Agricultural Weather Index Insurance in Thailand

Ms. Apiradee Yimlamai
Director of Research Center
Bank for Agriculture and Agricultural Cooperatives (BAAC)
8 July 2010

I. About Thailand II. About BAAC III. Why Risk Management? IV. How to Manage Risk? V. Weather Index Insurance VI. Next Step

I. About Thailand

About Thailand

Area: 513,120 sq.km.
• Agricultural land: 208,560 sq.km. (41%) • Irrigated land: 49,860 sq.km. (10%)

Population: 65 million
• 7 million live in capital (Bangkok)

Religion: Buddhist 95%

About Thailand

Economic Indicators

(in 2009)

GDP (at current prices: USD): 264 billion GDP per capita (USD per year): 3,920 GDP Growth (at constant prices): -2.3% Composition by Sector : - Services : 44% - Industry : 34% - Agriculture : 12%

About Thailand

Agricultural Sector
Agriculture’s share of GDP
25% 15% 11% 12% (1970s) (1985 to 1990) (1990 to 1996) (2009)

(in 2009)

Main Crop Rice Cassava Sugarcane Maize Rubber : 32 million ton : 30 million ton : 67 million ton : 5 million ton : 3 million ton

II. About BAAC

About BAAC

BAAC Head Office

About BAAC

BAAC Vision 2010

“To be secured rural development bank with modern managerial technology focusing on the uplift of small scale farmer’s quality of life”
Sustain Modern

Rural Development
Better Living

About BAAC

BAAC Delivery Structure
Bank Management and Policy

HEAD OFICE
DEPARTMENTS/DIVISIONS PROVINCIAL OFFICES (75) DISTRICT BRANCHES (977) FIELD OFFICES (957) CLIENTS (6,101,206)

Branch Administration and Support

Supervision of Activities

Credit Delivery to Clients

BUSINESS DEVELOPMENT OFFICERS contact with clients

Individual Clients (Joint Liability Groups) Agricultural Cooperatives Farmers’ Associations

About BAAC

Credit Services
(as of the end of March 2010)
G overnm P ent olicy 0.73%(115m illion)

F ers' A arm ssociations 0.01%(1m illion)

O thers 5.11%(806m illion)

A gricultural C ooperatives 5.08%(802m illion)

Individual C lients 89.07% (14,052m illion)

Total 15,776 million
(Unit: USD)

About BAAC

Operating Fund
(as of the end of March 2010)
O L ther iabilities 3.46%(826m illion) Shareholders' E quity 9.62%(2,299m illion)

B ing orrow 2.11%(505m illion)

I nterbank 0.82%(197m illion)

D eposits 83.99% (20,078m illion)

Total 23,905 million
(Unit: USD)

III. Why Risk Management?

Why Risk Management?
Natural Risks
Natural Disaster, Insect, Disease

Agricultural Risk Management
Risks Factor
Social Risks Economic Risks
• Cost of Input Fluctuation
• Change in Agricultural Pricing • Interest Rate

• Social Structure Change (Labor Migration) (Lack of Agriculture Labor) • New Technology in Agricultural Sector

Strategic Risks Management
• Future of Forward Market • Central Market Establishment • Agricultural Marketing Cooperatives • Group Occupation • Agricultural Cooperatives • Management Skill • Networking - Educated Institution - SME Association

• Income Supplement from
Non-Farm Activities • Local SME • MFI (ssp) • Insurance (Health,Life,Credit) • Farmer Pension Fund

Farm Type Diversification Zoning • Good Variety Crops • Appropriate Technology • Weather Index Insurance

Yield Risk Yield Risk

Price Risk Price Risk

Investment Risk Investment Risk

Crop Insurance Stabilization of Farmers’ Income

Why Risk Management?

Why Risk Management for Agricultural Sector? 1
Importance of Agriculture

2
Vulnerability to Hydro-meteorological Risks

6 5

7 4

3

Growing Insurance Strong Agricultural Burden on Public Sector Bank Resources

Strong Interest from Good Weather Data Stakeholders Infrastructure

Why Risk Management?

Why Weather Risk Management for Thailand?
• Importance of Agriculture • Vulnerability to Hydro-meteorological Risks Ranked among the top 6 countries in the world affected by floods; also frequent droughts (EM-DAT,OFDA/CRED) • Burden on Public Resource Between 2005-2008, Ministry of Finance (MOF) spent approximately USD 450 million on ad-hoc disaster relief • Strong Agricultural Bank BAAC reaches over 80% of farm households • Growing Insurance Sector Over 70 non-life insurance companies with USD 3.3 billion in gross written premiums (2009) • Good Weather Data Infrastructure 121 synoptic stations and 930 automatic rainfall stations in 2010 • Strong Interest from Stakeholder

IV. How to Manage Risk

How to Manage Risk?

Crop Insurance

How to Manage?

Production Risk
Weather Index Insurance

How to Manage Risk?

Tools Traditional Agricultural Reinsurance
- Named perils - Multi-Peril Crop Insurance (MPCI)

Parametric Insurance
- Weather-based - Area-yield - Satellite imagery (NDVI) - Other indices

How to Manage Risk?

Traditional crop insurance is a global failure

Moral hazard, adverse selection, high monitoring and administrative cost No successful crop insurance in the world

How to Manage Risk?

Challenge
Design an alternative, efficient and cost-effective crop failure insurance program

that can be easily reinsured and distributed to individual farmers: small, medium and large Weather-based

How to Manage Risk?

Financial protection based on the performance of a specified index in relation to a specified trigger
Offers protection against uncertain costs or revenues that result from volume volatility
– Buyers are compensated against unfavourable weather fluctuations that impact physical volumes produced or transacted

How to Manage Risk?

Developing a Programme
I. Identify significant farmer exposure to weather II. Quantify the impact of adverse weather on their revenues III. Structure a contract that pays out when adverse weather occurs IV. Execute contract in optimal form to reinsure or securitize the risk in the capital markets

How to Manage Risk?

What are Index Insurance Contracts?
An index insurance contract indemnifies based on the value of an “index”- not on losses measured in the field An index is a variable that is highly correlated with losses and that cannot be influenced by the insured Example indices: rainfall, temperature, regional yield, river levels Index insurance contracts overcome most of the supply side problems of traditional insurance contracts

How to Manage Risk?

Main Characteristics of an Index
Observable and Easily Measured Objective Transparent Independently Verifiable Able to be Reported in a Timely Manner Stable and Sustainable over Time Weather index can form the basis of an insurance contract that protects farmers from weather risk

V. Weather Index Insurance

Weather Index Insurance in Thailand

Project

Crop Insurance : Cotton (1977)

Weather Index Insurance (2006-2010)

Weather Index Insurance in Thailand

Project Model of Weather Index Insurance
• Bank-intermediated weather insurance contracts to farmers
Global Reinsurance Companies International Thailand Insurance Company/ Syndicate
Contractual Relationship
(risk transfer, services, operations etc.)

Reinsurance Treaty

BAAC
Weather Insurance Policy

Farmers

Weather Index Insurance in Thailand

Project Model
Model of the World Bank

Model of the Japan Bank for International Cooperation (JBIC)

Weather Index Insurance in Thailand

Model of the World Bank

Automatic Rain Gauge India Rain Measurement Tool Manual Rain Gauge

Weather Index Insurance in Thailand

Access to risk capital
Access to global reinsurance markets

Market-based Risk Transfer Products
Weather index-based insurance Price risk management contracts

Existing Transaction
India, Ethiopia, Malawi, Ukraine, Mongolia…

Knowledge Transfer and Education
Technical assistance Publications and training workshops

New Applications
Disaster risk financing Extension to new hazards

Weather Index Insurance in Thailand

Maize Rainfall Index Maize Rainfall Index
*Maize yields are particularly sensitive to rainfall during the tasseling stage and the yield formation stage – rainfall during the latter phase determines the size of the maize grain

2%

2%

2%

2% 13% 13%

13%

13%

13%

13%

13%

1%

1%

x Cumulative Rainfall in each decade = Maize Rainfall Index
Weights and diagram taken from the FAO’s maize water requirement report*

Weather Index Insurance in Thailand
RID DOI TMD

Nakorn Ratchasima Province,
Pak Chong District Maize Production

GIA

July 2006

110 Farmers 1,970 Acres of maize enrolled

Weather Index Insurance
Royal Irrigation Department (RID) Thai Meteorological Department (TMD) General Insurance Association (GIA) Department of Insurance (DOI)

The Radius of 25 km. Measured from the Suwan Maize Research Center Station

Weather Index Insurance in Thailand
Rain station BAAC’s Pakchong Branch Station Risk cover : Drought 35 Farmers 380 Acres

Nakhon Ratchasima Province

• Premium: USD 2,590 • Sum insured: USD 41,620

Insured Crop: Maize Rain station
Suwan Maize Research Center Station

USD 134/Acre USD 9/Acre USD 127/Acre

Physiological Maturity Days 30 Period 3 Knee Height Days 21 Period 2

July 2007 Premium rates

USD 6/Acre

Seedling Emergence to Knee High Days 30 USD 96/Acre Period 1

Weather Index Insurance in Thailand

Nakhon Ratchasima

Saraburi

Lopburi

Nakhon Sawan

Phetchabun

5 Provinces (8 Districts)
Premium: USD 23,300 Premium: USD 23,300 Indemnity: USD 3,520 (15%) Indemnity: USD 3,520 (15%)

388 Farmers

2,860 Acres

USD 104/Acre Flowering and Grain Filling (30 Days). Period 3 Growth (20 Days) Period 2 Sowing (30 Days) USD 28/Acre Period 1

USD 10/Acre Premium rates Premium rates USD 6/Acre

Weather Index Insurance in Thailand

Nakhon Ratchasima

Saraburi

Lopburi

Nakhon Sawan

Phetchabun

5 Provinces (15 Districts)
Premium: USD 42,040 Premium: USD 42,040 Indemnity: USD 11,160 (27%) Indemnity: USD 11,160 (27%) USD 104/Acre

817 Farmers

5,320 Acres

Flowering and Grain Filling (30 Days). Period 3 Growth (20 Days) Period 2 Sowing (30 Days) USD 28/Acre Period 1

USD 8/Acre Premium rates Premium rates USD 6/Acre

Weather Index Insurance in Thailand
(as of the end of May 2010)

Nakhon Saraburi Ratchasima

Lopburi

Nakhon Sawan

Phetchabun Pitsanulok

Nan

7 Provinces
Premium: USD 143,490 Premium: USD 143,490

2,535 Farmers

18,150 Acres
(Target 19,770 Acres) USD 8/Acre Premium rates Premium rates USD 6/Acre

USD 104/Acre Flowering and Grain Filling (30 Days). Period 3 Growth (20 Days) Period 2 Sowing (30 Days) USD 28/Acre Period 1

Weather Index Insurance in Thailand

Model of the Japan Bank for International Cooperation (JBIC)

Weather Index Insurance in Thailand

Overall Project
Japan
JBIC

Thailand
JBIC Thailand
Coordination

MOU
Sompo Japan Group

Sompo Japan

BAAC
Contracts New product for farmers

Sompo Japan Thailand

Sompo Japan Risk Management

National Institute for Agro-Environmental Sciences (NIAES)

Product Development

Weather Index Insurance in Thailand

Cumulative Rainfall (mm.) in July – September (3 months) Cumulative Rainfall (mm.) in July – September (3 months)

Premium rate: 4.64% of principle Non-Drought Upper Threshold Drought: payment 15 % of principle

Lower Threshold Severe Drought: payment 40% of principle

Weather Index Insurance in Thailand
OIC JBIC TMD

SJIT Khon Kaen Province Rice Production
July-September 2009
Cumulative Rainfall (mm.) Cumulative Rainfall (mm.)

276 Farmers, 5 Districts

Weather Index Insurance
Office of Insurance Committee (OIC) Thai Meteorological Department (TMD)

Weather Station at District

Sompo Japan Insurance (Thailand) Co., Ltd. (SJIT) Japan Bank for International Cooperation (JBIC)

Weather Index Insurance in Thailand
OIC

(as of the end of May 2010)
TMD

JBIC

SJIT Khon Kaen Province Rice Production
July-September 2010
Cumulative Rainfall (mm.) Cumulative Rainfall (mm.)

1,122 Farmers, 25 Districts
Premium: USD 22,500 Premium: USD 22,500 Weather Station at District

Weather Index Insurance
Office of Insurance Committee (OIC) Thai Meteorological Department (TMD) Sompo Japan Insurance (Thailand) Co., Ltd. (SJIT) Japan Bank for International Cooperation (JBIC)

Weather Index Insurance in Thailand

Project Summary Maize (from 5 to 7 Provinces)
Trend

143,490 42,040 23,300 2,590 380 35 5,320 2,860 817 388 2,535 18,150

Premium (USD) Acre Farmer

Year

2007

2008

2009

2010 (May)

Rice (1 Province: from 5 to 25 districts)
Premium (USD): 14,360 -----> 22,500 Farmers: 276 -----> 1,122

Weather Index Insurance in Thailand

Important Lessons Non-complicated Model Collaboration of Relevant Parties Perception and Understanding of Farmers Confidence of Measurement Direct Benefit to Farmers

VI. Next Step

THANK YOU