Weather insurance losses need to be measured (accurately)

by Artemis on June 23, 2009

One of the most important aspects of any weather insurance or weather risk management initiative is the ability to accurately measure the effects of the weather at a suitably granular level to be able to base claims payments on the measurements. That’s essentially the whole premise of an index based weather insurance product. In North Dakota it seems they’re not quite there yet.

A new index based weather insurance product designed to pay ranchers in North Dakota based on rainfall or the greenness of their pastures was supposed to provide the ranchers with a way to protect their livestock. In the past livestock producers have not been able to get any insurance as pasture cannot be measured in terms of bushells produced. The U.S. Risk Management Agency designed a product (now available in 18 states) which is measured at local weather stations and uses either a rainfall or vegetation index in order to measure and pay claims. Payment depends on the amount of rainfall or the amount of greenness in the vegetation.

Sounds great doesn’t it? Unfortunately in North Dakota they use the rainfall index and the state doesn’t have enough weather stations to be able to make the reporting granular enough. Livestock owners report that some claims have been denied because the index shows that they have had enough moisture, or course with the local nature of rain showers that isn’t always the case.

The RMA are now looking into making both the rainfall and vegetation index available to all states, this should help to make a level playing field for all livestock owners wanting access to this product. This really shows how important it is for analysis to be completed before index based weather risk products are launched to ensure that the granularity of data required is available in the proposed covered areas.

Read the full story here in the Grand Forks Herald.

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