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.