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USING INDEX-BASED WEATHER INSURANCE-THE

MALAWI EXPERIENCE

By Gift Livata

Opportunity Bank-Malawi

Expert Meeting on Risk Management for Financing to the Agric value chain in Africa.

Johannesburg

1-3 April, 2009

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Malawi’s Socio-Economical Background

• A small county in central south eastern Africa with a population of 13 Million

• 85% of the population live in rural and agriculture is their main livelihood

• 1% of the total population has access to credit

• The majority of the population is not insured

• GDP is $180 per capita per annum• Agriculture contributes 37.8 % to the

country’s GDP• 90% of the foreign earnings come

from agriculture

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Opportunity International Bank Of Malawi

• A microfinance Bank which started in Malawi in 2003

• A member of Opportunity International network operating in 45 countries

• Asset base $40M• Has a client base of over 203,000

customers• 38,800 Borrowers ($30M)• 6,500 agriculture borrowers (2009) • $7m agric loan portfolio• Over 12,000 lives are covered with

weather insurance

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Agriculture and Rural Finance in Malawi

• Not many players in the smallholder agriculture and rural sectors.

Only 150,000 smallholder farmers have access to agriculture credit out of estimated 3,000,000 farmers

• Why? Weak and inefficient linkages

between players in the agricultural value chain

High transaction cost

Lack of technology and instruments that can adequately manage risks

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Major Risks Associated With Agric Microfinance

Risk Factors EffectsWeather Adverse Weather, pests and

diseasesLow yields and loss of income

Price Market Forces (demand and Supply)

Lower prices and income

Financial Higher than anticipated input costs.

Length of production cycle linked to inflation risk.

High cost of credit

Cash flow problems.

Uncertain cash flow

Regulatory Regulatory changes affect cost of production

Changes in inputs costs

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Malawian Farmer’ Major Challenges

Market-prices

Extension Services/TechnicalExpertise

Inputs/Finance

Weather-drought

-flood

Farmer

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Strategic Links

The Rural Model

OUTPUT MARKETContract / Auction / Trader

Market Information

Systems

Infrastructure•Communications

•Power•Roads•Water

•Extension Services•Technical Support

•Research & Development

Input Supplier/sSeeds/Tools/Ferts/ Chems

MicrofinanceSavings / Loans / Transfer

Insurance products

FarmerFarmers Groups

7

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Weather Risk

• Weather is one of the biggest peril

• Weather risk has the most significant impact on the incomes of agricultural producers

• Weather related risks negatively impact individual house holds and local economy

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What Is Weather Index Insurance?

• Financial protection based on the performance of a specified index in relation to a specified trigger.

• This is a product designed to provide compensation to farmers when the rainfall during a crop growing cycle is insufficient or too

much for farmers to grow and optimize their yields • Weather insurance does not measure changes in yields instead it

measures changes in rainfall assuming that if rainfall is bad farmer’s yields will be poor

• Offers protection against uncertain costs or revenues that result from volume volatility

– Farmers are compensated against unfavorable weather fluctuations that impact physical volumes produced

– Objective & timely

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How does Weather Index Insurance work?

• Drought/Excess rain is not measured by what happens in a farmer’s field, it is determined by measuring the amount of rain that was received.

• It is impossible to do measurement on each individual farmer’s plot instead weather insurance measures the amount of rain recorded at Weather Station.

• It is believed that farmers experience similar weather conditions within a radius of 20 km

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Weather Insurance in Malawi

• Started a pilot in 2005 • No individual insurance companies was ready to underwrite

policies• Insurance Association accepted to test the pilot and spread the

risk among its members• Historical yield data for the past 40yrs were provided for five

weather stations • For the pilot to work agric value chain organisations were

identified and roles and responsibility were shared in accordance with line of mandate i.e OIBM,MRFC, NASFAM, MET Dept and Insurance Association of Malawi..

• Over the passage of time Malawi has been able to pilot weather index project at micro, meso and macro

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Example: Lilongwe Contract, Maize

Deficit Rainfall (mm)

Payou

t ($

)

PHASE 1Sowing & Establishment

PHASE 3Yield Formation to Harvest

Deficit Rainfall (mm)

Payou

t ($

)

Deficit Rainfall (mm)

Payou

t ($

)

Cropping Calendar Sowing Window &

Dynamic Start Date

PHASE 2Growth & Flowering

Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts)

Phase 1: 50 daysTrigger Level: 40mmPayout per mm: 580 MKW/mmMaximum Payout: 5800 MKW

Phase 2: 30 daysTrigger Level: 130mmPayout per mm: 58 MKW/mmMaximum Payout: 5800 MKW

Phase 3: 40 daysTrigger Level: 25mmPayout per mm: 1160 MKW/mmMaximum Payout: 5800 MKW

10th November – 10 January:25 mm in 10 days

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Weather Index Insurance Pilot Programs In MalawiWeather Index Insurance Pilot Programs In Malawi

• The pilot programs started in Malawi in 2005 with groundnuts farmers under NASFAM

• 892 farmers were recruited for the project.

• Two micro-finance institutions participated: Opportunity International Bank of Malawi (OIBM) and Malawi Rural Finance Company (MRFC) with a total sum of USD25,000 and USD12,000 respectively.

• The results well not satisfactory as many farmers side sold the groundnuts

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2006/2007 Season2006/2007 Season

• The number of farmers increased to 1800 farmers growing both maize and chalimbana 2000 groundnuts.

• Sums insured increased to USD80,000.00 against a premium of USD7100 OIBM policy and a sum insured of USD22,000 against a premium of USD1620 MRFC.

• Farmers bought the premiums because it was a bundled product.

• Payout of USD850 under OIBM and USD395 under MRFC policy were made to the farmers

• Side selling was still an issue

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2007/2008 Season2007/2008 Season

• Changed the lending model to a tripartite to address side selling issues.• Tobacco was preferred to g/nuts because of its well established market structure• This included 425 farmers growing tobacco and maize.• Participation of Swiss-Re (50%) and Paris-Re (30%).• The index was modified to provide cover against both deficit and excessive rainfall • OIBM changed the approach from farmer level to portfolio cover• Sum insured of USD310,000 against premium of USD13,500• No pay out

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2008/09 Growing Season

• This year we insured 2189 Burley Tobacco farmers and 344 flue cured tobacco farmers, making a total of 2533 farmers.

• The total sum insured this year USD2,402,804

• Changed from three phase to multi phase contracts (2 weeks period)

• No payout

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1 1.5 1.5 1.5 1 1 1.5 1.5 1 1 1 1 0.75 0.751 0.75 W

1 1.5 1.5 1.5 1.5 1.5 1.5 1 1 1 1 1 1 11 1 W

Example: Bi-Weekly phase

Weighted Cumulative Weekly Deficit, DSum (W * max(0 , 25 – Weekly Cumulative Rainfall))

e.g. 1 * 2 + 1 * 10 + 1 * 15 + 1 * 10 = 37

80mm

25mm

15mm

10mm

15mm

23mm

85mm

90mm

85mm

87mm

95mm

83mm

Weighted Cumulative Weekly Excess, ESum (W *max(0 , Weekly Cumulative Rainfall – 80))

e.g. 1.5 * 5 + 1.5 * 10 + 1.5 * 5 + 1 * 7 + 1 * 15 + 1 * 3 = 55

15 Nov – 20 Dec

Transplanting Window &Dynamic Start Date

Total Contract Payout =max(0, D – 85)*375 + max(0, E – 110)*375

Max Payout 231,000 MKW per hectare

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1. Non-homogeneity in rainfall patterns 2. Limited number of automated weather stations3. Lack of local capacity in terms of expertise

necessary to design and price the contracts.4. Lack of diversity in crops and space5. Lack of historical weather data6. Difficult for the farmers to understand

Challenges

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Lessons Learnt

• Farmers need practical solutions for their problems• Weather index insurance gives a safety net to both the farmer and

the bank• It provides cover for the specified index only• weather insurance is best sold when bundled with credit and not as

a stand alone product • weather index insurance provide a win-win situation to all the

players.• With weather index no physical presence is required to assess the damage• Weather Insurance is not the final solution for challenges that

farmers face it is part of the solution.

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WeatherStations and OIBM network

Current weatherdata allowedOIBM to cover35% of 2008-9Agric loans withWeather Index Insurance.It is envisaging that by 2009 the bank will be able to cover 100 of the agric portfolio with weather index if weather stations are automated.

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THANK YOU FOR YOUR ATTENTION

Gift LivataAgricultural Microfinance Coordinator

Opportunity International Bank Malawi

Email: glivata@oibm.mw

Alt email: livatag@yahoo.co.uk

Cell:+265 99 9 200 108