17 Weather Index-Based Insurance PDF

Weather Index-based Insurance
in Agricultural Development
A Technical Guide
Weather Index-based
Insurance in Agricultural
Development
A Technical Guide
© 2011 by the International Fund for Agricultural Development (IFAD)
The opinions expressed in this publication are those of the authors and do not necessarily
represent those of the International Fund for Agricultural Development (IFAD). The
designations employed and the presentation of material in this publication do not imply
the expression of any opinion whatsoever on the part of IFAD concerning the legal status
of any country, territory, city or area or of its authorities, or concerning the delimitation of
its frontiers or boundaries. The designations “developed” and “developing” countries are
intended for statistical convenience and do not necessarily express a judgement about the
stage reached by a particular country or area in the development process.
ISBN 9789290722762
November 2011
Cover Photo: ©IFAD/R. Ramasomanana
Table of contents
ACKNOWLEDGEMENTS 5
ACRONYMS 6
INTRODUCTION 9
Weather index-based insurance: Background 9
Rationale and structure of the guide 10
Flow charts 11
1. WEATHER INDEX-BASED INSURANCE:

CONCEPTS AND CHARACTERISTICS 15
Weather index-based insurance: Principles 15
Levels of intervention and business models 17
Advantages and disadvantages of index insurance 19
Opportunities and limitations of weather index-based insurance 21
Role in support of agricultural development 21
Weather index-based insurance and climate change adaptation 22
2. PERFORMING THE PRE-FEASIBILITY ASSESSMENT 25

Stage 1: Preliminary assessment 26
Stage 2: In-field pre-feasibility assessment 27
Existence of weather risk and potential demand for WII 28
Availability of weather data and infrastructure 29
Availability of agricultural data and information 30
Regulatory environment 30
Government policies and interest 31
Availability of partners, stakeholders, interested parties and champions 32
IFAD and possible partner programmes 33
3. ROADMAP FOR PILOTING AND IMPLEMENTING

WEATHER INDEX-BASED INSURANCE 37
Preparing for the pilot 38
Piloting weather index-based insurance 38
Develop product distribution channels 39
Interact with regulator for product approval 41
Select pilot areas 41
5
Collect weather data and define data transmission procedure 41
Collect agricultural data 43
Design and validate weather index-based insurance contracts 44
Develop programme implementation materials and train retailers 46
Design marketing and education for clients and end-users 46
Carry out and analyse baseline survey and monitor and evaluate pilot 47
4. BEYOND THE PILOT: SCALING-UP AND SUSTAINING

WEATHER INDEX-BASED INSURANCE 51
Build weather station infrastructure and data systems 52
Provide technical assistance, training and product development 52
Fund innovation 53
Facilitate development of an enabling legal and regulatory environment 53
Educate farmers on the role of insurance 54
Facilitate initial access to reinsurance 54
Support regular monitoring, evaluation and impact studies 54
FURTHER RESOURCES 57
ANNEX 1: INFORMATION ON WEATHER MEASUREMENT INFRASTRUCTURE 58
ANNEX 2: QUESTIONNAIRE FOR COLLECTING AGRICULTURAL

INFORMATION FOR WII CONTRACT DESIGN – AN EXAMPLE FOR MAIZE 59
FIGURES:
1. Concept analysis 15
2. Pre-feasibility assessment 25
3. Pilot implementation 37
4. Options for insurance organization and distribution of microlevel WII 40
5. Payout structure of a WII drought contract 45
6. Evaluation of support actions 51
TABLES:
1. Micro, meso and macro levels of WII application 18
2. Advantages and disadvantages of weather index-based insurance 19
3. Examples of parameter possibilities for contracts 44
6
Acknowledgements
This technical guide was developed for the IFAD-WFP Weather Risk Management
Facility (WRMF) by William Dick and Andrea Stoppa, together with Jamie
Anderson, Emily Coleman and Francesco Rispoli.
Thanks to our colleagues at the World Food Programme – Niels Balzer and
Richard Choularton – for their collaboration.
The guide was finalized with the editing support of Chris Jarzombek and
Lynn Ball.
7
Acronyms
ARMT Agricultural Risk Management Team (World Bank)

CPM Country Programme Manager
CPMT Country Programme Management Team
FAO Food and Agriculture Organization of the United Nations
FSP financial service provider
MFI microfinance institution
MPCI multi-peril crop insurance
NMS national meteorological service
P4P Purchase for Progress programme
USAID United States Agency for International Development
WFP World Food Programme
WII weather index-based insurance
WMO World Meteorological Organization
WRMF Weather Risk Management Facility
WRSI water requirement satisfaction index (FAO)
8
Photo: ©IFAD/Mwanzo Millinga
Introduction
WEATHER INDEX-BASED INSURANCE IN AGRICULTURAL DEVELOPMENT:
A TECHNICAL GUIDE
Introduction
IFAD has been working on index insurance as part of its commitment to reduce
the vulnerabilities of poor rural smallholders and open their access to a range of
financial services with a view to improving their livelihoods. With a grant from
the Bill and Melinda Gates Foundation, in 2008 IFAD joined forces with the
World Food Programme (WFP) to launch the Weather Risk Management Facility
(WRMF). The WRMF has conducted global research in government and donor
best practice in weather index-based insurance (WII), while supporting WII pilots
in China and Ethiopia (IFAD and WFP 2010). This technical guide translates the
findings and experience to date into practical decision-making steps for IFAD
and WFP country programme management staff and other donors interested in
promoting this risk mitigation tool.
Weather index-based insurance: Background

Poor rural people in developing countries are vulnerable to a range of risks and
constraints that impede their socio-economic development. Weather risk, in
particular, is pervasive in agriculture. Weather shocks can trap farmers and
households in poverty, but the risk of shocks also limits the willingness of
farmers to invest in measures that might increase their productivity and improve
their economic situation.
Nonetheless, formal and informal coping measures have been developed at
farmer, community, market and government levels. This technical guide discusses
WII, a class of insurance products that can allow weather-related risk to be insured
in developing countries where traditional agricultural insurance may not always
be feasible.
11
INTRODUCTION
In developing countries, WII can be considered for two broad purposes

(IFAD and WFP 2010):
• WII for development. WII can be used as a tool to promote agricultural and
rural development. It can help households, financial service providers (FSPs)
and input suppliers manage low-to-medium-frequency covariate risks such
as drought or excess rainfall.1
• WII for disaster relief. WII can provide an alternative method of funding
disaster recovery assistance or relief programmes.
This technical guide focuses on developing WII programmes for development.
Rationale and structure of the guide

Insurance operates best where it forms part of an integrated approach to risk
management, where constraints such as lack of access to finance, improved seed,
inputs and markets can be addressed. As such, it is important to understand that
WII does not have universal application. Its applicability needs to be considered
in context, through case-by-case evaluation.
This technical guide is intended as a practical reference tool to guide IFAD,
WFP and other donors’ country programme management staff through the steps
of implementing a WII programme. It looks at each phase of the process: from
the first step of assessing whether WII is the right method of intervention and
is feasible, through developing a pilot, to possible future areas that IFAD, WFP
and other donors can support through scaling up. The guide includes
background information, explanations and resource recommendations to help
inform decision-making.
1 Covariate risks are those that affect many people at the same time (e.g. widespread drought or flood), and
are thus more difficult to address with household-level coping strategies or traditional market-based risk
transfer than are localized risks such as hail. Since WII policies are characterized by a single premium level per
product (i.e. the cost of the policy) and provide the same payout to all insured parties in a defined geographical
area, WII works best where risk is covariate (i.e. the insured parties are all affected to the same degree). In
addition, in the presence of excessively frequent risks, insurance premiums may be too high to be affordable
or efficient, which is why insurance is financially more feasible in the case of medium- or low-frequency events
(once every five-to-seven years or less).
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A TECHNICAL GUIDE
Flow charts
The phases and decision points of the WII development process are illustrated
using flow charts. The charts are meant to be read from top to bottom, left to right,
following the direction of the arrows.
Symbol Meaning
Terminator: indicates the beginning or end of a process
Action: indicates that an action is performed
Decision point: indicates that a decision is to be made,

typically with separate ‘YES’ and ‘NO’ paths
Direction arrow: indicates the direction of the process
With this nomenclature in mind, the guide presents the typical decision process
as follows:
Initial Analyse Perform Pilot Evaluate

idea concept pre-feasibility implementation support
assessment analysis actions
Each of these actions is discussed in detail in the relevant chapter.
13
1. Weather index-based
insurance: Concepts and
characteristics
Photo: ©IFAD/G.M.B.Akash
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A TECHNICAL GUIDE
1. Weather index-based
insurance: Concepts and
characteristics
• Action: Understand key principles of WII.

• Objective: Determine whether WII is appropriate to a given situation.
• Key players: WII consultants guided by the CPM and the CPMT, together with
supplementary support from other key industry players.
Weather index-based insurance: Principles

Conventional crop or livestock insurance relies on direct measurement of the loss
or damage suffered by the farmer. However, field loss assessment is normally costly
or not feasible, particularly where there are a large number of small-scale farmers
or where insurance markets are undeveloped.
Figure 1. Concept analysis
Analyse Perform Pilot Evaluate

Initial idea concept pre-feasibility implementation support actions
assessment analysis
ANALYSE CONCEPT
Analyse WII Assess

WII YES
principles and prerequisites
suitable for intended
characteristics and determine
application?
feasibility
NO
End
17
1. WEATHER INDEX-BASED INSURANCE: CONCEPTS AND CHARACTERISTICS
The essential feature of WII is that the insurance contract responds to an

objective parameter (e.g. measurement of rainfall or temperature) at a defined
weather station during an agreed time period. The parameters of the contract are
set so as to correlate, as accurately as possible, with the loss of a specific crop type
suffered by the policyholder. All policyholders within a defined area receive
payouts based on the same contract and measurement at the same station,
eliminating the need for in-field assessment.
Typical features of a WII contract are:
• A specific meteorological station is named as the reference station.
• A trigger weather measurement is set (e.g. cumulative millimetres [mm] of
rainfall), at which the contract starts to pay out.
• A lump sum or an incremental payment is made (e.g. a dollar amount per mm
of rainfall above or below the trigger).
• A limit of the measured parameter is set (e.g. cumulative rainfall), at which a
maximum payment is made.
• The period of insurance is stated in the contract and coincides with the crop
growth period; it may be divided into phases (typically three), with each phase
having its own trigger, increment and limit.
WII is not a panacea. It is best suited to weather hazards that are well-correlated
over a widespread area and where there is a close correlation between weather and
crop yield. The strongest relationships typically involve a single crop, a marked
rainy season and no irrigation. To date, most WII efforts have focused on the risk
of rainfall deficit (drought).
WII is less useful where more complex conditions exist. Localized risks, such as
hail, or where microclimates exist (for example, in mountainous areas) are not
suitable for WII. Similarly, the scope for WII is limited where crop production is
impacted by many or complex causes of loss (as may be the case in the humid
subtropics), or where pests and disease are major influences on yields. For a given
environment, other insurance products may be more appropriate (such as
area-yield index insurance or named-peril crop insurance).2
2 Another product widely adopted in high income countries for large scale farm enterprises, is multi-peril crop
insurance (MPCI). MPCI establishes an insured yield as a percentage of the historical average yield. If yield is
less than the insured yield, an indemnity is paid. Individual farmer MPCI is not suited to smallholder agriculture
in developing countries, and is a product which has required significant subsidy where it is operated.
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A TECHNICAL GUIDE
Introducing WII to an area requires willing stakeholders: insurers, national weather

services and linkages for distribution and support, including FSPs, agri-chain
participants and government, which provides the regulatory environment. WII is
best introduced using market-based principles and business practices, but often
with an important developmental and social agenda. As such, private/public-sector
partnerships are common. There are many opportunities for technical and
organizational innovation in WII.
Levels of intervention and business models

Index insurance can be introduced at diverse levels. Various implementation
models can be used to benefit IFAD’s target group (Table 1). At the micro level,
the policyholders (the insurer’s customers) are farmers, households or small-
business owners, who purchase insurance to protect themselves from potential
losses caused by adverse weather events. Microlevel policies can also be distributed
to farmers by organizations such as FSPs, farmers’ associations, input suppliers,
processors or NGOs.3 In addition to having wider outreach to the target group
than most insurers, these intermediaries also have vested social or commercial
interests in protecting themselves and their smallholder clients against weather
risk. For example, insuring farmers can help FSPs, input suppliers and other
intermediaries manage their risk of default by farmers. This in turn can help
unlock development opportunities for poor smallholders, such as access to credit
or higher-quality inputs.
At the meso level, these organizations can act as the policyholder. At this level,
WII can be structured through a policy issued to the organization, but with payout
rules that could either directly or indirectly benefit farmers – for example, to
alleviate mass loan defaults in a microfinance institution (MFI).
Finally, index insurance can also be sold at the macro level, to aid governments
and relief agencies in development and disaster management. While intervening
at the micro and meso levels it is also important to analyse how any new WII
initiative would integrate with existing risk management policies, and equally how
these policies may impact on incentives for WII.
This technical guide focuses on delivery of WII at the micro level.
3 Intermediaries may be subject to regulatory approval; the potential regulatory implications of such a scheme
should be carefully assessed.
19
Table 1. Micro, meso and macro levels of WII applicationa

Policyholder Sales or distribution model Potential benefit(s) of WII
Micro
Farmers Farmers buy insurance as part WII payout can:
Households of a package (e.g. credit and Allow farmer to avoid default and
other financial services, restart production
Small businesses
technology, agricultural
Compensate for additional
information) or occasionally as a
livestock feed costs
stand-alone product
Provide income support in
lean periods
Note: FSPs, farmers’
Supplement other sources of
associations, processors, input
household income that may
suppliers or NGOs can also act
be disrupted
as a distribution channel for
micro products retailed to Facilitate access to credit
individual farmers Encourage investment in
higher-quality inputs
Meso
FSPs Meso-level institutions buy WII WII opens access to a new client
Processors policies (e.g. portfolio or group base and helps manage mass
insurance) to protect their own defaults caused by weather
Input suppliers
exposure, and may create shocks
Farmers’ payout rules that directly or Meso-level actors can develop
associations indirectly benefit farmers innovative linkages along the
NGOs supply chain (e.g. contract
farming, packaging of credit, and
inputs) to help manage their risk
and open market opportunities
Macro
Government Government or relief agency Government receives early

(or relief is reinsured liquidity following disasters; relief
agencies) agency is able to fund operations
a Based on IFAD and WFP (2010).
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A TECHNICAL GUIDE
Advantages and disadvantages of index insurance

The advantages and disadvantages of WII are well-documented.4 Table 2 provides
a summary.
Table 2. Advantages and disadvantages of weather index-based insurance

Advantages
Transparency. Index insurance contracts usually allow the policyholder direct access to the
information on which the payouts will be calculated. Trust is strengthened by transparency.
No on-farm loss adjustment. This is a primary advantage of index insurance, as
on-farm loss adjustment is quite complex and costly and may not be credible in many
low-income countries.
Lack of adverse selection. Adverse selection occurs when potential insured parties have
hidden information about their risk exposure that is not available to the insurer, who then
becomes more likely to erroneously assess the risk of the insured. Traditional insurance
encourages high-risk producers to insure, while risk and premium are calculated on the
average producer. Index insurance requires that all insured farmers within the defined area
have the same insurance payout conditions, regardless of their specific risk exposure.
Hence, insurers and clients benefit from reduced adverse selection.
Lack of moral hazard. Moral hazard occurs when individuals engage in hidden activities
that increase their exposure to risk as a result of purchasing insurance, or attempt to
influence the claims outcome. These hidden activities can leave the insurer exposed to
higher levels of risk than had been anticipated when premium rates were established. With
WII, there is no benefit in individual producers trying to influence claims. All producers in the
defined area are treated equally.
Addresses correlated risks. Index products work best where there are correlated risks.
With traditional products, perils such as drought are challenging to insure.
Low operational and transaction costs. Index insurance requires limited individual
underwriting (client assessment). It can be distributed, and claims can be settled, at
relatively lower cost. Education on the product remains important, both prior to product
launch and as an ongoing process.
Rapid payout. Measurement of weather station data, with no field loss adjustment, allows
rapid payouts.
4World Bank (2005), United States Agency for International Development (USAID) (2006) and IFAD and
WFP (2010).
21
Disadvantages
Basis risk. Basis risk in WII is a key constraint. Basis risk is the difference between the loss
experienced by the farmer and the payout triggered. It could result in a farmer experiencing
yield loss, but not receiving a payout, or in a payout being triggered without any loss being
experienced. Index insurance works best where losses are homogeneous in the defined
area and highly correlated with the indexed peril. There are various types of basis risk:
• Spatial basis risk. Local variations in the peril occurrence (e.g. rainfall) within the area
surrounding a weather station.
• Temporal basis risk. Inter-annual variations in seasonal crop phases, meaning that the
insurance phases are not temporally aligned with the intended crop growth stage.
• Product basis risk. Crop losses can be caused by many factors. Where there is no
clear-cut relationship between loss and the indexed weather peril, basis risk can be high.
WII is most likely to work for rainfed crops and at severe levels of the event, when losses
may be more widespread and homogeneous.
Limited perils. WII normally covers only one, or sometimes two, weather perils. Although
this reduces the cost compared with MPCI, the product may not provide broad enough
coverage to satisfy risk management needs.
Replication. The triggers, limits and increments of a specific product need to be adjusted
to reflect the weather parameters of each weather station. Different product designs are
required for different crop types (or at least generic crop types). WII requires considerable
technical work in its implementation and sustaining.
Technical capacity and expertise are required, particularly during the initial design phase
for new products, in agro-meteorology and in operationalizing the products.
Lack of weather data. WII depends on the availability and quality of weather data, which
can drastically vary from country to country. In developing countries, the shortage of
historical and real-time weather data is often a major hurdle.
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A TECHNICAL GUIDE
Opportunities and limitations of weather

index-based insurance
The majority of WII experience has been with microlevel applications and rainfall
deficit (drought). To date, many initiatives have been piloted, but only in India
has a market-based scale-up of WII taken place. The IFAD and WFP (2010) review
of 36 index-insurance case studies yielded the following lessons on sustainability
and scalability:
• Create a proposition of real value to the insured and offer insurance as part
of a wider package of services;
• Build the capacity and ownership of implementation stakeholders;
• Increase client awareness of index insurance products;
• Graft onto existing, efficient delivery channels, engaging the private sector
from the beginning;
• Access international risk transfer markets;
• Improve infrastructure and the quality of weather data;
• Promote enabling legal and regulatory frameworks;
• Monitor and evaluate products to promote continuous improvement.
One of the key messages from the case study review is that WII must provide
added value to the client, beyond the simple financial protection provided by
insurance. As a stand-alone product, WII may be seen as an unnecessary cost and
have little demand from poor smallholders, who face a variety of risks and
productivity constraints in addition to weather risks. Insurance is often more
appealing when linked to an existing development programme targeting these
constraints or when linked to other market opportunities. One obvious linkage
relates to seasonal credit, but can be further enhanced where a package of credit
and inputs is provided.
Role in support of agricultural development

WII can support agricultural development when it is part of an integrated
approach – being one element in an overall risk management or market-
development strategy.
Index insurance helps farmers protect their investments and become part of a
wider strategy to escape poverty. In addition to transferring the risk away from the
farmer, WII can provide better access to high-value markets, modern technologies
and inputs, agricultural information, and credit and other financial services.
23
WII appears most promising in helping households, FSPs and input suppliers
manage low-to-medium-frequency covariate risks such as drought, major pest
outbreaks due to weather events and excess rainfall.
In comparison with traditional agricultural insurance, WII lowers the threshold
of insurability (the economic size of an insurance transaction that can be
reasonably serviced by an insurer). The simplified nature of the product offers
additional opportunities to reach a wider range of households – and for innovative
design to target the poor. However, the most likely target group will be emergent
and commercial farmers, as it is unlikely that the majority of poor smallholders
would directly purchase insurance on a sustained basis.5
That being the case, a thorough market assessment might suggest entry through
an aggregator (e.g. agricultural processors, input suppliers, FSPs, farmers’
associations). Aggregators are key to reducing transaction costs and reaching more
clients. In this context, index insurance products could be designed to cover
portfolios of aggregators (through meso-level products) as well as the household-
level risk of individual farmers (through microlevel products distributed by the
aggregator). Table 1 presented a framework for various policyholders and
sales/distribution channels for WII.
Weather index-based insurance and

climate change adaptation
Climate has become an urgent issue on the development agenda. There is a high
degree of interest in the potential role of WII in agricultural adaptation to climate
change (Hellmuth et al. 2009). Climate change is expected to give rise both to
changes in the average climate conditions in different regions and to increases in the
variability of weather, with more frequent or extreme weather events. Adaptation
to these changes is built on actions to increase resilience and reduce risk
(e.g. appropriate crops, varieties and cropping patterns; irrigation; and soil and
farm management techniques). In spite of these actions, risks remain or will
increase (particularly to extreme weather events). WII can support appropriate
climate change strategies, but it should not be seen as a way to avoid taking proper
adaptation measures; nor should WII be seen as replacing other programmes that
address the effects of climate change.
5 Commercial insurance programmes may not always be an appropriate option for targeting the needs of
the poorest of the poor, since the repeated cost of purchasing insurance may maintain these farmers in a
poverty-trap situation (Chantarat et al. 2009). In such cases, WII applications should be considered in a
‘disaster relief’ framework.
24
2. Performing the
pre-feasibility assessment
Photo: ©IFAD/GMB Akash
2525
A TECHNICAL GUIDE
2. Performing the
pre-feasibility assessment
• Action: Assess the existence of the basic prerequisites for a successful

implementation of WII.
• Objective: Determine whether developing a WII pilot is appropriate.
• Key players: CPM, CPMT, WII consultants and local stakeholders (relevant
ministries, weather service, insurance industry, etc.).
Figure 2. Pre-feasibility assessment

assessment analysis
PERFORM PRE-FEASIBILITY ASSESSMENT
In-country pre-feasibility assessment

Preliminary Assessment
desk review of necessary
Existence of Availability preconditions
weather risk of weather
and potential data and
demand for WII infrastructure
Are all the

YES
necessary WII
Availability of prerequisites in
agricultural data Regulatory
place?
and information environment
NO
Government
policies and Availability
interest End
of partners,
stakeholders,
interested
IFAD and
parties,
partner
champions Carry out
programmes
pilot
implementation
analysis
27
2. PERFORMING THE PRE-FEASIBILITY ASSESSMENT
Not every context is suited to WII. In addition to a strong correlation between a

single crop yield and a particular type of adverse weather event, there are other
necessary prerequisites for developing and delivering a product. The next phase
assesses the pre-feasibility of the target area(s). Such an assessment involves three
stages: preliminary desk review; in-country interviews and assessment with key
stakeholders; and assessment of the necessary preconditions.
Stage 1: Preliminary assessment

The preliminary assessment analyses the general conditions of a country/area in
relation to the potential feasibility of WII. There are six key areas of research to
consider before moving on to the next stage:
• Country context. What is the rural development context? What are the policy,
governance, political and economic issues? Perform financial-sector and
agriculture-sector analyses.
• Weather. Review the existing natural hazard vulnerability profile.
• Insurance. What types of insurance exist in the country? Microinsurance?
Crop insurance? Index insurance? Are there any other donor initiatives in
index insurance or WII? If so, what are the key features of the programme
and who are the key players? Are there any current issues that should be
considered, such as the government regulatory framework?
• Intermediaries. Who are the intermediaries? Consider existing delivery
channels, microfinance institutions, input suppliers, etc.
• Potential clients and users. Who would use the product?
• IFAD operations. What are the current and planned operations, with their
relevant components (e.g. rural finance – IFAD [2010])?
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A TECHNICAL GUIDE
Stage 2: In-field pre-feasibility assessment

The objective of the in-field pre-feasibility assessment is to understand whether
WII would be appropriate in the country/area under discussion. A number of
factors need to be taken into account, as addressed in the following subsections.
Box 1
In-field pre-feasibility assessments – overall assessment aims
An in-field pre-feasibility assessment involves discovering, verifying and understanding
many different data points, including:
• Findings of the preliminary assessment (including a basic diagnosis of access to
financial services in the country);
• Overall natural-hazard vulnerability profile of the country;
• Vulnerability and risk profile of smallholders in the country (e.g. numbers, income levels,
sources of income, crops, rainfed/irrigated agriculture);
• Availability of relevant historical and real-time weather data and infrastructure, including
capacity and technology gaps;
• Availability of relevant historical agricultural data;
• General demand and supply of financial services;
• Insurance culture in rural areas – particularly for agriculture;
• Potential cost-efficient delivery channels (e.g. banks, rural finance institutions, farmer
organizations) for reaching poor farmers;
• Legal and regulatory framework for WII;
• Potential target areas and target clients where demand exists;
• Key public- and private-sector partners (e.g. primary insurers) and in-country
champions and project coordinators;
• Government interest in and commitment to supporting and partnering with initiatives
in WII; and
• Overall market potential for WII.
29
Existence of weather risk and potential demand for WII

The most basic prerequisite for WII is the existence of a weather risk that affects
crop yields in a targeted area. That is to say, that the justification for WII must
include a clear, verifiable need, as well as strong potential demand from the micro
and/or meso level.
A risk assessment of an enterprise, or a farming system, aims to identify and
quantify the risks faced by farmers. It can be extended to include other actors in
the agricultural value chain, such as buyers, processors, packers, service providers,
marketers and FSPs. The assessment can be carried out on a macro, meso, or
microlevel, depending on the intention of the programme.
Preliminary existence of weather risk can be assessed through a combination of
the following:
• Analysis of yield data;
• Damage statistics for a pre-identified crop or variety of crops;
• Weather data;
• Farmer interviews; and
• Expert opinion, especially of local extension officers.
WII can best be applied where there is a strong correlation between crop losses
and adverse weather events. Strong relationships are likely where there is single
cropping, a marked rainy season and no irrigation (e.g. drought risk in maize
crops in Southern and Eastern Africa). Direct correlations are less likely where
pest and disease play a major role, where climates are humid, where rainfall is
high and not markedly seasonal, or where crops are irrigated. For example, much
of South-East Asia suffers losses as a result of a combination of pests, disease and
excess rain and flooding.
Floods are a special case. While excess rainfall can be indexed, flooding is a very
localized hazard, and it is difficult to index because there is no one-to-one
relationship between amount of rainfall at a specific location and amount of
flooding (Lotsch, Dick and Manuamorn 2010). Further details on indexable crop
types, perils and practical analytical approaches are included in training course
material produced by the Agricultural Risk Management Team (ARMT) of the
World Bank (www.agrisktraining.org).
30
WEAthEr IndEx-bAsEd InsurAncE In AgrIculturAl dEvElopmEnt:
A tEchnIcAl guIdE
Interpreting potential demand for WII through focus groups can be problematic,
given low insurance awareness and the need to demonstrate a product and price –
the details of which have not yet been researched. Experience suggests that farmers
are more interested in WII when they see that it could ease the immediate
constraints they face, such as lack of access to improved seed or credit. Nevertheless,
focus groups can also assist in a preliminary assessment of potential demand for
WII, as well as help identify the wider constraints faced by farmers.
Availability of weather data and infrastructure

WII relies on historical and current weather data. Historical data are used as the basis
for data analysis in product design and pricing. Current data – as measured by local
weather stations – provide the information needed in the operational phase.6
Unfortunately, both historical and current data are not always plentiful. The
completeness of the historical dataset is highly variable for different areas,
particularly for daily data, which are needed for index design. Similarly, the density
of weather stations forming the national network (which could include WMO
reporting stations, national core stations and localized rain gauges) varies
considerably from country to country. In order to meet requirements for a
commercial WII insurance and reinsurance transaction, it is recommended, as a
guideline, that there be at least 20 years of historical daily data and that missing
data should not exceed 3 per cent of the total daily dataset.7
During operation, network density will likely need to be enhanced through
installation of automatic weather stations with dataloggers8 and daily reporting to
headquarters via telecommunications networks. Where there are no previous
station data, a methodology to generate artificial datasets for new station locations
can sometimes be used.
The national meteorological service (NMS) supervises data and related
information on past and present weather recording. The NMS can normally
provide a summary of data availability, a history of current and past networks and
the terms under which access to data may be permitted. Obtaining this
information may involve fees, as many NMSs are required to generate income. The
active involvement of the NMS in any ongoing project is critical, not only for access
6 Annex 1 provides a list of elements of information on weather measurement infrastructure.

7 The 3 per cent guideline is not a binding rule. Reinsurers may agree to use datasets that have a higher
percentage of missing data. See subsection ‘Collect agricultural data’, page 43, for detailed requirements for
weather data.
8 A datalogger is a device that can read various types of electrical signals and log the data in internal memory
for later download to a computer.
31
to data and knowledge of weather patterns and risks, but also for capacity-
building (especially in relation to agro-meteorology). Agricultural research stations
may have also analysed meteorological data and be well informed. In rare cases,
as in India, there may be private weather data providers that fill in the gaps in
public weather data on a for-profit basis.9
Availability of agricultural data and information

Agricultural data are necessary for a pre-feasibility assessment, including:
• Rapid assessment of crop area;
• Production techniques and yield data (as disaggregated as possible in
targeted areas);
• Official loss or damage data (if available);
• Information on mechanization and intensity;
• Cropping patterns and varieties;
• Soil types; and
• Basic water-balance parameters (e.g. from the Climate Information Tool of
the Food and Agriculture Organization of the United Nations [FAO]).10
Official statistics on crop loss or damage, information on food or cash crop loss
and risk mapping11 are all contributors to understanding the spatial distribution
of weather risk. Assessment of this risk involves a mix of data, broad information
sources, expert opinion on agronomic practices, and agro-meteorology.
National or regional agricultural research institutes may be needed as
stakeholders in WII. Their existence and capacity can be researched and assessed
simultaneously through data- and information-gathering. International linkages
can also be sought in order to bring additional key expertise to the collection and
assessment of agricultural data. Within these institutes, it is important to seek out
individuals with applied knowledge of crop production, crop modelling, agro-
meteorology and crop losses.
regulatory environment
Index insurance is different from traditional indemnity insurance. In particular,
claims involve no measurement of loss and agreed value payouts may be higher
9 Profits come from the sale of data not just for WII, but also to clients such as newspapers, agricultural
processors and input suppliers.
10 www.fao.org/nr/water/aquastat/gis/index3.stm
11 For example, food-security agency mapping, such as the Famine Early Warning Systems Network
(FEWS NET) of USAID.
32
A tEchnIcAl guIdE
or lower than actual loss sustained. In addition, it may be difficult to demonstrate

an ‘insurable interest’ in the conventional sense (e.g. demonstration of an
established crop). These matters are of interest to insurance regulators, who are
typically an arm of Ministries of Finance. Their commitment to creating an
enabling legal and regulatory environment is important in ensuring that the sale
and management of products are fair to both buyers and sellers.
As the result of pilot projects in many countries, most regulatory bodies have
developed some experience in legal and regulatory issues. Regulators have taken a
positive view towards approving index insurance, due to its importance to the
agricultural sector and because most initiatives start as pilots, which can be granted
preliminary approval on a trial basis.
Some countries classify index insurance as microinsurance; others classify it as
property insurance; but few countries mention index insurance specifically in their
regulations, and few have special agricultural insurance laws. Generally, legal and
regulatory approval by national authorities has not been a constraint in pilots
launched to date, although this situation is not universal.
The first step in understanding the regulatory environment is to find out
whether regulators have already addressed WII. For example, if the current
regulation requires loss adjustment to be carried out, this requirement may be a
bottleneck in implementing WII, which does not have loss adjustment procedures.
It is normally useful to inform the regulator regarding the laws and procedures in
other countries with similar economic contexts, providing supporting materials
and experiences, of which increasing amounts are available. Discussions with a
regulator are often best handled in partnership with a domestic insurer interested
in becoming a stakeholder.
government policies and interest

In addition to understanding the regulatory environment, the pre-feasibility study
should also assess current government policies relative to agriculture and insurance,
typically in coordination with the Ministries of Agriculture and of Finance.
It is important to understand how index insurance might blend in with existing
risk management policies and how these policies impact incentives for index
insurance. For example, in China and India, the government already provides
heavily subsidized crop insurance alternatives to index insurance, and these
programmes inevitably act to crowd out privately provided index insurance.
33
The analysis should determine whether governments are interested in and

committed to supporting WII and whether they may be willing to take extra steps
(if not already in place), such as supporting and investing in weather data and
agricultural statistics.
Availability of partners, stakeholders, interested parties and champions

The existence and commitment of key stakeholders, especially local entities, is one
of the critical success factors in a successful WII programme. The pre-feasibility
study should assess which ‘local champions’ might be willing to enter into
partnerships. Assessing capacity, interest and commitment is key to overcoming
initial set-up challenges, and champions can act as a common thread for all
stakeholders involved.
Insurers. Insurers play a key role in designing and underwriting the product. It is
important to assess whether a trustworthy insurer exists, which is willing to issue
the policy, accept some risk and play an administrative role. In an early pilot stage,
sometimes insurers will join as a pool, and an association of insurers can play a
facilitating role. In some pilots, the insurer has been the key champion driving the
pilot. In these cases, insurers have committed themselves to participating in
technical education on the design of WII products. The pre-feasibility study should
assess their experience with similar products, their capacity needs, and their level
of interest should the project develop into a pilot.
Intermediaries and delivery channels. As insurers normally have limited or no

business (or offices) in rural areas, distribution is best organized through a party
with existing links to farmers or farmer groups (e.g. a bank, processor, cooperative
or MFI). What is more, embedding WII into a development programme, or into a
package linked with credit, inputs or contract farming, can strongly add value to
the proposition for farmers and other stakeholders and make it easier to sustain
and eventually scale up.
34
A tEchnIcAl guIdE
Key stakeholder linkages for product delivery, product training and extension
can include:
Financial service providers. The existing client base of MFIs and rural banks, and
their interest in protecting both their clients and themselves against weather risks,
make rural financial institutions a natural partner for WII distribution.
Cooperatives and farmer organizations are a natural focus for any new product
development and as delivery channels.
Input suppliers and processors are both wary of and vulnerable to covariate risks
facing producers, which in turn trap smallholders in a cycle of small-scale
production. These entities can thus have a vested interest in acting as an
intermediary for WII. For example, inputs such as good-quality seed or fertilizer
could be sold on credit if the risk were to be transferred through index insurance.
IFAd and possible partner programmes

The project team should look for opportunities to leverage work already being
done in the region. The pre-feasibility assessment should investigate possible
linkages with other IFAD, WFP and partner programmes in the selected area.
Existing rural finance programmes or components may be particularly relevant, as
WII initiatives could link with participating financial institutions. The promotion
of risk management services such as WII could encourage access to credit – by
transferring risk away from either borrower or lender – and/or the development
of savings services.
Linkages with WFP activities in an area could also be relevant, given their focus
on food security and their in-country presence. One example is the Purchase for
Progress (P4P) programme, which uses innovative approaches to increase
smallholders’ productivity and offers them access to agricultural markets (Box 2).
Box 2
P4P
P4P is a WFP-led pilot initiative that aims to address key hurdles in procuring food locally
in emergencies through cost-efficiency, quality commodities and timeliness of deliveries.
P4P supports the development of agricultural markets and smallholder farmers’ access to
these markets. WII could be useful in some circumstances or regions as part of a wider
package of risk management and agricultural development tools.
35
Complementary agricultural development or risk management programmes in

which WII can be added as a component are good candidates for partnership,
because training and extension facilities may already exist. NGOs in particular
could play an important and independent role in extension of information to
farmers, possibly in conjunction with official extension services.
The assessment should also determine whether there are any other WII initiatives,
or other types of crop insurance in the country. If an index insurance programme
already exists, it would be pertinent to understand the key actors: implementers,
funders, insurers and reinsurers. The role of reinsurers is further discussed in the
subsections on piloting and scaling up (‘Develop product distribution channels’,
page 39 and ‘Facilitate initial access to reinsurance’, page 54).
36
3. Roadmap for piloting
and implementing weather
Photo: Raniel Jose Castañeda
A tEchnIcAl guIdE
3. Roadmap for piloting

and implementing weather
• Action: Carry out the necessary steps to develop and roll out a pilot programme.
• Objective: Development and roll-out of pilot programme.
• Key players: CPM, CPMT, WII consultants, local stakeholders (relevant
ministries, weather service, insurance industry, etc.).
Figure 3. Pilot implementation

assessment analysis
PILOT IMPLEMENTATION
Pilot development activities
Have all
Develop insurance Select pilot area(s) pre-implementation
product distribution activities been carried out
channel successfully?
Collect
agricultural data
YES NO
Collect weather
data and define Design marketing
transmission and education
procedure for clients and
Implement End
end-users
pilot
Develop programme
implementation
material and train
retailers Design and validate
WII contracts Monitor and
evaluate pilot
Interact with
regulator for
product approval Carry out
baseline survey
39
3. roAdmAp For pIlotIng And ImplEmEntIng WEAthEr IndEx-bAsEd InsurAncE
Preparing for the pilot

While every pre-feasibility assessment will yield different information based on
the local context, at a minimum the following should be completed before moving
into the pilot:
• A feasibility study has been undertaken;
• The meeting of preconditions has been carefully assessed;
• Potential programme benefits verified; and
• Relevant stakeholders have been identified.
Piloting weather index-based insurance

Private insurers face a number of barriers to entering the market, such as high
initial investment costs in research and development. Such insurers are often wary
of financing these start-up costs themselves, as they may be difficult to recoup, and
competitors can more easily replicate such products if they prove profitable.
Because of this ‘first mover’ problem, in most cases WII pilot programmes have
been initiated by organizations with a social mission, namely bilateral and
multilateral institutions, NGOs and private foundations.
As with other innovative financial products, WII needs appropriate testing
before it can be marketed on a large scale. Assessing the real potential of WII can
take time, and setting up an appropriate pilot is recommended. With a relatively
small budget, and through a real learning-by-doing experience, pilots can provide
useful indications about acceptance of the product, willingness to pay and product
design alternatives. They can also allow market participation and stakeholder
capacity to develop organically (USAID 2006).
The project team should develop a workplan for setting up the WII pilot.
The plan should include the following stages, some of which can be carried
out independently:
• Develop product distribution channels;
• Interact with regulator for product approval;
• Select pilot areas;
• Collect weather data and define data transmission procedure;
• Collect agricultural data;
• Design and validate WII contracts;
• Develop programme implementation materials and train retailers;
40
A tEchnIcAl guIdE
• Design marketing and education for clients and end-users;

• Carry out and analyse baseline survey;
• Monitor and evaluate pilot.
These activities are addressed in detail in the following subsections.
Develop product distribution channels

In planning implementation of a WII pilot, the first step is to set up the market
arrangement of the risk transfer and distribution proposition. Possible key
insurers and distribution channels may have already been identified during the
feasibility assessment.
Figure 4 summarizes the most frequent arrangements applied in WII for microlevel
products. In general terms, these arrangements can be classified as (a) insurance
policies retailed through an intermediary, such as a credit institution (bank, credit
cooperative, MFI) or an agribusiness firm; or (b) contracts directly distributed by the
underwriting insurance company, often through the company’s agents.12
The most suitable option will depend on local conditions, such as the nature
of the supply chain for which WII will be developed and the business interests of
the various stakeholders.
Using an intermediary may provide access to existing retail networks, potentially
reaching a larger number of clients. Such business partners may be strongly
motivated to facilitate the distribution of WII. For example, credit institutions may
be interested in linking WII to their lending operations in order to reduce default
rates generated by adverse weather events, while agribusiness firms may see offering
WII as a competitive advantage for their products.
Should insurance companies have a large outreach in rural environments
(e.g. mutual or cooperative insurance companies), the underwriter can also plan
to retail the policies directly. In this case, it is useful to carefully evaluate the interest
of farmers in purchasing the stand-alone insurance product, because experience
shows that selling may be easier when linked to a loan or input product.
12 At the meso level, WII contracts can also be purchased by intermediary institutions wanting to protect
against their own exposure to weather risk (e.g. protect a loan portfolio) – see Table 1. However, this kind of
transaction has not been very common.
41
When setting up the risk transfer proposition, it is critical that the insurers have
access to appropriate reinsurance coverage. WII transactions are highly exposed to
covariate risk, and in the case of a triggering event, payouts tend to be significant.
Regardless of the retailing model adopted, the insurance company must have access
to the reinsurance industry, usually at the international level (Figure 4).
Figure 4. Options for insurance organization and distribution of microlevel WII
Farmers
WII contracts
Intermediaries
(FSPs, input suppliers, farmers’ WII contracts
associations, NGOs, etc.)
Option A Contractual relationship Option B

(risk transfer, services,
operations, etc.)
Insurance company
National
International Reinsurance treaty
Global reinsurance companies
42
A tEchnIcAl guIdE
Interact with regulator for product approval

The pilot programme must receive approval from the regulatory authority
responsible for the area in which the pilot is to be implemented. This stage ensures
that the pilot complies with local regulations. Because the approval process may
take considerable time, the project team should engage regulators as soon as
feasible. Additionally, the regulator’s requirements may affect the actual design of
the WII products.
Select pilot areas

The success of the WII pilot depends heavily on the area in which it is
implemented. Consider the following criteria when selecting a pilot area.
The area should be:
• Exposed to relevant (but not excessive) weather risk for crop production;13
• Covered by a suitable weather station with an acceptable history of weather
data collection;
• Relevant to the partnering insurers and delivery channels in terms of business
development; and
• Significant in terms of the policy objectives of the development programme.
Collect weather data and define data transmission procedure

The data used to construct the underlying weather indices should adhere to quality
requirements, including:
• Reliable and trustworthy ongoing daily collection and reporting procedures;
• Periodic checks and quality control;
• An independent source of data for verification (e.g. surrounding weather
stations, the WMO Global Telecommunication System).
Areas without access to weather data satisfying the above criteria or areas with poor
spatial coverage may not be able to benefit from weather risk management
products, and another pilot zone should be considered.
13 In the case of excessive levels of weather risk, insurance premiums (i.e. the cost of the policy) may be
too high for insurance to be affordable or efficient. In such cases, insurance is probably not a good option and
alternative risk coping solutions should be found.
43
The following list provides general criteria for weather data requirements for
WII applications:14
• At least 20 years of historical weather data;
• Limited missing values and out-of-range values (preferably less than
3 per cent missing data from the entire historical dataset);
• Availability of a nearby station for fall-back verification purposes;
• Consistency of observation techniques – manual versus automated;
• Limited changes in instrumentation/orientation/configuration;
• Integrity of weather-data recording procedure;
• Little potential for measurement tampering.
Beyond the quality of data, definition of the boundaries of the area(s) covered by
the weather station(s) is critical, so that WII contracts can be written for specific
areas tied to a specific station. In some cases, national weather services can assist
with dedicated maps. A general rule of thumb is to consider a specific WII contract
marketable within a 20-km radius of the weather station; but in many cases the
applicable area is smaller. The more the terrain varies, the more the acceptable
distance from a station decreases.
Modalities must be defined for weather data collection and dissemination
during the contract coverage period. Insurance and reinsurance industries tend to
require the use of automated weather stations and availability of fallback
verification measurements from nearby stations with comparable weather patterns.
Manual measurement of weather variables (e.g. through manual rain gauges) is
usually not regarded as sufficiently reliable and secure.15 As a result, low-cost,
automatic weather stations are being implemented in some WII initiatives.
However, any installation of new weather stations must be accompanied by a
comprehensive plan to build the supportive capacities of the NMS for monitoring
and maintenance. Ways to support NMSs are further discussed in chapter 4:
‘Beyond the pilot’.
14 Adapted from ISMEA (2006), but originally presented by Brian Tobben at the Annual Meeting of the
International Task Force on Commodity Risk Management, jointly sponsored by FAO and the World Bank,
at FAO, Rome, 5-6 May 2004.
15 Measuring different weather parameters at the same time (i.e. rainfall, temperature, pressure, humidity, etc.)
makes attempts to tamper with weather data collection more evident, as the various weather variables are
linked by specific relationships.
44
A tEchnIcAl guIdE
Collect agricultural data

Agricultural information is the second part of the contract design equation. The
most relevant information to be collected is data on productivity (yield), but a
clear description of the agricultural production practices carried out in the areas
of interest is also necessary. Unfortunately, the availability of quality yield-data
series of adequate length and at the appropriate level of disaggregation is not
common. However, lack of quality yield data does not pose as large a problem as
lack of good weather data, since it is still possible to find alternative approaches
to estimating yield variability. One possibility is to simulate synthetic yield-data
series through plant-growth models. For WII drought applications, a particularly
simple and effective modelling approach has been developed by ARMT based on
FAO’s water requirement satisfaction index (WRSI). In balancing incoming and
outgoing water resources in the plant/soil system, the WRSI model can robustly
predict the impact of rainfall (or lack of it) on yield (Box 3).
Box 3
WRSI approach to weather risk assessment
Since yield data of appropriate quality and disaggregation are not always accessible, the
World Bank’s ARMT has developed a contract design methodology based on the
generation of synthetic (modelled) yield series for the crop under study. This methodology
has been adopted in an extended number of transactions globally.
The methodology is based on the water requirement satisfaction index developed by FAO
and used in many early warning systems that monitor plant growth as an indicator of
potential food crises. This method takes into account the distribution of rainfall over the
season and the water stress affecting plant development.
The WRSI approach is particularly useful in supporting the structuring of index contracts
that insure against drought events. The water balance index captures yield reductions
generated by lack of water availability that, in rainfed agriculture, are mainly driven by
insufficient precipitation and/or excessive evapotranspiration.
The fact that the WRSI approach does not account for other sources of yield reduction
(e.g. pests and diseases) is useful when analysing the impact of reduced precipitation on
crop yield. Where other risks are also important to the final yield, the WRSI approach can
be valuable in determining the yield variation dependent on rainfall alone.
45
Whether data on productivity are collected by official sources or generated by a

crop model, specific information must still be collected from potential WII
end-users on local cultivation practices and procedures. Information such as crop
varieties adopted, planting periods, modalities used (e.g. dry planting),
management practices, related costs, risk profiles, historical recollection of the
impact of the peril, and the most sensitive phases in crop life are essential in
designing a meaningful WII contract.16
Design and validate weather index-based

insurance contracts
The objective of contract design is to define a structure that effectively captures the
relationship between the weather variable and the potential crop loss and to select
the index that is most effective in providing payouts when losses are experienced,
eliminating basis risk as far as possible.
The set of possible index combinations is unlimited, and numerous structures
have been developed in the relatively short history of WII. Weather index-based
contracts can be classified according to many different parameters (Table 3).
Table 3. Examples of parameter possibilities for contracts
Contract parameter Options

Triggering measurement for weather variable Cumulative
Average
Maximum
Minimum
Period covered by index Entire life cycle of crop
Fractions of crop life cycle

Number of phases into which covered period is divided Typically 1 to 3 phases
Start of coverage period Fixed
Dynamic
Payout structure Incremental
Lump sum (single value payout)
16 Annex 2 presents a sample questionnaire for collecting agricultural information for drought coverage for maize.
46
A tEchnIcAl guIdE
One of the most commonly adopted structures is that of a continuous payout

triggered and limited by a cumulative measure of the weather variable (e.g. rainfall)
for each of the different crop growth stages (Box 4 and Figure 5).
Box 4
Payout parameters in a WII contract – an example
Using the drought coverage case represented in Figure 5 as an example, the parameters
that characterize an incremental payout structure can be defined as follows:
• Trigger. Threshold above or below which payouts are due. In this example, payments are
due when the calculated value of the index is below the trigger level (300 mm).
• Limit. Threshold above or below which no additional incremental payout will be applied.
The maximum payout is paid if the calculated value of the index is equal to or below the
exit threshold (100 mm).
• Tick. Incremental payout value per unit deviation increase from the trigger. With a maximum
payout (the insured sum) of US$200, a trigger of 300 mm and an exit of 100 mm, the
monetary value of each deficit mm of rainfall below the trigger is: US$200 /(300 mm-100
mm) or US$1 per mm.
Figure 5. Payout structure of a WII drought contract

250
Exit: 100 mm
200
Payout (US$)
150
100
50
Trigger: 300 mm
0
1 51 101 151 201 251 301 351 401
Cumulative rainfall (mm)
47
From a technical point of view, contract design is probably the most challenging
part of developing a pilot programme, and the local insurance company may not
have the expertise to carry out the necessary research and development activities.
Facilitating this part of the WII pilot development with the involvement of
specialists could be one of the most useful support activities that a development
organization can provide. It should be performed with a view towards
simultaneously building the technical capacities of the local insurer for future
contract adjustment and design.17
Develop programme implementation materials and

train retailers
The local insurance company may also need support in developing the programme
implementation materials needed to carry out the transaction. Should this be
required, the workplan should include help for the underwriter in structuring the
product manual, which describes the different elements of the transaction
(i.e. treatment of weather data, customer eligibility, contract features, underwriting
processes, product pricing, and contract monitoring and settlement processes),
and the client information sheet, which explains the WII product to the client.18
The workplan should also include dedicated training sessions for WII retailers
to ensure that the information on the type of coverage provided by WII is delivered
correctly and that the intermediaries understand the product.
Design marketing and education for clients and end-users

Marketing and education sessions for prospective clients, end-users and
intermediaries must be carefully structured. This communication is important even
if the end-users are not purchasing the policies directly from the insurer. Many
rural communities of the developing world are not familiar with insurance
practices. They need to be exposed to the basic concepts of insurance transactions
and to the specific features of WII in order to understand aspects such as the claims
process and to hold realistic expectations regarding payouts. Such sessions can also
foster general financial literacy and awareness of risk reduction options.
17ARMT has made online technical resources for WII available, including courses in contract design
(www.agrisktraining.org).
18 ARMT online technical resources also include guidance in this area (www.agrisktraining.org).
48
A tEchnIcAl guIdE
Of particular importance is communicating the idea that the insurance payout

is not triggered by losses occurred on individual farm plots, but rather by the
measurement of the indexed weather variable. It is also important to make sure
that the clients are aware of the exact location in which the weather variable is
measured and whether their operations are carried out in locations with similar
weather patterns.
Carry out and analyse baseline survey and monitor and

evaluate pilot
A baseline survey should be included in the workplan to collect the initial
information that will allow evaluation of any changes in policyholders’ behaviour
once the pilot has been implemented. After the pilot, a monitoring and evaluation
exercise can take place to compare results against baseline indicators and more
broadly monitor performance, identify any additional constraints and
opportunities, and make any necessary adjustments from previous steps.
49
4. Beyond the pilot:
Scaling-up and sustaining
weather index-based insurance
Photo: ©IFAD/Nana Kofi Acquah
A tEchnIcAl guIdE
4. Beyond the pilot:

Scaling-up and sustaining
weather index-based insurance
• Action: Choose one or a combination of options to focus support.
• Objective: Contribute to the sustainable scaling up of WII.
• Key players: CPM, CPMT, local public and private stakeholders, government,
donors, development organizations.
Figure 6. Evaluation of support actions

assessment analysis
PILOT PUBLIC SUPPORT ACTIONS FOR IMPLEMENTING AND SCALING UP WII
If pilot
Improve weather successful, select
among following support Facilitate access
station infrastructure
actions to reinsurance
and data systems
Support
Fund
development of
agro-meteorological
sound national rural
research leading
risk management
to product design
strategies
Facilitate
development of Support impact
enabling legal studies for
and regulatory systematic learning
environment
Educate farmers
on role of insurance
53
4. bEyond thE pIlot:
scAlIng-up And sustAInIng WEAthEr IndEx-bAsEd InsurAncE
If the pilot(s) indicate(s) that there is viable demand and supply for WII in the
local market, then the project team should consider scaling up. In the interests of
sustainability, stakeholders should continue applying the expertise they developed
in the pilot, while IFAD focuses on support for enabling activities.
If index insurance is to be scaled up, governments and donors will need to
intervene more actively – playing enabling and facilitating roles. WRMF research
into 36 index insurance programmes globally identified key areas in which donors
and governments could aid development of the sector in order to help initiatives
become sustainable.
Key public and donor roles are discussed in the following subsections.
Build weather station infrastructure and data systems

Many national weather services have very limited budgets, but scaling up can only
be achieved if there is systematic coverage of the territory, with weather stations
sufficiently close to the insured parties. In addition, data must be collected,
maintained, archived and made available on a timely basis in relation to insured
events. Working more closely with the NMS might help address these needs. Given
this, a thorough capacity and needs assessment of the NMS, including a mapping
of the current weather recording infrastructure on the ground, would be a crucial
step in supporting scaling up.
Investment in weather infrastructure can have benefits beyond the development
of index insurance products – including the development of other weather risk
management tools for agriculture, food security, early warning systems and
extension services.
Provide technical assistance, training and

product development
Technical assistance in product development and management is one area in which
government and donor support can have added value. The pilot product will need
to be continuously reviewed and developed, but there may also be a demand for
new products, for example those addressing different crops. Some level of
government and/or donor support for product development can be justified (for
example with regard to new agro-meteorological research or risk profiling of
smallholders) in order to overcome the ‘first mover’ problem mentioned earlier:
development of new WII products requires upfront initial investment in research
and development, but private actors may be hesitant to take this step by
54
A tEchnIcAl guIdE
themselves, as it substantially lowers the entry costs for competitors and thus they
might not be able to recoup the initial investment costs. This can perpetuate a cycle
in which nobody will take the first step without the support of properly directed
external investment from governments and donors, and thus the market can
stagnate. Government/donor investments should be targeted in the most costly
start-up phases (i.e. the feasibility studies and technical assistance for piloting of
new products) – with the involvement of local private-sector partners – but they
should use an extremely cautious approach with direct subsidies for premiums.
In addition to support for product development, relationships should be
cultivated that help build the skills and experience of local insurers and FSPs to
effectively identify client needs, estimate demand and deliver effective risk
management services. Other actors in the supply chain (e.g. farmers’ associations,
input suppliers and others) may also benefit from capacity-building. Promotion
of international exchanges (for example, with other insurers) can help nascent
initiatives learn from each other and avoid costly delays and mistakes.
Fund innovation
Donors can also push the frontiers of index insurance by funding innovations that
may open new directions in the market. Innovative approaches such as using new
technologies or satellite-based indices can help lower the entry barriers for insurers
and farmers alike.19
Facilitate development of an enabling legal and

regulatory environment
Gaining the support of regulators for a pilot product is normally fairly straightforward,
but facilitating development of an enabling legal and regulatory environment for
index insurance is a broader issue. Enforceable contracts that both buyer and seller
can trust are a fundamental prerequisite for index insurance. Additionally, laws and
regulations must harmonize with international standards to improve the chances of
insurers gaining access to global markets for risk transfer. Unfortunately, in many
countries, laws and regulations are simply not in place to accommodate the
development and use of weather insurance products. Human capacity-building and
technical assistance at the macro level are essential in developing the legal and
regulatory environment to govern index insurance programmes.
19 Interesting examples of new technology and satellite-based applications in index insurance are presented
Hellmuth et al. 2009; Vargas Hill and Torero 2009; Chantarat et al. 2009; IFAD and WFP 2010 and Rosema
et al. 2010.
55
4. bEyond thE pIlot:
scAlIng-up And sustAInIng WEAthEr IndEx-bAsEd InsurAncE
Educate farmers on the role of insurance

While private insurers will invest in marketing their products, they are unlikely to
invest at socially optimum levels in educating farmers – and intermediaries
generally – on the appropriate role of insurance. Support from governments and
donors can increase the likelihood that information is presented in a balanced way
and that sufficient investments are made in a broader educational effort for
untested insurance products.
Facilitate initial access to reinsurance

Reinsurers (which almost always operate internationally) primarily provide
financial risk transfer capacity, but they can also provide some technical support
to the insurer. In many cases it is important to have at least the interest of a
reinsurer in order to promote the necessary enabling environments at the macro
level jointly with the government.
Established insurers have relationships with reinsurance companies for existing
lines of business, although IFAD may be able to assist in gaining the interest of an
international reinsurer to partner on a comprehensive index insurance programme.
Recent expansion of WII has also encouraged some major international reinsurers
to devote resources to the development of reinsurance for index insurance,
including in developing countries.
Such reinsurers will want to understand the business development plan, as well
as the prospects for long-term business and relationship development. However,
the initial stages in establishing reinsurance can be a barrier if underwriting
research or assistance needs to the insurer are high, but anticipated premium
volumes are still relatively low.
Even with reinsurance in place, it may be necessary to develop catastrophe
protection layers involving government and/or donor intervention, or through
contingent loan arrangements (Mahul and Stutley 2010).
Support regular monitoring, evaluation and impact studies

Beyond the monitoring and evaluation activities suggested in the pilot phase, if
the product is rolled out on a longer-term basis, the project team is advised to carry
out systematic monitoring and evaluation exercises in order to assess potential
technical and operational issues (e.g. price, delivery channels), as well as any
impact of WII on farmers’ welfare and decision-making.
56
A tEchnIcAl guIdE
Impact studies are needed to ensure effective learning from programme

investments and to demonstrate that – over time – insurance has the potential to
generate real benefits. Positive results can in turn attract and maintain the support
of donors and governments for scaling-up activities.
Impact assessment needs to extend well beyond demonstrating a demand for
the uptake of insurance. The project team is encouraged to assess whether the
insurance has contributed to household socio-economic development, not only
through risk transference, but also through increased access to financial services
such as credit and savings. Beyond this, any assessment should aim to demonstrate
whether the existence of a WII policy has modified traditional risk management
behaviour, replacing it with forms of development, such as investment in higher-
quality inputs and/or technology for agricultural production, keeping children in
school, or reduced migration away from rural areas.
57
A tEchnIcAl guIdE
Further resources
Chantarat, S., A.G. Mude, C.B. Barrett and C.G. Turvey. 2009. The performance of
index based livestock insurance: Ex ante assessment in the presence of a poverty trap.
Ithaca, NY, USA: Cornell University, http://mahider.ilri.org/handle/10568/781.
Hellmuth, M.E., D.E. Osgood, U. Hess, A. Moorhead and H. Bhojwani, eds. 2009.
Index insurance and climate risk: Prospects for development and disaster management.
Climate and Society No. 2. New York: International Research Institute for
Climate and Society (IRI), Columbia University, http://portal.iri.columbia.edu/
portal/server.pt/gateway/PTARGS_0_5024_4201_0_0_18/Climate%20and%20
Society%20Issue%20Number%202.pdf.
IFAD. 2010. Decision tools for rural finance. Rome, www.ifad.org/ruralfinance/dt/
index.htm.
IFAD and WFP. 2010. Potential for scale and sustainability in weather index insurance for
agriculture and rural livelihoods. Rome, www.ifad.org/ruralfinance/pub/weather.pdf.
ISMEA. 2006. Risk management in agriculture for natural hazards. Rome: Istituto di
Servizi per il Mercato Agricolo Alimentare.
Lotsch, A., W. Dick and O. Manuamorn. 2010. Assessment of innovative approaches for
flood risk management and financing in agriculture. Washington, DC: World Bank.
Mahul, O., and C.J. Stutley. 2010. Government support to agricultural insurance:
Challenges and options for developing countries. Washington, DC: World
Bank, http://publications.worldbank.org/ecommerce/catalog/product?item_
id=9536852.
Rosema, A.M. de Weirdt, S. Foppes, and C. Wilczok. 2010. Food Early Warning
Solutions for Africa (FESA) Micro-Insurance: Methodology, Validation, Contract
Design. Delft, The Netherlands: EARS.
USAID. 2006. Index insurance for weather risk in lower-income countries, by J. Skees, A.
Goes, C. Sullivan, R. Carpenter, M. Miranda and B. Barnett. Prepared by
GlobalAgRisk Inc., Lexington, Kentucky, USA. Washington, DC: United States
Agency for International Development, www.microlinks.org/ev_en.php?
ID=14239_201&ID2=DO_TOPIC.
Vargas Hill, R., and M. Torero, eds. 2009. Innovations in insuring the poor. 2020
Vision for Food, Agriculture, and the Environment: Focus 17. Washington, DC:
International Food Policy Research Institute (IFPRI), www.ifpri.org/publication/
innovations-insuring-poor.
World Bank. 2005. Managing agricultural production risk: Innovations in developing
countries. Washington, DC: Agriculture and Rural Development Department
(ARD), World Bank.
59
ANNEX 1
Information on weather
measurement infrastructure
general questions
1. How many weather stations does the national weather service (NWS) manage across
the country?
2. Are there other relevant weather station networks in the country (e.g. stations maintained
by agricultural extension services or similar)?
3. Does the NWS receive and store data from all other networks as well?
4. How many stations in the country are fully automated weather stations?
5. How many stations are part of WMO networks?
6. What classifications of weather stations are adopted in the country? If possible, it would
be useful to have the number of stations per level of classification.
7. What are the data transmission modalities for the more advanced weather stations?
Do they have GSM/ GPRS connection to NWS headquarters?
8. How many lysimeters (devices for measuring actual evapotranspiration) does the
NWS operate?
9. How many stations measure temperature in addition to rainfall?
Questions on index insurance

1. Would the NWS be prepared to provide historical and real-time data for insurance
purposes?
2. In order to manage insurance contracts effectively and transparently, would the NWS be
prepared to set up periodic data transfer (every one-to-two weeks) to the parties involved
in the transactions?
3. Should international donors or private entities support the purchase and installation of
automatic weather stations to replace rain gauges, would the NWS be prepared to
maintain them?
60
A tEchnIcAl guIdE
ANNEX 2
Questionnaire for collecting agricultural
information for WII contract design –
20
an example for maize
Information for drought coverage for maize

General information
Date:
Location:
Country:
Crop:
Type of coverage:
Other information:
Production
1. What variety of maize is the most common in the area?
2. What is the average farm size for maize farmers?
3. What is the typical planting period for maize (month/week)?
4. What is the earliest date that maize can be planted?
5. What is the last date that maize can be successfully planted (month/week)?
6. Can you provide more details on the crop calendar of maize, highlighting the main plant
growth phases?
20 Source: ARMT, World Bank, www.agrisktraining.org.
61
Phenological phases Period Length of
(approximate starting date of phase period (days)
following a reference planting date )
Planting
Establishment
(germination & leaf development)
Vegetative (stem elongation)
Flowering
Maturation
7. Is maize production in this area rainfed or irrigated (if both, indicate relative proportion)?
8. What is the average cost of production in the area? Total cost of inputs per hectare (or
other area unit; if different, specify); specify if it includes labour costs and/or land rent.
9. What type of inputs are used by maize growers? When are they applied during the
season? What are the specific costs of these inputs per hectare?
Items Type Amount Value Month inputs

(litres, kg/hectare) (currency units) applied
Seed
Fertilizer
Chemicals
(specify)
Other
62
A tEchnIcAl guIdE
10. What is the optimal yield in the area?

11. What is the average yield in the area?
12. Which years in the past 10 to 20 years do you recall having the best yields?
Year Size of land Yield Notes
13. Which years in the past 10 to 20 years do you recall having the worst yields?
Income
1. Do farmers in the area have alternative sources of income? What percentage of farmers
rely only on farm income?
2. How relevant are maize revenues for households’ incomes in the area?
3. Is maize produced for commercial purposes or for self-consumption?
4. What are the main sales markets for maize?
5. On average, what are the prices for maize? Recent years’ highs vs. lows.
6. Is there any forward contracting for maize?
7. During which month do most farmers normally sell their production?
63
Risk
1. What are the main risks for farmers’ incomes?
2. What are the primary production risks?
Pests?
Diseases?
Weather?
Lack of access to inputs?
Other?
3. What are the specific weather risks that production faces?
Drought?
Excess rain?
Temperature?
Other?
4. If farmers are exposed to weather risks, how do they currently manage them?
5. In how many years out of 10 are yields reduced because of drought?
6. Which years in the past 10 do you recall having the most favourable weather
for production?
64
A tEchnIcAl guIdE
7. Which years in the last 10 do recall having the worst weather for production?
Rainfall contract parameters (if drought or excessive rain risks apply)

1. Do farmers in the area practice dry planting or do they wait for the onset of rain?
2. How do farmers judge when rainfall is sufficient for planting?
3. What do they do if rainfall is insufficient for planting? Plant a different crop versus
plant anyway? Do they ever not plant if rainfall is not adequate?
4. (a) In which periods in the growing season is rainfall most critical for a successful
harvest?
Planting Establishment Vegetative Flowering Maturation

(germination & leaf dev.) (stem elongation)
KEY: Not important, somewhat important, very important, critical
b) Are there periods during the growing season when too much rain has destroyed or
damaged the harvest?
Planting Establishment Vegetative Flowering Maturation

(germination & leaf dev.) (stem elongation)
KEY: Not important, somewhat important, very important, critical
65
5. (a) In drought years, at which growth stage(s) was the crop most affected?
(b) In excess rainfall years, at which growth stage(s) was the crop most affected?
Phases Year
Type of event (Drought: D or Excessive Rainfall: ER)
Occurrence of events
Planting
Establishment
Vegetative
Flowering
Maturation
6. Does rainfall at XXXX station reflect the rainfall pattern of the area? Do parts of the area
have diverse rainfall patterns?
Access to finance
1. How do farmers normally finance input costs?
Do not Own Loan from Money- Other Interested in

buy inputs finances bank lenders sources financing,
but no access
2. What type of financing? What are the terms?

3. What time of year is the financing received? What time of year is financing needed?
4. What types of collateral do they normally provide?
5. In which month are they expected to pay back loans?
6. Would having access to some form of insurance improve farmers’ access to credit?
7. Have there been experiences with rescheduling and/or default? If so, when and why?
66
Contact information
IFAD WFP
Francesco Rispoli Niels Balzer
Technical Adviser Policy Officer
Rural Finance Climate Change
Policy and Technical Advisory Division and Disaster Risk Reduction
Telephone: +39 06 54592725 Policy and Strategy Division
E-mail: f.rispoli@ifad.org Telephone: +39 06 65132033
E-mail: niels.balzer@wfp.org
Emily Coleman
Consultant Richard Choularton
Rural Finance Senior Policy Officer
Policy and Technical Advisory Division Climate Change
Telephone: +39 06 54592590 and Disaster Risk Reduction
E-mail: e.coleman@ifad.org Policy and Strategy Division
Telephone: +39 06 65132908
www.ifad.org/ruralfinance/wrmf
E-mail: richard.choularton@wfp.org
www.wfp.org/disaster-risk-reduction
November 2011
International Fund for World Food Programme

Agricultural Development Via C.G. Viola 68
Via Paolo di Dono 44 Parco dei Medici
00142 Rome, Italy 00148 Rome, Italy
Telephone: +39 06 54591 Telephone: +39 06 65131
Facsimile: +39 06 5043463 Facsimile: +39 06 6590632
E-mail: ifad@ifad.org www.wfp.org
www.ifad.org
www.ruralpovertyportal.org

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Weather Index-based Insurance

1. WEATHER INDEX-BASED INSURANCE:

2. PERFORMING THE PRE-FEASIBILITY ASSESSMENT 25

3. ROADMAP FOR PILOTING AND IMPLEMENTING

4. BEYOND THE PILOT: SCALING-UP AND SUSTAINING

ANNEX 1: INFORMATION ON WEATHER MEASUREMENT INFRASTRUCTURE 58

ANNEX 2: QUESTIONNAIRE FOR COLLECTING AGRICULTURAL

ARMT Agricultural Risk Management Team (World Bank)

Weather index-based insurance: Background

In developing countries, WII can be considered for two broad purposes

This technical guide focuses on developing WII programmes for development.

Rationale and structure of the guide

Terminator: indicates the beginning or end of a process

Action: indicates that an action is performed

Decision point: indicates that a decision is to be made,

Direction arrow: indicates the direction of the process

Initial Analyse Perform Pilot Evaluate

Each of these actions is discussed in detail in the relevant chapter.

• Action: Understand key principles of WII.

Weather index-based insurance: Principles

Figure 1. Concept analysis

Analyse Perform Pilot Evaluate

Analyse WII Assess

The essential feature of WII is that the insurance contract responds to an

Introducing WII to an area requires willing stakeholders: insurers, national weather

Levels of intervention and business models

Table 1. Micro, meso and macro levels of WII applicationa

Government Government or relief agency Government receives early

a Based on IFAD and WFP (2010).

Advantages and disadvantages of index insurance

Table 2. Advantages and disadvantages of weather index-based insurance

Opportunities and limitations of weather

Role in support of agricultural development

Weather index-based insurance and

• Action: Assess the existence of the basic prerequisites for a successful

Figure 2. Pre-feasibility assessment

Analyse Perform Pilot Evaluate

PERFORM PRE-FEASIBILITY ASSESSMENT

In-country pre-feasibility assessment

Are all the

Not every context is suited to WII. In addition to a strong correlation between a

Stage 1: Preliminary assessment

Stage 2: In-field pre-feasibility assessment

Existence of weather risk and potential demand for WII

Availability of weather data and infrastructure

6 Annex 1 provides a list of elements of information on weather measurement infrastructure.

Availability of agricultural data and information

or lower than actual loss sustained. In addition, it may be difficult to demonstrate

government policies and interest

The analysis should determine whether governments are interested in and

Availability of partners, stakeholders, interested parties and champions

Intermediaries and delivery channels. As insurers normally have limited or no

IFAd and possible partner programmes

Complementary agricultural development or risk management programmes in

3. Roadmap for piloting

Figure 3. Pilot implementation

Analyse Perform Pilot Evaluate

Pilot development activities

Preparing for the pilot