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

¾Area: 513,120 sq.km.

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

¾ Population: 65 million
• 7 million live in capital (Bangkok)

¾ 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 (in 2009)

Agriculture’s share of GDP

25% (1970s)
15% (1985 to 1990)
11% (1990 to 1996) Main Crop
12% (2009)
Rice : 32 million ton
Cassava : 30 million ton
Sugarcane : 67 million ton
Maize : 5 million ton
Rubber : 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

HEAD OFICE Bank Management and Policy

DEPARTMENTS/DIVISIONS
Branch Administration and Support

PROVINCIAL OFFICES
(75) Supervision of Activities

DISTRICT BRANCHES
(977) Credit Delivery to Clients

FIELD OFFICES
(957) BUSINESS DEVELOPMENT OFFICERS
contact with clients

CLIENTS
(6,101,206)
Individual Clients (Joint Liability Groups)
Agricultural Cooperatives
Farmers’ Associations
About BAAC
Credit Services
(as of the end of March 2010)
Government Policy
Farmers' Associations 0.73%(115million) Others
0.01%(1million)
5.11%(806million)

Agricultural
Cooperatives Individual Clients
5.08%(802million) 89.07%
(14,052million)

Total 15,776 million

(Unit: USD)
About BAAC
Operating Fund
(as of the end of March 2010)
Shareholders' Equity
OtherLiabilities 9.62%(2,299million)
Borrowing 3.46%(826million)
2.11%(505million)

Deposits
Interbank 83.99%
0.82%(197million) (20,078million)

Total 23,905 million

(Unit: USD)
III. Why Risk Management?
Why Risk Management? Agricultural Risk Management
Risks Factor
Natural Risks Social Risks Economic Risks

• Social Structure Change • Cost of Input Fluctuation

Natural Disaster, (Labor Migration) • Change in Agricultural Pricing
Insect, Disease (Lack of Agriculture Labor) • Interest Rate
• New Technology in Agricultural Sector

Strategic Risks Management

ƒ Farm Type Diversification
Zoning
• Good Variety Crops
• Appropriate Technology
• Weather Index Insurance
• Future of Forward Market
• Central Market Establishment • Income Supplement from
• Agricultural Marketing Cooperatives Non-Farm Activities
• Group Occupation • Local SME
• Agricultural Cooperatives • MFI (ssp)
• Management Skill
• Insurance (Health,Life,Credit)
• Networking
- Educated Institution • Farmer Pension Fund
- SME Association

Yield
Yield Risk
Risk Price
Price Risk
Risk Investment
Investment Risk
Risk

Crop Insurance
Stabilization of Farmers’ Income
Why Risk Management?

Why Risk Management for Agricultural Sector?

1 2
Importance of Vulnerability to
Agriculture Hydro-meteorological
Risks

6 7 3
Growing Insurance Strong Agricultural Burden on Public
Sector Bank Resources

5 4
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 Weather Index Insurance

: Cotton (1977) (2006-2010)
Weather Index Insurance in Thailand

Project Model of Weather Index Insurance

• Bank-intermediated weather insurance contracts to farmers

Global Reinsurance
Companies

International Reinsurance Treaty

Thailand Insurance Company/
Syndicate
Contractual Relationship
(risk transfer, services, operations etc.)

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 Manual Rain
Measurement Tool Gauge
Weather Index Insurance in Thailand

¾Access to risk capital

¾Access to global
reinsurance markets
¾Market-based Risk ¾Existing Transaction
Transfer Products ¾India, Ethiopia,
¾Weather index-based ¾Malawi, Ukraine,
insurance ¾Mongolia…
¾Price risk management
contracts

¾ Knowledge Transfer ¾New Applications

and Education ¾Disaster risk financing
¾Technical assistance ¾Extension to new
¾Publications and hazards
training workshops
Weather Index Insurance in Thailand
Maize
Maize Rainfall
Rainfall Index
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, GIA

Pak Chong District
July 2006
Maize
Production
Weather
Index
110 Farmers
1,970 Acres of
Insurance
maize enrolled
Royal Irrigation Department (RID)
Thai Meteorological Department (TMD)
The Radius of 25 km.
General Insurance Association (GIA)
Measured from the
Department of Insurance (DOI)
Suwan Maize Research Center Station
Weather Index Insurance in Thailand

Rain station
BAAC’s Pakchong
Branch Station Nakhon Ratchasima Province
Risk cover : Drought

35 Farmers • Premium: USD 2,590

380 Acres
• Sum insured: USD 41,620

Insured Crop: Maize

Physiological Maturity
Rain station Days 30
Suwan Maize Research USD 134/Acre Period 3
Center Station
USD 9/Acre Knee Height
Days 21
USD 127/Acre Period 2
July 2007 Premium rates
Seedling Emergence to Knee High
Days 30
USD 96/Acre Period 1
USD 6/Acre
Weather Index Insurance in Thailand

Nakhon Saraburi Nakhon Phetchabun

Lopburi
Ratchasima Sawan

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

388
2,860 Acres USD 104/Acre
Farmers Flowering and Grain Filling
(30 Days).
Period 3

USD 10/Acre Growth (20 Days)

Period 2
Premium
Premium rates
rates Sowing (30 Days)
USD 28/Acre Period 1
USD 6/Acre
Weather Index Insurance in Thailand

Nakhon Nakhon
Saraburi Lopburi Phetchabun
Ratchasima Sawan

5 Provinces (15 Districts)

Premium:
Premium: USD
USD 42,040
42,040
Indemnity:
Indemnity: USD
USD 11,160
11,160 (27%)
(27%)

817 USD 104/Acre

5,320 Acres Flowering and Grain Filling
Farmers (30 Days).
Period 3

USD 8/Acre Growth (20 Days)

Period 2
Premium
Premium rates
rates
Sowing (30 Days)
USD 6/Acre USD 28/Acre Period 1
Weather Index Insurance in Thailand

(as of the end of May 2010)

Nakhon Nakhon
Saraburi Lopburi Phetchabun Pitsanulok Nan
Ratchasima Sawan

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

2,535 18,150 Acres USD 104/Acre

Flowering and Grain Filling
Farmers (Target 19,770 Acres) (30 Days).
Period 3

USD 8/Acre Growth (20 Days)

Period 2
Premium
Premium rates
rates
Sowing (30 Days)
USD 6/Acre 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
Thailand Japan

JBIC
JBIC
Thailand

Coordination
MOU
Sompo Japan Group

Sompo Japan
National Institute
for
BAAC Sompo Japan Sompo Japan Agro-Environmental
Thailand Risk Management Sciences
(NIAES)

Contracts New product Product

for farmers Development
Weather Index Insurance in Thailand

Cumulative
Cumulative Rainfall
Rainfall (mm.)
(mm.) in
in July
July –– September
September (3
(3 months)
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 July-September 2009
Rice Cumulative
Cumulative Rainfall
Rainfall (mm.)
(mm.)
Production
Weather
Index
276 Farmers,
Insurance
5 Districts

Office of Insurance Committee (OIC)

Weather Station at District Thai Meteorological Department (TMD)
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) JBIC

TMD

SJIT
Khon Kaen
Province July-September 2010
Rice Cumulative
Cumulative Rainfall
Rainfall (mm.)
(mm.)
Production
Weather
1,122 Farmers,
Index
Insurance
25 Districts

Premium:
Premium: USD
USD 22,500
22,500
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

Project Summary

Maize (from 5 to 7 Provinces)

Trend
143,490 Premium (USD)
42,040
23,300 18,150 Acre
5,320
2,590
2,860 2,535 Farmer
817
380
388
35
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