Speaker Name & Country :

Topic:

Dr. David M. Dror, MIA, India

Climate Cost of Cultivation:

A New Crop Index Method
to Quantify Farmers Cost of Climate Change

Outline
Problem statement on agricultural insurance
MIAs experience in catalyzing demand
A new index: Climate Cost of Cultivation

Agricultural insurance in
developing countries
Traditional indemnity-based crop insurance
oHigh admin costs

Index based crop insurance

oIntroduced to overcome
supply side short comings

Two main
policy
instruments

oFraud, moral hazard

adverse selection

oHigh basis risk

Mandating

Demand side ignored

Most farmers do not buy
index based insurance
Demand low in terms of
people enrolled, total
premium and area insured

Subsidization

Microinsurance
key challenges
Supply
Challenges

One-size products not sufficiently customized

to local risk exposure
Extremely costly and complex program
Too linked to loans

Demand
Challenges

the government should solve this problem

I am too poor to pay
What is in it for me

Intermediation
Challenges

Formal vs informal sector

Complicated policies and processes
Regulatory constraints

Last mile untouched

What to do to generate demand?

MIA has evidence that:
context specific insurance is more relevant to
farmers
Challenges are mainly conceptual, technical
and administrative
MIA piloted bottom-up insurance schemes for
crop, livestock and health
without subsidies and voluntary
yet farmers bought insurance

MIAs efforts to address challenges:

community run schemes
MIAs Microinsurance (MI) Model

MIAs Success Stories in MI

High renewal rates: 30-80%

Cumulative enrollment: 100K+
Social empowerment: 57% women & 89% socially marginalized enrolled + local governance

Prompt claim settlement: < 1 month

Claim ratio: 40-85% (health)
Financial sustainability: All MI schemes
solvent into year 4 of operations bankrupt
Zero premium subsidy
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3 main considerations that

generate demand for crop insurance:
1. Process: Farmers trust other farmers most

Involving farmer communities before and after sales

2. Product design: Higher correlation of index

with risks of farmers
Lower basis risk

3. Link to value added services: Services for risk

mitigation which complements risk transfer
solutions
E.g. agricultural advisories, provision of weather
information

Climate Cost of Cultivation

We developed a method called Climate Cost
of Cultivation (CCC) to reduce design-related
basis risk: This improved modelling of
drought describes production risks better.
We demonstrated the CCC method for winter
wheat in the Indian state of Bihar. Winter
wheat in India is an irrigated crop.

Index

Parameters

Risks Covered

CCC Index: Covering reasons for

crop loss and increase in cost of cultivation

Water Stress

Water Logging

Non-Climatic

Climatic

(Topography, Soil type,

Groundwater depth)

Excess Heat

(Daily Rainfall, Temperature,

Humidity etc.)

CCC
Index

Climate Cost of Cultivation: an innovative

method to quantify the added cost to
farmers of climate change
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CCC: Schematic Model

10
10

CCC: Data Requirements

Data
Data
Type
Climate Precipitation
Data
Max/min temperature
Relative humidity
Wind speed
Solar radiation
BioSoil type
physical Depth to groundwater (not
Data
needed if area is rainfed)
Topography
Waterlogged area

Data Type
Rain gauge / weather
station data, daily
Satellite grid data, daily

Availability
Free
Payable
Govt. departments,
research institutes,
private providers
NCEP Reanalysis I /II

Primary or secondary data

Secondary data
Govt. departments,
research institutes
Secondary data
ASTER Digital Elevation
Map 30 m
Secondary data
Govt departments or
research institutes
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CCC: Temporal Analysis

Loss

Better than
average

Average Climate Cost of Cultivation of wheat in Bihar from 1979/80 to 2012/13

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CCC: Spatial Analysis

CCC (a) 1979/801995/96; (b) 1996/972012/13; (c) 1979/802012/13

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CCC Index: comparison with

typical index insurance
Better performance of CCC over typical index insurance

Correlaton Coefficient

Correlation between losses and payout*

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

0.760

0.196

Habitual Index

CCC Index

*analysis at community level

CCC premium: 75% cheaper than habitual index insurance at community level
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How does the CCC differ

from existing models?
1.

We considered aggregated rainfall in the preceding

season, because it influences soil moisture during the
insured season;

2.

CCC focuses on what matters most: soil moisture;

3.

Others only use aggregated rainfall as a proxy for crop loss.

CCC considers both the effect of yield loss and increased

input costs.

Latter calculated by considering influence of:

o Soil type: needed for modelling the soil moisture

o Groundwater: which influences the cost of replenishing insufficient
soil moisture, if farm land is irrigated with groundwater.
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Main Findings
Better modelling of agricultural droughts
CCC enables implementing the polluter pays principle:
Today, farmers pay incremental risk due to climate change,
while they have probably not contributed much to it
CCC allows to assess risk increment due to climate change
Region, season and crop specific

Once this increment has been quantified, it can be funded

from other sources
Reduction in premium to foster uptake

16

Conclusion
Insurance must make sense for farmers (whether
or not it is subsidized)
The business process of insurance can become
better understood and more trusted by
community-based and peer-to-peer
engagement.
The index itself can be much improved. For this
purpose we developed the CCC and we invite
insurers to work with us to take it to market.
17

Reference
Jangle N, Mehra M, Dror DM (2016). Climate
Cost of Cultivation: a method to quantify the
added cost to farmers of climate-change,
illustrated in rural India. The Geneva Papers on
Risk and Insurance. 41, 280306.
doi:10.1057/gpp.2016.6

18

Contact for follow-up

Prof. David Dror
Email: daviddror@socialre.org
Dr. Nihar Jangle
Email: nihar@mia.org.in
Micro Insurance Academy
86, Okhla Industrial Estate, Phase III,
New Delhi 110020 (India)
Tel: +91-11-4379 9100 Fax: +91-11-43799117
http://www.microinsuranceacademy.org
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Engaging Farmers in the Design of the

Insurance Solution (MIA Work in Progress)
Interactive user interface for
weather index design
Feed to weather data
Inputs from experts
Actuarial pricing
Customization according to
needs and willingness to pay
by end-users, i.e. farmers

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Basis risk
Index based insurance overcame many
problems of traditional crop insurance
But it created another dilemma: basis risk.
Basis risk = risk that payout does not match loss
Reduces effectiveness of crop insurance
Reduces the willingness of farmers to take up insurance

Hardly been studied

Many indices have high basis risk
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Reasons for basis risk

Basis risk can be of two dimensions:
Spatial basis risk

Design-related basis risk

Weather at station used for

settlement differs from
weather in field
Can be addressed by setting up
more weather stations

Ignoring relevant weather

parameters, e.g. only
considering aggregated rainfall.
Ignoring non-climatic
parameters
Not all production risks are
weather related
Inability to capture
idiosyncratic risks through an
weather index
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Basis risk: examples from India I

Example: Weather Based Crop Insurance Scheme (WBCIS) in India

(Clarke et al, 2012)

23

Basis risk: examples from India II

Example: Weather Based Crop Insurance Scheme (WBCIS) in India
9 years of data (1999 2007), 318 products in 1 state: correlation only -13%

(Clarke et al, 2012)

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Reasons for basis risk

On individual farm level the correlation between index payout and crop yield
is most likely even weaker
Basis Risk = mismatch between actual losses incurred by a farmer and
insurance payout
But: Farmers want reliable protection
Reasons for high basis risk:
Certain extreme weather events and catastrophes cannot be captured by
local weather parameters only
Certain other perils also not captured, e.g. losses due to pest attacks and
diseases, wild animal grazing
Some relevant parameters and other risk factors are ignored
Farming practices differ considerably
Weather and yield data inadequate (quality, resolution) for calibration of
index and determination of payout
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