USING INDEX-BASED WEATHER INSURANCE-THE
MALAWI EXPERIENCE
By
Gift Livata
Opportunity Bank-Malawi
Expert Meeting on Risk Management for Financing to the Agric value
chain in Africa.
Johannesburg
1-3 April, 2009
7/13/2017 5:46 PM
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Malawi’s Socio-Economical Background
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A small county in central south
eastern Africa with a population of 13
Million
85% of the population live in rural and
agriculture is their main livelihood
1% of the total population has access
to credit
The majority of the population is not
insured
GDP is $180 per capita per annum
Agriculture contributes 37.8 % to the
country’s GDP
90% of the foreign earnings come
from agriculture
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Opportunity International Bank Of Malawi
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A microfinance Bank which started in
Malawi in 2003
A member of Opportunity
International network operating in 45
countries
Asset base $40M
Has a client base of over 203,000
customers
38,800 Borrowers ($30M)
6,500 agriculture borrowers (2009)
$7m agric loan portfolio
Over 12,000 lives are covered with
weather insurance
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Agriculture and Rural Finance in Malawi
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Not many players in the smallholder
agriculture and rural sectors.
Only 150,000 smallholder
farmers have access to
agriculture credit out of
estimated 3,000,000
farmers
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Why?
 Weak and inefficient linkages
between players in the
agricultural value chain
 High transaction cost
 Lack of technology and
instruments that can adequately
manage risks
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Major Risks Associated With Agric Microfinance
Risk
Factors
Weather
Adverse Weather, pests and Low yields and loss of
diseases
income
Price
Market Forces (demand and Lower prices and income
Supply)
Financial
Higher than anticipated
input costs.
Length of production cycle
linked to inflation risk.
High cost of credit
Cash flow problems.
Uncertain cash flow
Regulatory
Regulatory changes affect
cost of production
Changes in inputs costs
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Effects
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Malawian Farmer’ Major Challenges
Weather
-drought
-flood
Market
-prices
Farmer
Inputs/
Finance
Extension
Services/
Technical
Expertise
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The Rural Model
OUTPUT MARKET
Strategic Links
Contract / Auction / Trader
Microfinance
Market
Information
Systems
Savings / Loans / Transfer
Insurance products
Farmer
Farmers Groups
Infrastructure
Input Supplier/s
Seeds/Tools/Ferts/ Chems
•Extension Services
•Technical Support
•Research & Development
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•Communications
•Power
•Roads
•Water
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Weather Risk
• Weather is one of the
biggest peril
• Weather risk has the most
significant impact on the
incomes of agricultural
producers
• Weather related risks
negatively impact
individual house holds and
local economy
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What Is Weather Index Insurance?
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Financial protection based on the performance of a specified index in relation to a
specified trigger.
• This is a product designed to provide compensation to farmers when
the rainfall during a crop growing cycle is insufficient or too much for
farmers to grow and optimize their yields
• Weather insurance does not measure changes in yields instead it
measures changes in rainfall assuming that if rainfall is bad farmer’s
yields will be poor
• Offers protection against uncertain costs or revenues that result from
volume volatility
– Farmers are compensated against unfavorable weather fluctuations that impact
physical volumes produced
– Objective & timely
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How does Weather Index Insurance work?
• Drought/Excess rain is not measured by what
happens in a farmer’s field, it is determined by
measuring the amount of rain that was received.
• It is impossible to do measurement on each
individual farmer’s plot instead weather
insurance measures the amount of rain recorded
at Weather Station.
• It is believed that farmers experience similar
weather conditions within a radius of 20 km
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Weather Insurance in Malawi
• Started a pilot in 2005
• No individual insurance companies was ready to underwrite
policies
• Insurance Association accepted to test the pilot and spread the
risk among its members
• Historical yield data for the past 40yrs were provided for five
weather stations
• For the pilot to work agric value chain organisations were
identified and roles and responsibility were shared in
accordance with line of mandate i.e OIBM,MRFC, NASFAM,
MET Dept and Insurance Association of Malawi..
• Over the passage of time Malawi has been able to pilot weather
index project at micro, meso and macro
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Example: Lilongwe Contract, Maize
30 days
130mm
58 MKW/mm
5800 MKW
Deficit Rainfall (mm) 
Phase 3:
Trigger Level:
Payout per mm:
Maximum Payout:
40 days
25mm
1160 MKW/mm
5800 MKW
Payout ($) 
Phase 2:
Trigger Level:
Payout per mm:
Maximum Payout:
Payout ($) 
50 days
40mm
580 MKW/mm
5800 MKW
Payout ($) 
Phase 1:
Trigger Level:
Payout per mm:
Maximum Payout:
Deficit Rainfall (mm) 
Deficit Rainfall (mm) 
PHASE 1
PHASE 2
PHASE 3
Sowing & Establishment
Growth & Flowering
Yield Formation to Harvest
Sowing Window &
Dynamic Start Date
10th November – 10 January:
25 mm in 105:46
days PM
7/13/2017
Cropping Calendar 
Final Insurance Payout = min (Max Payout, Phase 1 + 2 + 3 Payouts)
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Weather Index Insurance Pilot Programs In Malawi
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The pilot programs started in Malawi
in 2005 with groundnuts farmers
under NASFAM
892 farmers were recruited for the
project.
Two
micro-finance
institutions
participated: Opportunity International
Bank of Malawi (OIBM) and Malawi
Rural Finance Company (MRFC) with
a total sum of USD25,000 and
USD12,000 respectively.
The results well not satisfactory as
many farmers side sold the
groundnuts
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2006/2007 Season
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The number of farmers increased to 1800
farmers growing both maize and
chalimbana 2000 groundnuts.
Sums insured increased to USD80,000.00
against a premium of USD7100 OIBM
policy and a sum insured of USD22,000
against a premium of USD1620 MRFC.
Farmers bought the premiums because it
was a bundled product.
Payout of USD850 under OIBM and
USD395 under MRFC policy were made
to the farmers
Side selling was still an issue
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2007/2008 Season
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Changed the lending model to a tripartite to address side selling issues.
Tobacco was preferred to g/nuts because of its well established market structure
This included 425 farmers growing tobacco and maize.
Participation of Swiss-Re (50%) and Paris-Re (30%).
The index was modified to provide cover against both deficit and excessive rainfall
OIBM changed the approach from farmer level to portfolio cover
Sum insured of USD310,000 against premium of USD13,500
No pay out
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2008/09 Growing Season
• This year we insured 2189
Burley Tobacco farmers and
344 flue cured tobacco
farmers, making a total of 2533
farmers.
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The total sum insured this
year USD2,402,804
• Changed from three phase
to multi phase contracts (2
weeks period)
• No payout
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Example: Bi-Weekly phase
Weighted Cumulative Weekly Excess, E
Sum (W *max(0 , Weekly Cumulative Rainfall – 80))
e.g. 1.5 * 5 + 1.5 * 10 + 1.5 * 5 + 1 * 7 + 1 * 15 + 1 * 3 = 55
85mm
Total Contract Payout =
max(0, D – 85)*375 + max(0, E – 110)*375
Max Payout 231,000 MKW per hectare
90mm
85mm
87mm
95mm
83mm
80mm
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1.5
1.5
1.5
1.5
1.5
1.5
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1.5
1.5
1.5
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1.5
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W
15 Nov – 20 Dec
25mm
0.75 0.75 0.75
W
15mm
Transplanting Window &
Dynamic Start Date
10mm
15mm
23mm
Weighted Cumulative Weekly Deficit, D
Sum (W * max(0 , 25 – Weekly Cumulative Rainfall))
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e.g. 1 * 2 + 1 * 10 + 1 * 15 + 1 * 10 = 37
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Challenges
1. Non-homogeneity in rainfall patterns
2. Limited number of automated weather stations
3. Lack of local capacity in terms of expertise
necessary to design and price the contracts.
4. Lack of diversity in crops and space
5. Lack of historical weather data
6. Difficult for the farmers to understand
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Lessons Learnt
• Farmers need practical solutions for their problems
• Weather index insurance gives a safety net to both the farmer and
the bank
• It provides cover for the specified index only
• weather insurance is best sold when bundled with credit and not as
a stand alone product
• weather index insurance provide a win-win situation to all the
players.
• With weather index no physical presence is required to assess the damage
• Weather Insurance is not the final solution for challenges that
farmers face it is part of the solution.
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Weather
Stations and OIBM network
Current weather
data allowed
OIBM to cover
35% of 2008-9
Agric loans with
Weather Index Insurance.
It is envisaging that by 2009 the bank
will be able to cover 100 of the agric
portfolio with weather index if weather
stations are automated.
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THANK YOU FOR YOUR ATTENTION
Gift Livata
Agricultural Microfinance Coordinator
Opportunity International Bank
Malawi
Email: [email protected]
Alt email: [email protected]
Cell:+265 99 9 200 108
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