Weather index insurance is not just for developing economies

by Artemis on October 10, 2012

We’ve written about the application of weather index insurance products, where payouts are based on parametric indices of actual climatic conditions such as temperature, moisture or rainfall, many times in our coverage of the growing microinsurance sector. Use of weather index insurance has enabled microinsurance to become more widespread as the policy terms and conditions are more easily understood by customers in developing economies.

For the developing world the concept of insurance based on indemnity assessments, where a claims assessor would need to visit a farmer to tell him how much a claim was worth, was never going to work for small holder farmers and rural businessmen. For one thing the act of assessing claims needs to be undertaken quickly after a weather event, something that would not be possible in the middle of rural Africa. Another issue has been education, it is much simpler to understand that your insurance policy will payout a pre-defined amount if weather conditions reach a certain level on an index. Overall weather index insurance has been responsible for the rapid growth of rural weather linked microinsurance products and is proving very successful.

It’s becoming clear that weather index insurance is also needed in developed nations, particularly for farmers, where the quick payout could make the difference between survival and bankruptcy for potential policyholders. In the UK there have been cases of farmers becoming bankrupt before their insurers could provide a payout. Payouts are often too late for a farmer to be ready for the next growing season as well, meaning that not only have they lost a crop but are unable to fund planting of another.

Now in the UK the BBC warn that food prices are set to rise due to a particularly wet summer of weather. The National Farmers’ Union (NFU) said that wheat yields in England were down by almost 15% on the five-year average, with productivity down to 1980s levels. Food prices are already on the rise across the globe, thanks to the U.S. drought and a heat wave in Russia caused grain prices to spike.

In the UK this summer just gone was the second wettest on record and that followed an extremely dry spring meaning that farmers crop yields are way down on the norm. The farmers who are worst hit will struggle to recover and what is essential is fast payouts of agricultural insurance.

Weather index insurance could be the answer here. There has to be a way to provide farmers in both developed and developing nations with crop insurance cover that is linked directly to weather conditions and which will payout promptly. In the U.S. the Climate Corporation offer weather insurance products designed to complement Federal crop cover by covering the gaps in policies attributable to bad weather.

The risk transfer and reinsurance sector are uniquely placed to assist in making parametric or weather index based crop insurance products available. With the understanding of risk, weather, climate data and how to structure risk transfer products, the industry needs to take a lead going forwards to help broaden the availability of weather index insurance around the world.

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