REGIONAL CONFERENCE ON CATASTROPHIC
RISK MANAGEMENT IN AFRICA
NOVERMER 12 - 14, 2006
Presented By Tewodros Tilahun
November 2006
1
Executive summary............................................................................................................. 3
Introduction ......................................................................................................................... 7
Chapter 1 ............................................................................................................................. 8
Past Drought events, their economic and social impacts ................................................ 8
Chapter 2 ........................................................................................................................... 12
Insurability of drought .................................................................................................. 12
Insurance solutions for drought .................................................................................... 15
Crop insurance ............................................................................................................ 155
Coverage ..................................................................................................................... 166
Duration of the insurance cover .................................................................................. 166
Sum Insured .................................................................................................................. 16
Procedure in case of loss ............................................................................................... 16
Problems in implementing Crop Insurance................................................................... 17
Innovative measures to tailor crop insurance................................................................ 19
Index-Based Weather Insurance ................................................................................... 20
Chapter 3 ........................................................................................................................... 22
Recommendations for National Drought preparedness ................................................ 22
Conclusions ..................................................................................................................... 244
References ....................................................................................................................... 255
2
Economic and Social Impact of Drought
Executive summary
The existence of drought is since time immemorial. Drought is known to be a cause for
most of famines that occurred in history of mankind. There is disagreement between
researchers to have common definition of drought because drought has different
meanings in different geographical locations. Despite this, however, a definition intended
to represent various meanings have been coined. Drought according to U.S. Weather
Bureau is defined as continuous lack of rainfall, which injuriously affects the plant, and
animal life of a place by depleting water supplies for domestic and social purposes in a
particular region where rainfall is normally sufficient for such purposes.
Two schools of thoughts forward their understanding for the causes of drought. One
school of thought believes the cause for drought is natural. Another school of thought
disagrees. According to them, the concept of ‘drought’ has human factor. Increased use
of marginal land, extensive land cultivation and substitution of eco-friendly agriculture
with commercial cash led to soil erosion and reduced fertility of the land. Different
researchers have differing views about the causes of drought, which can be aligned along
these thoughts.
Many researchers now reckon that the occurrence of various droughts in Africa,
especially in Southern Africa and the Horn, are caused by physical processes related to
the occurrence of (El Nino-southern Oscillation (ENSO) events thousands miles away.
Examination of past records of drought and famine in Ethiopia, and the occurrence of
ENSO indicate a corresponding relationship. Past ENSO events show notable correlation
with the Ethiopian drought and famine. In some year’s drought followed ENSO, while in
some other years it occur together. The frequency and severity of drought increased
through time, and it is now observed the cycle of drought happens every 10 years.
For many of countries in Africa their principal source of income is Agriculture. The
impact of drought in these countries is disastrous. The immediate impact results in loss of
income and consequent failure to meet daily food need. For example the drought that
occurred, in Ethiopia, in 1984 affected 10 million people. This drought of 1984 also
affected other Sub-Saharan countries GDP, including Ethiopia, Mali, and Niger, to fall by
9%. Zimbabwe’s GDP declined 3% after the 1983 drought (Benson and Clay, 1994).
Zimbabwe suffered enormous economic losses as a result of the 1982/83 drought,
including US$ 360 million in direct agricultural losses and US$ 120 million in drought
relief costs (Ogallo 1987)
Government’s strategy in mitigating drought varies from country to country depending in
their level of development. As part of their strategic plan, countries in developed
countries include risk management of the Agriculture sector. Prior to the introduction of
3
crop insurance, countries like U.S.A. compensated the agriculture loss by different
schemes like reduction of land rent taxes, cancellation of Agricultural debts and direct
relief from the government.
In many of African countries such type of planning is absent. Some countries, like
Ethiopia, after facing consecutive disaster in the past and by learning from these disaster,
have established institutions, that deal with Disaster Prevention and Preparedness, with a
rank of Commission and have further devised drought combating plans in the National
five years’ strategic plan which covers 2006 to 2011.
Consideration of insuring the risk of drought demands examination of the risk in light of
two basic insurance principles: fortuity, which is, expressed 50:100 of probabilityuncertainty ratio, and the law of large numbers.
Uncertainty is the function of probability. Uncertainty is zero when the probability is nil,
when probability increases uncertainty also increases. Until it becomes the maximum,
that is 50:100. Increase or decrease of probability beyond 50%, uncertainty will also
diminish (Ray, 1981). From this premise, therefore, there is no insurance cover for 100%
probable loss or will there be cover for a loss which occur frequently, i.e., where
uncertainty approaches 100 per cent. By the same analogy, a loss that occurs too
infrequently is not likely to be insured, because it may not be numerous enough to be
subject to the law of large numbers – the basic underlying law of insurance.
Uncertainties (not causes of uncertainties) largely can be eliminated through a
combination of a large number of similar risks. The uncertainty is reduced and the risks
become fairly predictable when they are considered in the aggregate. Insurance not only
reduces uncertainty through the combination of large numbers of similarly exposed
individuals, but in the case of a loss, evens out its burden among such individuals.
Incidence of loss is broad based through insurance so that the group as a whole can
absorb the shock of even the heaviest impact of loss with little difficulty.
Past records of the occurrence of Elinino, which affects sub-Saharan Africa, reveals
drought is more of a certainty than fortuity to happen. Past records of drought and famine
in Ethiopia, and the occurrence of ENSO indicate a corresponding relationship. Past
ENSO events show notable correlation with the Ethiopian drought and famine. In some
year’s drought followed ENSO, while in some other years it occurred together.
Examination of this fact in light of probability-uncertainty ratio seems to be more than 50
percent beyond the ideal 50:100 ratio. Certainty of drought risk is more on the scale than
uncertainty.
Considering drought risks in light of the law of large numbers, each insured is exposed to
the same type of risk, BUT each loss is not a separate event. The loss, arising due to
drought, affects all insured in the region where drought occurs.
The above analysis in light of the two basic insurance principles places drought in the
category of risks where it is not insurable. Drought, however, is similar with natural
4
catastrophes like hurricanes, Katrina, Rita, and Wilma, whose occurrence involves huge
financial loss. Drought differs from these catastrophes because of its lingering
characteristics. Catastrophes like hurricanes, earthquakes, and floods have insurance
cover. By devising and implementing underwriting measures, that are commensurate with
the high exposure, frequency, and severity of catastrophic losses, which include, adequate
pricing, substantial deductibles, etc. insurance cover is provided for these risks.
This shows that what was considered to be impossible at one time is made possible
through consistent innovations and by devising various mechanisms. Terrorism risk
which at one time was excluded by insurers is now written by insurers by devising
underwriting measures and expanding the reinsurance capacity of the capital markets, and
also governments taking the role of insurers of last resort. The risk of drought disaster
which the world have witnessed its devastating effect on economic and social structure is
still a threat to the world development. It is hindrance to achieve the Millennium
Development Goal and eradication of poverty. It is, therefore, a risk, which must be dealt
with. Governments of developed countries, and the respective insurance industry since
the beginning of the twentieth century have been endeavoring to find insurance solution
for natural perils that affect the agricultural sector.
Examination of past records to consider the possibility of insurance as a solution for
drought brings to attention two types of insurance products, namely, Crop Insurance and
Index-based insurance. Crop Insurance, which began in 1898, to compensate loss of crop
yields due to natural perils, in the USA, has gone through many refinements to overcome
problems encountered during implementation. The attempt to implement this insurance
product, especially in underdeveloped countries, like many of African countries, faced
many problems. To mention few amongst many of the problems include, lack of basic
data, small and scattered risks, lack of awareness of the benefit of insurance, wide variety
of agricultural practices, etc.
Innovative measures have been taken in countries like India to harmonize crop insurance
with the economic and social level of structure the country is found. The government in
partnership with the insurance industry launched two major crop insurance schemes in
1972, 1979, and 1999. The schemes undertaken include, crop insurance on individual
approach, example, for cotton, cover offered on a fixed guaranteed yield. In 1979 a
scheme, which have a cover for all natural risk, on an area, approach; in 1999, a scheme
launched to provide cover for Comprehensive Crop Insurance.
Crop insurance, in the same manner as it is implemented in India cannot be implemented
in many African countries due to the major difficulties mentioned earlier. In overcoming
this problem another alternative of insurance solution, to combat drought, which is indexbased weather insurance have been innovated. This new approach, rather than
indemnifying natural disasters, specifically drought, based on crop yield, establishes
another methodology. By correlating the risk of loss, or, lack of rainfall with crop yield,
index-Based Weather Insurance attempts to provide insurance cover for small and
medium farmers of Africa.
5
The core idea behind index-based weather insurance is to establish correlation between
rainfall risk and crop yield. The establishment of the correlation creates a foundation to
measure, and compare, objectively, the rainfall variation which affects crop yield. This
will then assist to compensate the insured accordingly.
Index-based weather insurance has been implemented in India, Morocco, Malawi,
Ethiopia, (on pilot project basis). In India, the implementation of Index-based Weather
insurance has gone through many refinements as a result of which various options are
provided for the insured.
The frequent occurrence of drought is likely to happen in light of the current climate
change and global warming. Mitigating drought demands multi-faceted measures by all
stakeholders. Devising strategies by Governments to manage the risk of drought, like for
example, prevention, preparedness, mitigation, and response and rehabilitation are very
important. Insurance solutions then come complementary to these strategies. These
strategies are conditions for insurability of drought. The presence of the above strategy
enhances the fortuity of drought, which makes it insurable.
Assuming these strategies are in place, following insurance solutions is recommended.

Even though drought, the main threat of development can be mitigated by
weather-indexed insurance, the remaining perils, which are also a threat to
Agricultural production, must be addressed. Agricultural perils like, flood and
inundation, plant diseases, insects, and other pests, over which the farmer has no
control, should also be addressed by insurance solutions. Feasible insurance
product for these perils is crop insurance. The insurance industry in African
countries should take the initiative, in collaboration with international institutions
like the WB, in developing a hybrid insurance solution that can integrate weatherindexed, for drought, and crop insurance for the rest of the perils.

Drought having higher than 50:100 uncertainty-probability ratio, and the
occurrence of it, in one area, in an event, affecting all insured contrary to the law
of large numbers, will fetch expensive premium for the insured. Insurance
companies, as noticed earlier, accept risky businesses with cautious underwriting
measures, like, setting adequate price, substantial deductibles, and limiting the
amount of indemnity, are some of the underwriting measures employed by
insurance companies. From the insured perspective the measures taken by
insurance companies make the premium payment and the loss sharing expensive,
which will be seen, as discouraging.

It is at this juncture that governments should involve themselves in the risk
partnership with the insured and the insurer. Lessons drawn, from countries like
India, in their crop insurance schemes, show the involvement of the government
in sharing risks with the insured and insurers have encouraged the awareness of
the benefit of insurance, and enabling the farmers to stand on their own feet at the
time of drought.
6
Introduction
The purpose of this paper is to review the Economic and social impact of drought on
African countries and examine the possibility of finding insurance solution. The paper
begins by assessing past economic and social impacts of drought, mitigating measures
taken by governments, and anticipated future disaster in light of the current population
growth. Based on these assessments the paper attempts the role governments should play
as a principal responsible body in their national strategies to mitigate drought,
considering examples of developed countries as a background.
The paper then considers whether drought is insurable or not in light of applicable
insurance principles and compares drought with similar natural catastrophes, like
hurricanes, earthquakes, tournedos, that have insurance cover despite their catastrophic
nature. Drought being one of natural elements of Agricultural risks, the paper then
examines insurance products that are devised to mitigate Agricultural risks, together with
the experience of countries that implemented these products, then identify their strength
and weakness.
Finally the paper foreword recommendations that governments should consider in their
strategies to effectively use insurance as complementary strategy.
7
Chapter 1
Past Drought events, their economic and social impacts
Mankind knows droughts since time immemorial. Drought is a slow onset disaster. Its
first manifestation is shortage of rainfall, and when it extends a hydrological effect,
which will eventually be a cause of failure of crop. Although the cause for famine is
attributable to many factors, like land degradation, rinder pest etc, drought is believed to
be the primary cause of famine.
Many researchers agree that there is no common definition of drought because drought
has different meanings in different geographical location. Drought in arid areas, as
opposed drought in temperate areas has different meanings. Despite this, however, a
definition that is intended will represent the various meanings of drought in different
geographical locations have been coined.
According to U.S. Weather Bureau, drought is defined as continuous lack of rainfall,
which injuriously affects the plant, and animal life of a place by depleting water supplies
for domestic and social purposes in a particular region where rainfall is normally
sufficient for such purposes. Hewitt (1979) provides somewhat similar definition of
drought by stating that drought is simply a period in which moisture availability falls
below the current requirements of some or all the living communities in an area and
below their ability to sustain the deficit without damage, disruption or excessive costs.
Causes of drought
There are many reasons forwarded as to what causes drought. These reasons are
categorized into two school of thoughts. One school of thought argues that drought is the
result of lack of rainfall. As a consequence of loss of rainfall agricultural and
hydrological hazards follow. According to this school of thought, the cause of drought is
a natural phenomenon. Al-Salihi (2003), Ben-Zvi (1987), Dracup et al. (1980) and Desai
(1990) share the argument of this school of thought
Another school of thought led by Hulme (1987) and Howell et al. (1986) and others
disagree. According to them, the concept of ‘drought’ has a human factor. Increased use
of marginal land, extensive land cultivation and substitution of eco-friendly agriculture
with commercial cash led to soil erosion and reduced fertility of the land.
Different researchers have forwarded similar arguments, which can be classified in one of
the above school of thoughts. Others like Wright (1986) suggest that drought is normally
associated with semi arid, low-rainfall areas having high evaporation rates, which was
letter refuted because high rainfall areas like Kerla and Goa (coastal areas of India) with
fertile soil texture have faced recurrent drought like conditions
8
What may appear to be a natural disaster may actually be the indirect result of human
activities, which harm the environment. For example, river flooding may be due to heavy
soil sedimentation arising from serious soil erosion in the river’s catchments area, which
in turn is due to deforestation and land degradation.
Many researchers now reckon that the occurrence of various droughts in Africa,
especially in Southern Africa and the Horn, are caused by physical processes related to
the occurrence of (El Nino-southern Oscillation (ENSO) events thousands miles away.
Examination of past records of drought and famine in Ethiopia, and the occurrence of
ENSO indicate a corresponding relationship. Past ENSO events show notable correlation
with the Ethiopian drought and famine. In some year’s drought followed ENSO, while in
some other years it occur together. This is shown in the following table:
El Nińo Years
1539-41
1618-19
1828
1864
1874
1880
1887-89
1930-32
1953
1957-1958
1965
1972-1973
1982-1983
1986-87
1991-92
1993
Drought/Famine
1543-1562
1618
1828-29
1864-66
1876-78
1880
1888-1892
1932-1934
1953
1957-1958
1964-66
1973-1974
1983-1984
1987-1988
1990-92
1993-94
Regions
Hararghe
Northern Ethiopia
Shewa
Tigray and Gondar
Tigray and Afar
Tigray and Gondar
Ethiopia
Ethiopia
Tigray and Wollo
Tigray and Wollo
Tigray and Wollo
Tigray and Wollo
Ethiopia
Ethiopia
Ethiopia
Ethiopia
Source: http://www.brad.ac.uk/research/ijas/ijasno2/Georgis.html
A group of scientists from Canada and Australia are of the opinion that drought in Africa,
Sahel region, may have been triggered by tiny particles of sulfur dioxide spewed by
factories and power plants thousands of miles away in North America, Europe, and Asia.
According to these Scientists, the tiny sulfur-dioxide pollution particles, which are short
lived, are the causes in altering the physics of the cloud formation, without these particles
traveling to Africa. One substantiating clue the scientists holding is the return of rain in
the 1990’s which they think is due to emission laws enacted in the same year. The
scientists do not think this is a coincidence.
9
Review of past impacts of drought
For many countries in Africa their principal source of income is their Agriculture. A
higher percentage of the total land area is believed to be suitable for agriculture. In
Ethiopia, for example, 65 % of the total land area is considered suitable for cultivation
and pasturage (RRC, 1985). 85% of the population lives in the rural areas agriculture is
the source of income though at a subsistence level. The impact of drought here is
disastrous. Agriculture, which employs 80% of the total employment, is affected when
there is drought. Besides, these countries also have large livestock resource. Ethiopia, for
example, has a sizable animal resource, which places it in the high-ranking livestock
owning countries, in Africa, and the world at large.
A great majority of farmers in many African countries, due to insufficient means and
resources, are unable to stand risk of drought. The immediate impact of drought, in many
African countries, results in loss of income and consequent failure to meet daily food
need.
The occurrence of drought in these countries heavily affects the economic and social
structure s and very shortly leads to famine. Amongst many examples, some of the
disasters that are significant are as follows:
For example the drought that occurred, in Ethiopia, in 1984 affected 10 million people.
This drought of 1984 also affected other Sub-Saharan countries GDP, including Ethiopia,
Mali, and Niger, to fall by 9%. Zimbabwe’s GDP declined 3% after the 1983 drought
(Benson and Clay, 1994). Zimbabwe suffered enormous economic losses as a result of
the 1982/83 drought, including US$ 360 million in direct agricultural losses and US$ 120
million in drought relief costs (Ogallo 1987)
Nearly 10 million people were affected, in Ethiopia, in the 1983-84 drought. The 1983-84
droughts was more devastating than the 1972-73 droughts, which caused the death of
some 200,000 people and large herds of livestock in Wollo and tigary regions.
Considering the magnitude of its impact, the 1983-84 has encompassed 12 regions of the
country out of the then total 14 regions.
Drought also affected the social structure of these countries very heavily. The male
population leaving behind their families, especially women and children migrated to
areas where food is available. Women and children were, therefore, the first victims of
death due to famine.
Impact of drought in light of the current population growth
There is a mismatch between agricultural production of many of African countries, and
the rate of population growth. For example, countries in the Horn of Africa, except
Djibouti, have high reported rate of population growth rate ranging between 3 and 4%
10
annually.1 Population growth that is not supported by equivalent food production is an
obstacle to development. The report of the World Commission on Environment and
Development (WCED, 1987) argued that environmentally sound and sustainable
development could be attained only if population size and growth rates are commensurate
with the productive potential of nature.
In view of this fact, it is not difficult to contemplate the disaster that will follow if
drought occurs. In 2005 there was the news of more than 10 million people who are in
danger of famine, in East African Region, because of lack of rainfall for two consecutive
years.
If this kind of disaster is left unchecked, it will be difficult to get relief, because by
extrapolating the growth rate, the number of people seeking aid will be 10 time more than
what it was in the past. Moreover, donors will get fatigued to extend their aid due to the
increase in frequency and the number of places they are requested to donate to.
Government strategies in mitigating drought
Natural risk affects agriculture in two ways, by reducing crop production or yield and
causing losses to the farm stock. Farming is faced with uncertainties arising from natural
elements. The risk of reduced or entire loss of crop yield is a phenomenon, which all
farmers in the globe are facing. The financial capacity in sustaining loss of crop yield
differs, however, from country to country.
Farmers who live in developed countries can easily stand natural catastrophic risks like
drought because as part of their overall strategic plan governments in these countries
include risk management of the agricultural sector. These countries have devised various
methods that assist farmers stand natural disasters by collaborating with the agricultural
sector.
Prior to the introduction of insurance cover to crop, loss of crops by farmers, in
developed nations, like USA, were compensated in different ways by government
schemes. This includes reduction of land rent and taxes, cancellation of agricultural
debts, and direct relief from the government (Ray, 1981). Reduction of land rent and
taxes, moratoria, scaling down or cancellation of accumulated agricultural debts, and
direct relief from the State are among the principal methods applied (Ray, 1981). In the
United States, for example, during the 10 years ended 30 June 1936, the Federal
Government alone had spent a total of $615 million, or $ 61.5 million annually, in
various ways to meet crop failure. (Ray, 1981). During the years 1974-76 such payments
averaged over $ 434 million for wheat, feed grain, cotton and rice crops (Ray, 1981).
In many of African countries, such type of method that enable the farmer sustain the crop
loss due to natural disaster is absent due to lack of resource. Besides this, there was no
awareness, on part of governments, that it is their duty to devise strategies that mitigate
1
John Markakis, Resource Conflict in the Horn of Africa, 1998.
11
natural perils, and incorporate in their overall strategic plan. The 1972/73 and 1983/84
droughts, in Ethiopia, for example, which claimed the lives of 200,000 and over 1 million
people, respectively, was due to neglect and lack of mitigating strategy. The only
methods available for the then governments were seeking international relief aid.
Some governments, for example Ethiopia, have realized the need to devise strategies to
combat drought. After the 1972-73 drought the then Military Government established
Relief and Rehabilitation Commission which was entrusted the duty of monitoring
drought and finding relief. The current Government established Disaster Prevention and
Preparedness Commission further strengthening the previous Commission. The 1987
drought was overcome before its effect. Moreover, the Government of Ethiopia
incorporates in its five year National Strategic Plan drought mitigating strategies which
include, for example, irrigation, water harvesting, eresearching drought resistance crops,
etc.
Chapter 2
Insurability of drought
It is observed in the previous section that agriculture can be affected by natural perils,
which is composed of natural elements, plant and animal diseases, and insect and other
pests. Consideration of these natural perils in light of risk management principle indicates
that much of the risks are risks, which should be transferred. The transfer of these risks
requires the willingness of the other end, the insurer, to accept these risks. The
willingness whether to accept or not, by the insurer, depends on the result of the
examination of the risks in light basic insurance principles.
According to a notable authority in insurance, Alfred Manes, the term insurability is
defined as follows:
“The essence of insurance lies in the elimination of the uncertain risk of loss for
the individual through the combination of a large number of similarly exposed
individuals who each contribute, to a common fund, premium payments sufficient
to make good the loss caused to any one individual”.2
The primary function of insurance coverage is based on, the risk must be uncertain, that
is, the risk must be accidental or fortuitous. The basic content of risk is uncertainty; it is
the “objective correlative of subjective uncertainty”3
Insurance policies provide coverage against losses that occur only on a chance basis,
where the insured cannot control the loss. Insurance cover is not provided for certain
2
3
Encyclopedia of the social sciences, 8, p.95
Willet, A.H., The Economic theory of Risk and Insurance (Columbia Univ.,1901),p.91
12
events. Life insurance, for example, will not pay a death benefit if the insured commits
suicide within the first two years the policy is in force. Even though death is a certainty,
the insured cannot buy a policy with the intention of suicide within the first two years.
Uncertainty is the function of probability. Uncertainty is zero when the probability is nil,
when probability increases uncertainty also increases. Until it becomes the maximum,
that is 50:100. Increase or decrease of probability beyond 50%, uncertainty will also
diminish (Ray, 1981). From this premise, therefore, there is no insurance cover for 100%
probable loss nor will there be cover for a loss which occur frequently, i.e., where
uncertainty approaches 100 per cent. By the same analogy, a loss that occurs too
infrequently is not likely to be insured, because it may not be numerous enough to be
subject to the law of large numbers – the basic underlying law of insurance.
The “law of large numbers” is based upon two propositions:
I. That in a very extensive number of trials or observations there exists a
demonstrably greater probability that the events under examination will occur in
numbers proportioned to their respective chances in a single trial;
II. That a number of trials or observations may always be assigned of so large an
extent as to make the probability of the events happening in numbers within any
specified limits of deviation from the proportion just mentioned, however
narrowly, those limits may be fixed, approach to certainty as closely as we please
by multiplication of experiments.4
Another important point in insurance is that uncertainties (not causes of uncertainties)
largely can be eliminated through a combination of a large number of similar risks. The
uncertainty is reduced and the risks become fairly predictable when they are considered
in the aggregate. Insurance not only reduces uncertainty through the combination of large
numbers of similarly exposed individuals, but in the case of a loss, evens out its burden
among such individuals. Incidence of loss is broad based through insurance so that the
group as a whole can absorb the shock of even the heaviest impact of loss with little
difficulty.
When setting premium rates, insurers must be able to estimate future losses. It is,
however, impossible to predict the precise moment fate will strike any one individual, or
the extent of a resulting loss. Therefore, insurers consider large groups of their clients
under the assumption that each is exposed to the same type of risk, and that each loss is a
separate event.
4
CF. Young, F.E., Insurance, 3rd ed. (Pitman, 1920), pp. 24-25.
13
Examination of drought risk in light insurance principles
Examination of drought in light of the two functions of insurability the reveals following
points:
Observation of past records of the occurrence of Elinino, which affects sub-Saharan
Africa, reveals drought is more of a certainty than fortuity to happen. Past records of
drought and famine in Ethiopia, and the occurrence of ENSO indicate a corresponding
relationship. Past ENSO events show notable correlation with the Ethiopian drought and
famine. In some year’s drought followed ENSO, while in some other years it occurred
together. Examination of this fact in light of probability-uncertainity ratio seems to be
more than 50 percent beyond the ideal 50:100 ratio. Certainty of drought risk is more on
the scale than uncertainty.
Considering drought risks in light of the law of large numbers, each insured is exposed to
the same type of risk, BUT each loss is not a separate event. The loss, arising due to
drought, affects all insured in the region where drought occurs.
The characteristics of fortuity can also be affected by human activities. Man can increase
the probability of loss or decrease it through his action. For example, past deforestation
and environmental pollution are few of the causes for significant climate change, which
include drought. Drought in this respect is man made and thus loses its fortuity.
The above analysis in light of the two basic insurance principles places drought in the
category of risks where it is not insurable due to the following facts:
 The uncertainty-probability ratio is beyond 50:100 making this risk certain;
 The law of large number cannot be applied because in one loss event the exposed
risks suffer the same loss;
 There are human activities that increase the probability of loss, like deforestation,
environmental pollution, etc.
Examination of drought from the point of view of the basic insurance principle, therefore,
looks very daunting whether or not to provide insurance cover for this peril. Drought,
however, is categorically similar with natural catastrophes like hurricanes, Katrina, Rita,
and Wilma, whose occurrence involves huge financial loss. Drought differs from these
catastrophes because of its lingering characteristics.
Today, catastrophes like hurricanes, earthquakes, and floods have insurance cover. By
devising and implementing underwriting measures like:





Adequate price,
Substantial deductibles depending on the degree of exposure,
Limiting indemnity,
Reinsurance,
Loss prevention,
14



Standardizing claims settlement procedures,
Exclusion of certain hazards,
Exclusion of particularly exposed areas, etc
This shows that what was considered to be impossible at one time is made possible
through sustained innovations and by devising various mechanisms. Terrorism risk which
at one time was excluded by insurers is now written by insurers by devising underwriting
measures and expanding the reinsurance capacity of the capital markets, and also
governments taking the role of insurers of last resort. The risk of drought disaster which
the world have witnessed its devastating effect on economic and social structure is still a
threat to the world development. It is hindrance to achieve the Millennium Development
Goal and eradication of poverty. It is, therefore, a risk, which must be dealt with.
Governments of developed countries, and the respective insurance industry since the
beginning of the twentieth century have been endeavoring to find insurance solution for
natural perils that affect the agricultural sector. As shown in the previous section,
governments in developed countries besides implementing agricultural mitigating
techniques, they encouraged the development of insurance through partnership with the
farmers and the insurance industry to enable the farmer stand any natural disaster with
own finance.
Following are some of the insurance solutions which have been implemented in both the
developed countries, and underdeveloped countries.
Insurance solutions for drought
Crop insurance
The first initiative of insuring growing crop against natural risks began in the USA, in
1898. The attempt failed, however, due to the high cost incurred by insurance companies,
which include, (1) lack of adequate data for proper actuarial calculation of risks, (2) too
low premiums, (3) limited area of operation with consequent limited spread of risks, (4)
acceptance of applications when the probabilities of crop failure existed, (5) attempt to
insure both yield and price (Ray, 1981).
Due to the aforementioned reasons and to the great depression of 1930, private insurance
companies who were operating in this business withdrew. The vacuum created was filled
out by the Federal Government, which subsequently passed Crop Insurance Act in 1938.
This act was subsequently amended in later years.
Governments in these countries considering Agriculture as one of their development
strategies encouraged commercial and individual farmers to buy insurance cover for their
agriculture as a supplement to other mitigating techniques. Since its inception, Crop
insurance, has gone through many changes and refinements. The refinements were
necessitated to match this product with a countries specific level of development,
education and by drawing lessons from those who have implemented. Following is a brief
15
description of the feature of crop insurance, as (Ray, 1981) puts it, and some of the
problems encountered in countries that have implemented it.
Coverage
Two major types of crop insurance cover are available. Specific Risk Crop Insurance, and
All Risk Insurance Cover.
Under specific risk coverage, insurance cover is for agricultural crops against fortuitous
specific perils like fire, hail, windstorm, flood, and drought. The most outstanding in this
kind of cover is insurance of growing crops against hail damage, which is practiced in
countries of Europe and North America.
All risk crop insurance is devised to protect the farmers against uncertainties of crop
yields arising out of vagaries of weather, such as drought, hot winds, excess moisture,
storms, hail, frost, floods, earthquake, and landslide; and plant and animal diseases and
animal pests (Ray, 1981).
Protection is given only against crop yields, excluding price fluctuation.
Duration of the insurance cover
The period of insurance cover runs from the time of planting of the crop to the time of
harvesting or removal from the field. In most cases, there is a date limit when the
protection is due to end for each type of crop. For example, in the USA, the end of cover
date for wheat and flax should not extend beyond 31 October.
Sum Insured
Sum insured does not exceed the investment value of the crop and varies through stages
of coverage, keyed to differences in the amount of investment during the growing season.
Procedure in case of loss
Occurrence of loss of or damage should promptly be reported in writing to the office
assigned this task. A written notice is also expected within 15 days where the loss is
concerning harvesting. Notice after 15 days after threshing or harvesting or the prescribed
calendar date is completed is not acceptable (example 31 October in case of wheat) which
ever is earlier. In case any such damage or loss occur before harvesting, the crop shall not
be harvested or removed nor any other use be made of the land until the insurance makes
inspection.
Adjustment of losses is considerable importance in indemnification of crop losses. A
properly carried out loss adjustment contributes to the well operation of the insurance
system.
The adjuster’s duty is various. For example,
16
He has to inspect reports of early losses and decide whether to give or not his consent of
to the claim.
He has to make some inspection throughout the growing season.
The bulk of the losses have to be adjusted after harvest. This involves many activities. It
must be determined that the loss was unavoidable and that it occurred from a cause
insured against and not for some other reason such as poor farming practices. The
acreage must be determined, which often requires actual measurement. Crops must be
inspected to see that they were harvested properly and to find out if there is any evidence
of lack of care. In addition, the yields obtained from the insured farm are often compared
with those of adjacent farms. Again, any production left in the field or un-harvested must
be appraised. Then the production that was harvested must be determined
Problems in implementing Crop Insurance
Underdeveloped countries who mostly rely on agriculture, in their economy, have
attempted to implement Crop Insurance to reap the benefit of compensation of natural
perils. India, who have now been transformed from underdeveloped to emerging
economy have attempted to implement crop insurance. In implementing this insurance
product various problems have been encountered. Analysis of these problems with the
intention of implementing crop insurance to many of African countries who face the risk
of drought reveals the following. Lesson can be drawn from the experience of India from
its implementation of crop insurance by analyzing problems encountered in light of the
African situation.
Lack of basic data
There is a requirement to have comparable statistical data of average yield and damage
by natural elements, diseases, and pests, as distinguished from those caused by
negligence, poor farming practices, and the like. This statistical data is useful for actuarial
work. Most of the farmers, in many African countries, are illiterate and they do not keep
yield records. Even most governments have no system of accumulating such important
data. Considering the experience of developed countries that first launched crop
insurance, these statistical data have accumulated over the years and until such time
actuarial rating was done, based on estimation. Replication of this same methodology is
possible, but very costly and discouraging to many of African countries with subsistence
level of economy.
Small and scattered risks
Farms in many African countries are small and scattered. The fact that these farms are
scattered and small creates difficulty for the loss assessor that he has to deal with
numerous farmers whose acts or omissions are likely to affect materially the interest of
the farm. The scattered nature of farms also contributes to the difficulty of conducting
17
farm inspection at different crop growing stages. This is exacerbated by the fact there are
no adequate number of trained staff to carry out this task.
Lack of awareness of the benefit of insurance
The benefit of insurance is not much known, among farmers in many, African countries.
Most farmers live in countries classified below poverty line. Farmers in majority of
African countries lack appreciation of what insurance is about. Application of crop
insurance in most African countries is difficult due to inability of most farmers to pay
insurance premiums. Application of crop insurance, therefore, demands that farmers be
charged low premium rates, and the balance subsidized by their respective governments.
This in turn is also difficult for most of the African governments are in budgetary
constraints due to many economic and social factors.
Inaccessibility of farm holdings
Many of the farmer’s villages lack even minimum infrastructure, which connects them to
the main cities and main roads, which make them inaccessible for assessment of crop
losses. Technical ability of farmers including the use of new methods of farming differs
from place to place in the same country. These varied agricultural practices results in
different yields making it difficult to establish insurance coverage and premium rates.
Wide variety of agricultural practices
Many of the countries in Africa, even within the same country, have varying agricultural
practices because of variation of soil, climate, water and drainage facilities. Differences
in technical ability and the resources fullness of the farmers including the use of new
method of farming such as the application of chemical fertilizers and composite manure,
use of improved seeds as well as modern implements and also of pest and disease control
measures are also varied. Such varied agricultural practices often result in variability of
yields as a consequence of which create difficulty when establishing premium rate as
well as making loss assessment difficult.
Lack of adequate infrastructure
Absence or inadequate development of infrastructures in developing countries is another
problem to implement crop insurance. As was observed from developing countries who
have implemented crop insurance, there is a regular need to have close contact and
supervision on farms, throughout the cropping season, by insurance experts, insurance
offices. There is also a need for immediate assessment of loss by the insurance company
and for the payment of indemnity.
18
Limited financial resource to launch crop insurance
To launch crop insurance requires, at least at the initial stage, considerable financial
support by governments. The resources available in many African countries are limited.
Priority may be given to other economic development overlooking agricultural insurance.
Innovative measures to tailor crop insurance
In overcoming the above and other difficulties, many developing countries, like India, for
example, have done innovative research to make crop insurance compatible with their
level of economic, technological, and social development.
In 1972, Genral Insurance Corporation of India (GIC) launched an experimental crop
insurance scheme for cotton crop on individual approach (Muntaqa, 2006). Under this
scheme, a fixed guaranteed yield was offered to selected farmers and losses were
assessed individually. The outcome of the experiment, were similar with the problems
cited earlier. A study was commissioned, again, to GIC to conduct Pilot Crop Insurance
Scheme (PCIS) in 1979. Key features of this scheme were,






The scheme was for all natural risk, and it was on an “Area approach”, which
means, at the time of loss, indemnity was uniformly applied for all insured
farmers irrespective of their individual experience.
The scheme covered Cereals, Millets, Oilseeds, Cotton, Potato, and Grain
It was restricted to farmers who take loans and it was on voluntary basis.
The risk was shared between GIC and the State Government in the ratio of 2:1
The maximum sum insured was 100% of the crop loan, which was later increased
to 150%
50% insurance charges, which is payable by small/marginal farmers, was
subsidized by the State Government and the Government of India on 50:50 basis
Based on the experience gained from the pilot scheme, the Government of India launched
Comprehensive Crop Insurance Scheme (CCIS), in 1999. The main features include:




It covered farmers who borrowed money, for growing food crops & oil seeds,
from banks. The coverage is restricted to 100% of crop loan, subject to a
maximum of Rs 10,000/ farmer.
Central and State Governments subsidized 50% of the premium payable by small
and medium farmers.
Central and State Government shared premium and claims in the ratio of 2:1
The scheme is administered under multi agency model, involving Government of
India, Departments of State Governments, Banking Institutions and GIC.
19
Index-Based Weather Insurance
In the foregoing section of Crop Insurance, as insurance solutions for natural catastrophic
losses in Africa, we have observed the difficulties arising upon trying to implement this
insurance scheme. Crop insurance, which developing countries are working on and which
have proved effective for developed economies, did not prove successful in developing
countries, especially in Africa, where natural disaster like drought is pushing the
continent below poverty line. This was not successful, especially, for small holders of
farms, which are numerous in Africa, and above all the cover excludes drought. We have
also seen that because of fragmentation of farms, conducting crop insurance operation is
difficult. Moreover, African countries cannot subsidize this insurance solution, as it is
done in developed countries, due to financial constraints, and other important economic
programs, which demand priority. We have further observed the absence of recorded
yield database, in many of African countries, where premium rates and loss assessments
could be based for establishing premium rate and loss payment. Besides this crop,
insurance is susceptible for moral hazard.
New approaches in finding appropriate insurance solutions for many of African farmers,
which most of them are small and medium have been on demand. The farmers, whom
heavily depend on rainfall, would immediately face famine upon reduction or loss of
rainfall even in one major crop season. This new approach, rather than indemnifying
natural disasters, specifically drought, based on crop yield, establishes another
methodology. By correlating the risk of loss, or, lack of rainfall with crop yield, indexBased Weather Insurance attempts to provide insurance cover for small and medium
farmers of Africa.
General feature of index-based insurance
Index-based weather insurance operates based on the mechanism of hedging. To hedge is
to remove RISK from a transaction that will take place some time in the future (Ryland,
1998). To create a hedge, one must first recognize what the exposed risk is.
Traditionally, hedging of risks started through financial derivatives, where this is
structured as futures, call or put options, based on underlying traded instrument like
equities, and bonds. The energy industry, in the developed countries like USA has been
using weather derivatives to hedge the variability of weather that affects the consumption
of energy. For example, the risk of a reduced consumption of oil for household heating
system due to higher than normal temperatures will impact the revenue of energy
supplying company. To remove the risk of unexpected reduced revenue, energy
companies structured weather derivatives similar to financial derivatives but without
these derivatives representing underlying risk. This means weather derivatives are not
designed to hedge an underlying traded instrument, rather to hedge other risks affected by
the weather.
Similar analogy is applied to combat the risk of natural catastrophe, especially drought in
the developing countries. Drought as we have observed in the previous sections is the
20
gradual result of absence of rainfall. If drought affects the production of crop, and the
cause for drought is loss of rainfall the underlying risk, therefore, is the variability of
rainfall. The main concern here is to find a measurable underlying risk that is the cause
for drought.
How index-based Weather insurance works
The core idea behind index-based weather insurance is to establish correlation between
rainfall risk and crop yield. The establishment of the correlation creates a foundation to
measure, and compare, objectively, the rainfall variation which affects crop yield. This
will then assist to compensate the insured accordingly. The main steps involved in
establishing the correlation is as follows:

Identify a measurable objective risk, in this case it is rainfall. Others like
temperature, wind speed, etc can be objective risks.

Gather historical data from regional weather stations and determine the mean
rainfall for a given period of the farm. Given period denotes the period that covers
from sowing to harvesting, for example.

Compare this with the corresponding crop yield, from sowing to harvesting.

Identify rainfall cycles that are important to crop production. This involves
identifying the crop cycle periods that require rainfall from those that do not
require.

Develop a weighting that allows differentiating the importance of rainfall in
different growth period and to shape the model so as to take into account the fact
that excess rain may be wasted without contributing to plant growth.

Once a sufficient degree of correlation is established between rainfall and yield,
and the index has been weighted properly, an agricultural producer can hedge his
production risk by purchasing a contract that pays in case rainfall falls below a
certain threshold. Farmers can elect coverage for a given period taking into
consideration the crop cycle and the marketing cycle.5

Based on the above core idea of weather indexed insurance, many countries have
implemented this scheme.
Examples of countries that have implemented Index-based Weather Insurance is shown
in Appendix 1
5
Erin Bryla, The Use of Price and Weather Risk Management Instruments
21
Chapter 3
Recommendations for National Drought preparedness
The frequent occurrence of drought is likely to happen in light of the current climate
change and global warming. Drought, therefore, demands multi-faceted measures.
Devising strategies by governments, that include, prevention, preparedness, mitigation,
and, response and rehabilitation is vital. The following are some of the few strategies that
ca be taken.
 Devising water management, increased irrigation water efficiency, reduced water
consumption the level of drought can be prevented.

Measures that encourage crop substitution, developing drought resistant crops,
keeping of balance between livestock and rangeland production are few of the
mitigation measures that can be pursued.

Encouraging water harvesting which enriches precipitation

Increased public awareness and encouraging public participation in efficient use
of limited water resources, both for irrigation and drinking.

Governments should be prepared in overcoming the occurrence of drought. This
includes, creation of food reserve at national level, establishment of early warning
system.
Establishment of early warning system, especially, vulnerability warnings and
drought information networks.

In the background the above strategies, insurance solution can complement mitigation of
drought. These strategies are conditions for the insurability of drought. Without the above
strategies, the risk of drought is more of a certainty. The presence of the above strategy
enhances the fortuity of drought, which makes it insurable.
Implementation of weather indexed insurance in conjunction with
crop insurance
It is a hard fact that drought is the primary peril that affects crop yield. The drought
problem of many of African countries, which was not addressed by crop insurance, due to
various hindrances mentioned earlier, is resolved by weather insurance. Weather-indexed
insurance, which addresses the serious problem of drought, is a step forward.
Crop insurance since its inception in 1898 has evolved through many refinements over
the years, and have reached a stage where it can stand out many moral hazards and
administrative problems, provided there is the required infrastructure and education level
of the country where this is implemented. Moreover, crop insurance, which is covering
22
all natural perils, is in much use in developed countries and it is an enabler for self
reliance rather than seeking aid.
India can be a good example to draw a lesson from because it has gone through different
schemes (1972 to 1999) to adapt and customize crop insurance to the countries level of
economic, social, and technological development.
It cannot be concluded, therefore, that crop insurance is, entirely, not applicable to
African countries. If drought, the main threat of development can be mitigated by
weather-indexed insurance, the remaining perils, which are also a threat to Agricultural
production, must be addressed. Agricultural perils like, flood and inundation, plant
diseases, insects, and other pests, over which the farmer has no control, should also be
addressed by insurance solutions. Feasible insurance product for these perils is crop
insurance.
The insurance industry in African countries should take the initiative, in collaboration
with international institutions like the WB, in developing a hybrid insurance solution that
can integrate weather-indexed, for drought, and crop insurance for the rest of the perils.
Risk partnership
Drought having higher than 50:100 uncertainty-probability ratio, and the occurrence of it,
in one area, in an event, affecting all insured contrary to the law of large numbers, will
fetch expensive premium for the insured. Insurance companies, as noticed earlier, accept
risky businesses with cautious underwriting measures, like, setting adequate price,
substantial deductibles, and limiting the amount of indemnity, are some of the
underwriting measures employed by insurance companies. From the insured perspective
the measures taken by insurance companies make the premium payment and the loss
sharing expensive, which will be seen, as discouraging.
It is at this juncture that governments should involve themselves in the risk partnership
with the insured and the insurer. Lessons drawn, from countries like India, in their crop
insurance schemes, show the involvement of the government in sharing risks with the
insured and insurers have encouraged the awareness of the benefit of insurance, and
enabling the farmers to stand on their own feet at the time of drought.
It is true that governments, especially, in African countries, may be reluctant to
participate in Risk Partnership because this involves subsidizing the farmer, from the
national annual budget, by forfeiting other economic and social development programs.
In one way it is a better option for these governments rather than hurrying to relief the
occurrence of drought and seeking international aid. For many African countries, which
are in the poverty line, however, this will be a dilemma. These countries need assistance,
for a limited period of time, in their endeavor to fight drought. If assistance is extended in
subsidizing the farmer, for fixed years, the farmers can be strengthened to buy insurance
cover by themselves. Parallel to this governments can proceed in their other economic
development program which both of these will eventually help attain the millennium
23
development goal. The kind support already initiated by International institutions, like the
World Bank (WB), World Food Program (WFP), Food and Agricultural Organization
(FAO) should continue, as this move is better than relief aid.
Conclusions
Drought is a serious problem and impediment to development. It is an obstacle to world
development because it will not be possible to eradicate poverty globally. Combating
drought, therefore, requires a multi-faceted action globally and by individual countries,
that faces a recurrent drought.
Individual countries, especially in Africa, have to exert all their efforts in actions that
improve the eco system. This could be realized when these countries begins incorporating
drought management in their national strategies. Development efforts in infrastructure,
and creation of awareness and education in how to combat drought should be given
priority. Empowering the farmers to financially support themselves at the time of natural
disaster, like drought, for example, should be part of the program of all African countries.
When all the efforts explained above are in place, insurance can be considered as a
supplementary solution to the above measures that should be taken by governments. As
discussed earlier, without these development and drought management strategies the risk
of drought will become certain rather than fortuity. The insurance products that are
available in the market have to be further renovated to match the condition and
purchasing power of the majority farmer residing in African countries.
24
References
 Jam Inam Ullah, 2004, The Economic and Social impact of drought
on the rural poor: The Case of Pakistan
 Tsegaye Woldegiorgis, El Nino and Drought Early Warning in
Ethiopia
 Economic impacts of drought
(http://www.isse.ucar.edu/sadc/chptr3.html)
 FTC Foulks Lynch, Strategic Financial Management
 http://www.rgsq.gil.com.au/heath18c.htm, Royal Geographical Society of
Queensland, managing the Droughts: Anticipating the risks – would forecasts
help?
 Dr. Surjit Singh, WEATHER INSURANCE, AND DERIVATIVES IN
DEVELOPING COUNTRIES. AN ALTERNATIVE TO AGRICULTURAL
INSURANCE, FAIR Review, Issue No. 138, December 2005, Issue No 139,
March 2006, p1
 http://kyclim.wku.edu/RADD/drought/mitigation.html
 Munich Re Group, Knowledge Series, Weather catastrophe and
climate change. Is there still hope for us?
 Bryla, E., “The Use of Price and Weather Risk Management Instruments”, Paving
the Way Forward for Rural Finance an International Conference on Best Practices
 Swiss Re, Reinsurance matters, a manual of the non-life branch
 Mwita Rukandema and Gűrkan, Food Emergencies, food Security and Economic
Progress in Developing Countries, FAO Corporate Documentary Repository
 http://www.commondreams.org/cgibin/print.cgi?file=/headlines02/0721-07.htm, Famine Blamed on
Pollution, Joseph B Verranga
 P.K. Ray, Agricultural Insurance, Theory and practice and application
to developing countries, 2nd Edition, 1981
 Philip Raikes, Modernising Hunger, 1988
 John Markakis, Resource Conflict in the Horn of Africa, 1998
 Getachew Diriba, Economy at The Cross Roads, Famine and Food
Security in Rural Ethiopia
 Disaster Prevention and Preparedness Commission, Early Warning
System
 National Meterological Services Agency of Ethiopia, Assessment of
Drought in Ethiopia, January 1996
 Philip Ryland, Pocket Investor, 1998.
 Modernizing Hunger, Philip Rakies, 1988, pp 73
 John Markakis, Resource Conflict in the Horn of Africa, 1998, pp31
 Index based weather insurance, EIC’s operation manual
25
Appendix 1
Experiences of countries that have implemented index-based
weather insurance
Ethiopia
Coverage features

The index based weather insurance is designed to be applied, on a pilot
project basis, to farmers that are growing Maize around Alaba, a district
found in Southern Region of the country.

The policy compensates farmers who are within 20 KM radius from Alaba
against a rainfall shortfall for their maize.

For the areas surrounding the pilot, Alaba Woreda, maize sowing is
expected to occur between April 1, and 10 May.

Sowing is taken to have occurred in the dekad that the weather station
receives cumulative rainfall of equal to or more than 30 mm.

The sowing period is classified in four dekads. Insurance starts on the first
day of the first dekads.

If non of the applicable dekads receive equal to or more than 30 mm of
rainfall and this is confirmed by the accredited rainfall station, sowing is
assumed to have been unsuccessful and Birr 200 is payable to the insured
and the contract terminates.

The total number of days required for the growth of maize is estimated at
183 days or 18.3 dekades. These are the days required from day of sowing
to maturity.

The rainfall at each month of maturity is given weight according to the
importance it gives to the crop growth. The sum of the deficit rainfall of
each month in the growth period multiplied by the corresponding weight
gives the weighted deficit rainfall. If the weighted deficit rainfall is greater
than the trigger, there will be payout to the farmer.
26

There is also a level of deficit rainfall at or above which the crop is
considered a crop failure. This level of deficit rainfall is 300 mm. At this
level total sum insured is payable.
Contract monitoring process

It is important that all stakeholders in the contract closely monitor the
development of events at the weather station.
India
In India, a viable crop insurance scheme to provide insurance protection against
rainfall deficit has been developed to mitigate the adverse financial loss due to
weather variation.6The objective of the scheme is to compensate insured farmers
from anticipated financial loss due to adverse rainfall incidence. What is required
from the insured is, to submit to the insurance company, the insured object, i.e.
the actual crop acreage the insured desires to get insured.
Various options is provided for acceptance of risk depending on the schedule of
Metrological Departments’ Rain gauge stations, and pursuant to this, risks shall
be accepted until the onset of the rainfall season.
Generally, the scheme coverage is based on a payout of claims on a graded scale,
upon adverse incidence of rainfall. The “Actual rainfall” incidence during the
period of insurance shall be measured against the “Normal rain fall” incidence
(based on historical data) of the specific Metrological Department (MD) raingauge station, and deviations if any recorded.7
The insured can purchase coverage from out of three options, explained below:
Option A:
Coverage is against adverse deviations beyond 20% in “Actual Rainfall” (in mm)
for the entire season. “Actual rainfall” is the monthly cumulative rainfall during
the whole season. Periods for short and medium duration crops are considered.
The payout structure is designed in such a way that the yield output elasticity (i.e.
sensitivity of a crop to given adverse deviation in rainfall for a particular crop) is
correlated to various ranges of adverse deviation in rainfall.
6
FAIR central office, FAIR Review, Issue No. 140, June 2006
7
Ibid
27
The sum insured per hectare is the maximum payout corresponding to the
maximum potential loss. The claim payout shall be on a graded scale (in slabs),
corresponding to different degrees of adverse deviation in Actual Rainfall.8
Option B:
Rainfall Distribution Index
Coverage is against deviation beyond 20% in “Actual Rainfall Index” from
“Normal Rainfall Index” for the entire season. The index reflects the ideal and
practical method of assessing the rainfall requirements and therefore is more
efficient compared to aggregate rainfall. The index is constructed to maximize the
correlation, by assigning “Key Factor Weights” for weekly rainfall the ‘season
span’. The key factor weights are based on sound scientific research work. The
indexes (normal and actual) are both Metrological Department Stations and crop
specific. The sum insured per hectare is the maximum payout corresponding to
the maximum potential loss. The claim payout will be on a graded scale (in slabs),
corresponding to different degrees of adverse deviation in Actual Rainfall index.
Option C:
Sowing failure
Coverage is against adverse deviation in “Actual Rainfall” (in mm) from “Normal
Rainfall” (in mm) beyond 40% during the sowing period. The sum insured per
hectare is the maximum input cost incurred by the cultivator till the end of the
said period, and is pre-specified. The claim payout shall be on a graded scale,
corresponding to different degrees of rainfall deviation. The maximum payout of
100% of sum insured is available of 80% and above.
Sum Insured: sum insured for option A and B is pre-specified and normally is
between cost of production and value of production. In the case of option C,
“Sowing Failure”, it is the maximum input cost incurred by the cultivator till the
end of the sowing period, which again is pre specified.
Premiums are pre-fixed and vary from option to option and crop to crop. The
premium for different crops (areas) coverage options range between 2% - 8%.
Coverage procedures – Acceptance of Risk:
The coverage at the grass-root level will be made mostly through the network of Rural
Finance Institutions (RFI), particularly Cooperative Sector Institutions. The Insurance
Company may also directly market the insurance scheme subject the availability of its
network.
8
Ibid
28