set pricing guidelines,and a required maximum payout per phase are calibrated to a simple crop water-balance model – the FAO WRSI – cross-checked against historical yields and local experts to minimize farmer income Value-at-Risk and maximize payout correlation to yields

8. EXAMPLE: LILONGWE CONTRACT, MAIZE 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 Cropping Calendar  Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts) Sowing Window & Dynamic Start Date Phase 1: 50 days Trigger Level: 40mm Payout per mm: 580 MKW/mm Maximum Payout: 5800 MKW Phase 2: 30 days Trigger Level: 130mm Payout per mm: 58 MKW/mm Maximum Payout: 5800 MKW Phase 3: 40 days Trigger Level: 25mm Payout per mm: 1160 MKW/mm Maximum Payout: 5800 MKW 10th November – 10 January: 25 mm in 10 days

9. Applications of Weather Risk Insurance in Malawi Application #1: A weather risk insurance product that compensates smallholder farmers for weather risks that negatively impacts crop yields • Farmers are organised in clubs • Participating farmers live within 20km of a weather station • Index calculated at a nearby weather station • Uses historical rainfall index and weather stations to establish weather derivative • Too little rain (drought) triggers a payment • Premiums included in loan value Crops insured include: Maize, Tobacco, Groundnuts

10. What is Weather Risk Insurance? Is a financial protection that compensates farmers against unfavourable weather that impacts physical volumes produced leading to loss of household income and food security To prove that the losses are due to weather factors, it was necessary to have an objective, verifiable, transparent, temper resistant and effective system for monitoring weather elements in the targeted crop growing areas in real-time, hence growing need for AWS Is a financial protection that is based on the performance of a specified index (rainfall, yield etc) in relation to a specified trigger (threshold of rainfall (mm))

11. APPLICATION #2:DROUGHT INSURANCE FOR GoM Malawi Maize Production Index (MMPI) is the output of rainfall-based index model for maize production Details: Malawi Met Office developed the model, CRMG of the world bank adapted it Crop water balance model, FAO’S WRSI Variable input is daily rainfall data uses 23 primary weather stations throughout the country to track maize yields Protection Structure: Trigger to protect against maize output below 1,500,000 MT Strike: 1,500,000 MT Limit: 1,000,000 MT Payout Rate: $300 per MT Coverage to protect against the impact of drought on national maize production Structure designed to reflect conditions which would impact national maize production and food security, resulting in GoM maize imports

12. HISTORICAL PAYOUTS $160,000,000 2,500,000 $140,000,000 2,000,000 $120,000,000 $100,000,000 1,500,000 Index Predicted National Production (MT) Payout ($US) $80,000,000 Histroical Payouts ($US) 1,000,000 $60,000,000 Index (MT) $40,000,000 500,000 $20,000,000 $- 0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Harvest Year

13. The True Impact of Weather Risk Insurance in Malawi Smallholder farmer Henry Kangwelema puts meat on the table and sends his children to school now that he has a Weather Risk Insurance policy from the Micro Insurance Agency. Source: OIBM Thanks to Weather Risk Insurance from the Insurance Association of Malawi, farmer Gelesom Chimpopi was able to get a loan to purchase high-quality seed and fertilizer to greatly increase his crop yield

14. ACHIEVEMENTS OF WEATHER RISK INSURANCE IN MALAWI At the household level: The program provides more stable income for smallholder farmers Provides a way to protect livelihoods of smallholder farmers and improve their access to finance Farmers see potential in investing in their farms For the government of Malawi: The program provides government contingent financing Allows the cost of drought risk to be smoothed over time Provides some predictability to drought financing and buys time for other emergency responses to take affect The program may lessen the effects of drought (asset depletion etc) by getting the needed resources into the hands of the government and beneficiaries sooner ie protect livelihoods Provides government a level of autonomy Managed to unlock credit facilities for smallholder farmers. Before the pilot OIBM did not lend to agriculture, but now is using lessons learnt from project to expand lending book. Four other banks promised to unlock more than USD 10 million of credit if weather risk is insured. Allowed smallholder farmers to access to high yielding seeds and fertilizers. Farmers interviewed indicated that they got an average of SIXTY 50 kg bags (by using hybrid maize seed) as opposed the usual 20-25 bags. Improved sustainability for contract farming operations Has enabled DCCMS to expand and upgrade network of weather stations to support the growing markets Introduction of new weather stations allowed more farmers to access weather insurance and input financing Expansion of the risk retention capacity through risk transfer to the international market The program is therefore a win win for all the stakeholers

15. Challenges, Opportunities and Recommendations To upscale and ensure sustainability weather risk insurance markets require the presence of a dense, secure, high quality automated weather station Network The spatial variability of rainfall and the lack of rainfall stations with reliable long-term records are limitations that will need to be addressed if scaling up is to be successful Since many parts of Malawi are covered by GSM network providers, there is an opportunity for improvement and expansion of meteorological observations and services to include more rural smallholder farmers in the insurance scheme. There is need for capacity building to integrate data from Automatic Weather Stations with a Geographical Information System. Automatic Weather Observing Systems should form a major component in the future expansion programs of the Department of Climate Change and Meteorological Services in Malawi. Once weather stations have been automated useful value added products can be produced at the station level thereby helping in dissemination of meteorological information to the local communities for the better management òf weather and climate risks.

16. Thank you very much for your attention