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MALAWI’S EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215 Email:[email protected] Website:www.metmalawi.com African Ministerial Conference on the Environment (AMCEN), Nairobi, Kenya 25 – 29 May 2009

MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

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Page 1: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

MALAWI’S EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME

By

Gray MunthaliMeteorological Services

P.O. Box 1808Blantyre

Tel: +265 1 822014Fax: +265 1 822215

Email:[email protected]:www.metmalawi.com

African Ministerial Conference on the Environment (AMCEN), Nairobi, Kenya

25 – 29 May 2009

Page 2: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

Purpose of the Insurance SchemePurpose of the Insurance Scheme

The purpose of this Insurance scheme is The purpose of this Insurance scheme is to use an index-based weather to use an index-based weather derivative contract to transfer the derivative contract to transfer the financial risk of severe and catastrophic financial risk of severe and catastrophic national drought that adversely impacts national drought that adversely impacts the Government’s budget to the the Government’s budget to the international risk markets. international risk markets.

It will also provide micro weather It will also provide micro weather insurance for farmers and agribusinesses insurance for farmers and agribusinesses in Malawiin Malawi

Page 3: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

WEATHER AND CLIMATE CHANGE RISK WEATHER AND CLIMATE CHANGE RISK SECTORS INCLUDE:SECTORS INCLUDE:

AgricultureAgriculture Water ResourcesWater Resources HealthHealth EnergyEnergy InfrastructureInfrastructure Social ProtectionSocial Protection LivestockLivestock TourismTourism Construction IndustryConstruction Industry GenderGender

Page 4: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

Weather Risk ManagementWeather Risk Management

What is it?What is it?• Financial protection against adverse weather conditions that result in Financial protection against adverse weather conditions that result in

losses or additional costslosses or additional costs• Contracts can be structured as insurance or derivativesContracts can be structured as insurance or derivatives• Based on the performance of a specified weather indexBased on the performance of a specified weather index• Payouts are made if the index crosses a specified threshold at the end Payouts are made if the index crosses a specified threshold at the end

of the contract periodof the contract period Objective and timelyObjective and timely

Malawi context at the national level:Malawi context at the national level:• GoM is concerned about the impact of rainfall on maize GoM is concerned about the impact of rainfall on maize

productionproduction• Can provide payouts in the event of contractually specified Can provide payouts in the event of contractually specified

shortfalls in rainfall during growing seasonshortfalls in rainfall during growing season• Essentially “budget insurance” for GoMEssentially “budget insurance” for GoM• Timely access to cash in times of crisis, reducing reliance on Timely access to cash in times of crisis, reducing reliance on

international appealsinternational appeals

Page 5: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

Prerequisites for a Risk Transfer Prerequisites for a Risk Transfer ProgramProgram

An index that captures national drought risk in Malawi An index that captures national drought risk in Malawi • Government’s Maize Yield Assessment ModelGovernment’s Maize Yield Assessment Model• Rainfall-based FAO model used since 1992 to forecast maize Rainfall-based FAO model used since 1992 to forecast maize

productionproduction High quality historical weather data and reliable real-time High quality historical weather data and reliable real-time

communication is key for risk transfercommunication is key for risk transfer• Malawi Met Office data reliable: Malawi Met Office data reliable:

23 stations with over 40 years, few gaps 23 stations with over 40 years, few gaps • Can provide real-time data required by Can provide real-time data required by

market market Premium:Premium:

• DFID supported initial premium cost DFID supported initial premium cost in piloting phase starting 2008 in piloting phase starting 2008

International market wants to diversify and grow their portfolios,

wants new risks

Page 6: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

Why Climate Change Insurance Why Climate Change Insurance SchemeScheme??

In 2004, the National Smallholder Farmers Association In 2004, the National Smallholder Farmers Association of Malawi (NASFAM) of Malawi (NASFAM) wanted to expand its operations wanted to expand its operations and grow the Malawi groundnut market domestically and grow the Malawi groundnut market domestically and for exportand for export• Greater output potential for farmers, profit; reliable yields; Greater output potential for farmers, profit; reliable yields;

lower risk of disease; will receive training by NASFAM; access to lower risk of disease; will receive training by NASFAM; access to high quality seed; export potentialhigh quality seed; export potential

• Farmers needed financing to purchase quality seed from Farmers needed financing to purchase quality seed from NASFAM NASFAM

Perceived high risks from drought and high loan default Perceived high risks from drought and high loan default rates deterring financing institutions from providing rates deterring financing institutions from providing loansloans• 2004/2005 drought led to 2004/2005 drought led to recovery rates for lenders in the recovery rates for lenders in the

range 50-70%range 50-70%• Major government and donor lending program was discontinuedMajor government and donor lending program was discontinued• Two microfinance institutions stopped lending to agriculture, Two microfinance institutions stopped lending to agriculture,

many reduced activitiesmany reduced activities

Page 7: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

Pilot Details, 2005-2006Pilot Details, 2005-2006

Loans to cover seed, insurance premium and interest:Loans to cover seed, insurance premium and interest:• Opportunity International Bank of Malawi Opportunity International Bank of Malawi • Malawi Rural Finance Corporation Malawi Rural Finance Corporation

Program linked to larger NASFAM sensitization program on groundnutProgram linked to larger NASFAM sensitization program on groundnut Policies:Policies:

• Insurance Association of Malawi (seven companies pooled the risk) Insurance Association of Malawi (seven companies pooled the risk) • Premium: 6-7%, Max Payout per farmer: Loan Size given by bankPremium: 6-7%, Max Payout per farmer: Loan Size given by bank

Seed & Product Distributor:Seed & Product Distributor:• NASFAM: Groundnut in 2005, Groundnut & Hybrid Maize in 2006NASFAM: Groundnut in 2005, Groundnut & Hybrid Maize in 2006

Participants:Participants:• Farmers all members of NASFAM clubsFarmers all members of NASFAM clubs• 2005: 900 farmers, 4 weather stations, sum insured $35,0002005: 900 farmers, 4 weather stations, sum insured $35,000• 2006: 1710 farmers, 5 weather stations, sum insured $110,0002006: 1710 farmers, 5 weather stations, sum insured $110,000

Insurance Payout Payment details:Insurance Payout Payment details:• Payout: channeled from insurance company directly to the bank; Payout: channeled from insurance company directly to the bank; • No Payout: farmers benefit from selling the higher value productionNo Payout: farmers benefit from selling the higher value production

Page 8: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

Pilot ResultsPilot Results Major Achievements:Major Achievements:

• Unlocking credit facilities for smallholder farmersUnlocking credit facilities for smallholder farmers• Access to high yielding seeds and fertilizersAccess to high yielding seeds and fertilizers• Generated high-level of interest from banking sectorGenerated high-level of interest from banking sector

But… But… • program discontinued in 2007program discontinued in 2007– Groundnuts market prone to side-selling, leading to non-weather Groundnuts market prone to side-selling, leading to non-weather

related defaultsrelated defaults– Emerging agricultural supply chain with many problems greater Emerging agricultural supply chain with many problems greater

than weatherthan weather– Banks stopped lending to groundnuts in 2007, so no need for Banks stopped lending to groundnuts in 2007, so no need for

insuranceinsurance

Other lessons learned:Other lessons learned:– Stand alone product had no takersStand alone product had no takers– Premiums will always have to be pre-financed through loansPremiums will always have to be pre-financed through loans– Distributor channel operational capacity criticalDistributor channel operational capacity critical

Page 9: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

……Malawi: 2007 OnwardsMalawi: 2007 Onwards Focus on Focus on establishedestablished agricultural supply chains, e.g. tobacco agricultural supply chains, e.g. tobacco

• 70% of current loan portfolios, has a maize loan component 70% of current loan portfolios, has a maize loan component • Economies of scale and critical diversification for insurersEconomies of scale and critical diversification for insurers• Tie-in with emerging contract farming relationships in MalawiTie-in with emerging contract farming relationships in Malawi

Since 2007:Since 2007:• Working with 3 banks and 2 contract farming companies, more Working with 3 banks and 2 contract farming companies, more

interestedinterested 2600 farmers insured in 2008, portfolio size of $3 million2600 farmers insured in 2008, portfolio size of $3 million Currently limited expansion due to lack of local weather Currently limited expansion due to lack of local weather

stationsstations Access to reinsurance market since 2007Access to reinsurance market since 2007

• Working at farmer and risk-aggregator (bank) levelWorking at farmer and risk-aggregator (bank) level• Developing off-the-shelf products for other to support emerging Developing off-the-shelf products for other to support emerging

supply chains and contract farming relationshipssupply chains and contract farming relationships Cotton, tea, soybeans, paprika, other upcoming crops in Cotton, tea, soybeans, paprika, other upcoming crops in

need of financeneed of finance Banks and agri-businesses see this as a product for both Banks and agri-businesses see this as a product for both

themselves and farmersthemselves and farmers

Page 10: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

1. FARMERS1. FARMERS Gives farmers the ability to mitigate drought riskGives farmers the ability to mitigate drought risk

• Secure access to finance and inputs for improved productionSecure access to finance and inputs for improved production• Possibly improve long-term production and revenuesPossibly improve long-term production and revenues

2. AGRIBUSINESSES2. AGRIBUSINESSES

Weather risk management can also serve to enhance the efficiency of Weather risk management can also serve to enhance the efficiency of agricultural supply chains agricultural supply chains • Increased use of ag technology and inputsIncreased use of ag technology and inputs• New product offerings and servicesNew product offerings and services

3. BANKS3. BANKS Protects both producer and loan provider from weather-related production Protects both producer and loan provider from weather-related production

risksrisks• Allowing banks to expand their lending portfolios in a managed wayAllowing banks to expand their lending portfolios in a managed way• Managing weather risk can influence outreach, quantity, and cost of Managing weather risk can influence outreach, quantity, and cost of

lendinglending Helps financial institutions in determining their exposure to weather risk– Helps financial institutions in determining their exposure to weather risk–

adding value even without insuranceadding value even without insurance

4. INSURERS 4. INSURERS Gives insurers the opportunity to re-enter rural marketsGives insurers the opportunity to re-enter rural markets

• Agricultural markets are relatively untappedAgricultural markets are relatively untapped

Who is the client and why?Who is the client and why?

Page 11: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215
Page 12: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215
Page 13: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

NO STATION ADD STATUS OTHER AUTO-GAUGE STATIONS

REMARKS

1 CHITIPA Karonga Full Automatic MisukuNthalire

2 KARONGA (AIRPORT)

Karonga Full Automatic VinthukutuLupembeBaka

Baka is under Agricultural Research (AR)

3 RUMPHI Mzuzu Full Automatic BoleroBwenguLivingstoniaNchenachena

Nchenachena and Bolero are under Agricultural Research

4 MZIMBA Mzuzu Full Automatic ZombweChikangawaMbalachandaEmfeniEuthini EmbangweniMbawa

Mbawa is under Agricultural Research

5 MZUZU (AIRPORT)

Mzuzu Full Automatic KavuziEkwendeni

6 LUNYANGWA Mzuzu Full Automatic Under Agricultural Research

7 NKHATA BAY Mzuzu Full Automatic Chintheche, Mkondezi Mkondezi is under AR

STATION NETWORK PLANNING LISTSTATION NETWORK PLANNING LIST

Page 14: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

NO STATION ADD STATUS OTHER AUTO-GAUGE STATIONS

REMARKS

8 LIKOMA ISLAND

Mzuzu Full Automatic

9 KASUNGU Kasungu Full Automatic

MwimbaKFCTA

10 DOWA Kasungu Full Automatic

Madisi

11 Mponela

12 NTCHISI Kasungu Full Automatic

Malomo

13 MCHINJI (TEMBWE)

Kasungu Full Automatic

Mchinji Boma Tembwe fully operational and was supported by World Bank

14 NKHOTAKOTA Salima Full Automatic

Dwangwa

15 SALIMA Salima Full Automatic

ChitalaLifuwu

Both auto-gauge stations are under Agricultural Research

16 LILONGWE (KIA)

Lilongwe Full Automatic

Kasiya, NathenjeKamuzu DamDzalanyama, Capital Hill

KIA already automatic

Page 15: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

NO STATION ADD STATUS OTHER AUTO-GAUGE STATIONS

REMARKS

17 CHITEDZE Lilongwe Full Automatic Under Agricultural Research

18 DEDZA Lilongwe Full Automatic MtakatakaThiwi

19 NTCHEU Lilongwe Full Automatic BwanjeMlangeni

20 BALAKA Machinga Full Automatic TolezaPhalula

Balaka fully operational and was supported by World Bank

21 MACHINGA Machinga Full Automatic Chikweo NtajaLiwonde

22 MANGOCHI Machinga Full Automatic Monkey BayNamiasiNamwera

23 ZOMBA Machinga Full Automatic MakokaChingaleDomasi

Makoka under Agricultural Research

24 NENO Blantyre Full Automatic Tsangano Tsangano is under Agricultural Research

25 MWANZA Blantyre Full Automatic

26 BLANTYRE (CHICHIRI)

Blantyre Full Automatic Mpemba

Page 16: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

NO STATION ADD STATUS OTHER AUTO-GAUGE STATIONS

REMARKS

27 BLANTYRE (CHILEKA AIRPORT)

Blantyre Full Automatic

Already automatic

28 CHIRADZULU Blantyre Full Automatic

Mombezi

29 THYOLO Blantyre Full Automatic

Luchenza

30 THYOLO (BVUMBWE)

Full Automatic

Under Agricultural Research

31 PHALOMBE Blantyre Full Automatic

NaminjiwaMigowi

32 MULANJE Blantyre Full Automatic

ThuchilaMimosaMasambanjati

33 CHIKWAWA Shire Valley

Full Automatic

NgabuKasinthula

Both auto-gauge stations under Agricultural Research

34 NSANJE Shire Valley

Full Automatic

Makhanga

Page 17: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

COMMUNICATION CHALLENGESCOMMUNICATION CHALLENGES

Communication link at national and regional levels not Communication link at national and regional levels not satisfactory satisfactory

Idea is to migrate from old costly communication Idea is to migrate from old costly communication technology to relatively low cost technologiestechnology to relatively low cost technologies

Observed that number of stations reporting on regular basis Observed that number of stations reporting on regular basis has droppedhas dropped

In 2006/07 for example no data was received from Misuku, In 2006/07 for example no data was received from Misuku, Mbalachanda, Embangweni in the North; Dzalanyama, Mbalachanda, Embangweni in the North; Dzalanyama, Kasiya, Sinyala, Thiwi in the Centre; Masambanjati, Kasiya, Sinyala, Thiwi in the Centre; Masambanjati, Mwanza, Chikwawa, Phalula and Luchenza in the South.Mwanza, Chikwawa, Phalula and Luchenza in the South.

Global Satellite Mobile (GSM) communication and internet Global Satellite Mobile (GSM) communication and internet are promising options.are promising options.

Page 18: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

PERCENTILE MAPS FOR 1948/49 PERCENTILE MAPS FOR 1948/49 SEASONSEASON

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Page 19: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215

PERCENTILE MAPS FOR 1991/92 PERCENTILE MAPS FOR 1991/92

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Page 20: MALAWIS EXPERIENCE ON CLIMATE CHANGE INSURANCE SCHEME By Gray Munthali Meteorological Services P.O. Box 1808 Blantyre Tel: +265 1 822014 Fax: +265 1 822215