Index insurance – Enabler for agricultural risk transfer

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Index insurance – Enabler for agricultural risk transfer

For the agribusiness industry and for aggregators such as cooperatives, index insurance is the efficient way to mitigate unbalanced agricultural exposure. Index insurance for individual farmers is a starting point to agriculture insurance where individual data is still missing.

Index insurances such as yield index or weather index solutions provide an alternative to farmers in markets without workable traditional crop insurance. Agriculture producers mostly understand the risks they face; they should also understand the most effective measures they can take to mitigate their production risks while allowing their business to grow. Next to essential production-related risk management, these include risk transfer measures such as individual yield insurance (e.g. MPCI) or index insurance.

In some cases, especially in emerging markets, traditional crop insurance is not feasible. Reasons for this could be a lack of data for individual yield insurance or a high moral hazard due to intransparent data. In such markets, index insurance could be an alternative that is easy and cost-efficient to launch thanks to low administration costs and low costs for loss adjustment measures.

While data availability is still a huge challenge for such insurance products, technical advancements such as remote sensing and big data promise greater feasibility.

Munich Re offers index insurance in various structures, based on yield and weather or on remote sensing data or combined indices.

Yield index insurance – New technologies for a long-established coverage concept

Yield index insurance addresses the shortcomings of individual yield insurance and weather-based index.

Wherever yield index insurance is available, it is the cover of choice over weather-based indices, and the uptake is significant, for example in markets such as India, the United States and Mexico. Munich Re has been engaged in these markets for a long time.

Yield index insurance pays out if the actual yield in a given region falls below an agreed percentage of the yield guarantee. The trigger point is expressed as the coverage level of a guaranteed yield per region. Today, with data intelligence and digitalisation, it is possible to design a demand-oriented product that reduces the deficiencies of both the yield insurance and the weather-based index. The benefits of a yield index are manifold, especially for:

  • Insureds: Yield index insurance is the cover of choice over weather-based indexes, as the basis risk is significantly reduced. All production-related perils are covered, and the payout does not rely on any model and its parameters.
    Yield index insurance is a starting point for individual yield covers that can be offered once extensive individual yield data has been collected.
    Even in regions where the yield data landscape is advanced, yield index insurance often remains in place to cover just catastrophe events.

  • Official administrative bodies: Statistical yield data assessment is an enormous job undertaken by administrative bodies. Integrating yield statistics for insurance generates added value that pays for the ongoing effort of maintaining transparent and efficient assessment methods. Public access to that data increases development in the agricultural sector.

  • Finance institutions and agribusiness companies: Finance institutions and agribusiness companies are key aggregators, and hence potential beneficiaries of yield index insurance. Regional and publicly available yield information increases the market potential perspectives for all businesses along the entire agricultural value chain.

  • Insurers: Insurers can minimise reputational risk by offering yield index insurance, as the basis risk can be significantly lower than in weather index insurance. Insurers fear being blamed for not paying out if the insured does not completely understand the impact of the basis risk.

Weather index insurance and other parametric solutions

Munich Re serves a specific demand for weather-exposed risks with agriculture weather index insurance and other parametric solutions.

Weather index insurance can be used as part of an overall risk management strategy to reduce risks associated with adverse or unexpected, non-catastrophic weather conditions or catastrophic weather events. It is a parametric insurance solution that absorbs an exact portion of exposure, leaving a residual risk. The protection is based on parametric triggers in a defined area throughout the crop’s growth cycle. Triggers differ per crop, growth phase and weather station.
 
Munich Re offers customised weather index solutions:
Weather index insurance/weather derivative: Weather index solutions are risk transfer products that allow clients to manage or "hedge" their weather-related risk exposures. They can be part of an overall risk management strategy to reduce risks associated with adverse or unexpected, non-catastrophic weather conditions or catastrophic weather events. Depending on the individual requirements, weather index solutions can be structured as an insurance policy or as a financial product such as a weather derivative. A wide variety of available structures are swaps, calls, puts, collars, exotics, baskets, etc.

Other parametric insurance solutions: Next to weather data, parameters derived from satellite sensors can function as an index. For example, the biomass of crops can be estimated by way of parameters such as remotely sensed NDVI (normalised difference vegetation index) or EVI (enhanced vegetation index) and serve as an index for agricultural risks.

Find more information on weather index solutions

Feel free to contact us if you would like more information.

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This publication is available exclusively to Munich Re clients. Please contact your Client Manager.