weather risk management indian agriculture risk: case study 11 dan tomlinson galileo weather risk...

Weather Risk Management

Indian Agriculture Risk:Case Study 11

Dan Tomlinson

Galileo Weather Risk Management

http://www.whitemountains.com/default.cfm


Alternative risk taking arm of the White Mountains Insurance Group (NYSE: WTM)

Business is focused globally through relationships with banks, intermediaries and direct customers

Wholly-owned subsidiary of White Mountains Insurance Group

$19BN global insurance company with $4BN GAAP equity

Galileo’s transactions are guaranteed by an affiliate – OneBeacon – a US P&C carrier rated “A” by S&P

Global full-service weather market participant

Offers protection against adverse temperature, precipitation, snowfall and windspeed as well as other weather index based products.

Galileo Weather Risk Management Ltd

Who Am I?



Weather Risk Management in India

Indian Agriculture: Very High Local Value

• India sustains 16% of the world’s population on 2.4% of land resource• Agriculture contributes 24% of the Indian GDP• Livelihood support to two-thirds of the population• Employment to 57% of work force• Single largest private sector occupation• Raw material source to large number of industries like (textiles, silk, sugar, rice, flour mills, milk

products)




But:

Small farm size: Average of 1.4 hectares

Large number of farm holdings

Predominantly Rain-fed Agriculture

Large number of farmers still practice predominantly sustenance agriculture: Hand to Mouth

Many areas prone to extremes: Flood and Drought.

Agriculture is a fragile economy.




General Weather Factors

• Indian Agriculture is predominantly controlled by monsoon • Up to 80% of variability in crop yields is attributable to weather.• Less than 40% of net sown area irrigated.• Most Irrigation from non-perennial sources.• High risk / low margin production inhibits improvement of crop production techniques.

Weather hazards:• - High Rainfall • - extreme Low and High temperatures • - Droughts




Agriculture is Complex

Different weather has a different effect at different periods.

For Example:

Pre-Sowing SeedingVegetative PhaseReproductive PhaseMaturing Phase

Each being different for different crops.




The Message is Clear

The Wrong Weather at the wrong time will impact a very large proportion of the population.

For Individuals the Impact will be catastrophic.

Impact is not only current season but also Seasons to come.




How Weather Risk Management Can Help

As described in this meeting:

Clear definitions of payout enable swift payment to those who need it most and fastest.

Prevents loan defaults enabling further loans for coming seasons.

Clear definitions of payout enable access to International Capital.




State and Government Assistance

Government subsidy of premium facilitates wider access to the product.

Compulsory purchase of product for farmers taking loans from financial institutions.




Everything coming together:

Similar risks for a large proportion of population.Huge proportion of national economy at risk.High Motivation to be protected at both Macro and Micro Level.Government incentive / subsidy allowing more access to protection.Compulsory purchase of protection for those taking loans.

This should all mean a very high take up of product and as a result a very large potential risk transfer.




BUTThe Weather Risk Management market relies on data.

NO DATA = NO DEAL



Weather Risk Management: Four Steps

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40

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Apr May Jun Jul Aug Sep

Avg Temp Revenue1 - Identify significant exposure(s) to weather

2 - Quantify the impact of adverse weather.

3 - Structure a contract that pays when adverse weather events occur

4 - Execute contract in optimal form to address business concerns

Coverage Layer Client Galileo

premium

coverage




Here's the Good News

Indian Weather Data is Excellent.

Recording is diligent. Error Checking is amongst the most thorough in the world.There are many many stations covering a very diverse area.




Here's the Bad News

If you can get it.




Here's the Bad News

To the outsider the Indian data system is highly confusing.

I am still not sure if what I am saying is actually correct but as far as I can tell it is.

I represent International Capital




Here's the Bad News

There is currently about a 3 year lag between data being recorded and finally being archived at the Central IMD Offices.

Access to data is to say the least difficult.

Data is recorded by different agencies:Drought Monitoring CentreCoffee BoardPrivate Weather Stations Next to IMD stations.




Here's the Bad News

Data is handwritten in Legers. Not Digitised.

But you can’t take a photocopy.

Bureaucracy

Time.

Settlement Data.




Here's the Bad News

The largest provider of Agricultural Insurance is allowed to use data.

IMD will not allow them to share (even at a cost) all data with their Reinsurers.




Galileo Participation In India So Far

Taken part as a Reinsurer of AICI Pilot Projects.

Have extended coverage to smaller scope projects via financial institutions.

Have covered commercial institutions with an interest in crop product.




Galileo Experience In India So Far

The Large project with the greatest potential to reach the people who need it the most is the most difficult to underwrite due to lack of data. Not because its not available but because we cant get it.

Smaller Scope Commercial applications for financial institutions and corporate customers have the least problems with data.




Pilot Projects:

Many of the projects in India so far have been Pilot Projects.

Pilot means that the user of cover learns.

Pilot also allows the provider of cover to learn.

Danger is that demand will quickly outstrip risk capacity if capacity cannot get underwriting information.



Contact

Dan Tomlinson

+44 20 7469 0035 (W)+44 7973 426 233 (M)

[email protected]

mailto:[email protected]

http://www.whitemountains.com/


weather risk management indian agriculture risk: case study 11 dan tomlinson galileo weather risk...

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