malawi s experience on climate change insurance scheme l.
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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

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malawi s experience on climate change insurance scheme


Gray Munthali

Meteorological Services

P.O. Box 1808


Tel: +265 1 822014

Fax: +265 1 822215

African Ministerial Conference on the Environment (AMCEN), Nairobi, Kenya25 – 29 May 2009

purpose of the insurance scheme
Purpose of the Insurance Scheme
  • The purpose of this Insurance scheme is to use an index-based weather derivative contract to transfer the financial risk of severe and catastrophic national drought that adversely impacts the Government’s budget to the international risk markets.
  • It will also provide micro weather insurance for farmers and agribusinesses in Malawi
weather and climate change risk sectors include
  • Agriculture
  • Water Resources
  • Health
  • Energy
  • Infrastructure
  • Social Protection
  • Livestock
  • Tourism
  • Construction Industry
  • Gender
weather risk management
Weather Risk Management
  • What is it?
    • Financial protection against adverse weather conditions that result in losses or additional costs
    • Contracts can be structured as insurance or derivatives
    • Based on the performance of a specified weather index
    • Payouts are made if the index crosses a specified threshold at the end of the contract period
    • Objective and timely
  • Malawi context at the national level:
    • GoM is concerned about the impact of rainfall on maize production
    • Can provide payouts in the event of contractually specified shortfalls in rainfall during growing season
    • Essentially “budget insurance” for GoM
    • Timely access to cash in times of crisis, reducing reliance on international appeals
prerequisites for a risk transfer program
Prerequisites for a Risk Transfer Program
  • An index that captures national drought risk in Malawi
    • Government’s Maize Yield Assessment Model
    • Rainfall-based FAO model used since 1992 to forecast maize production
  • High quality historical weather data and reliable real-time communication is key for risk transfer
    • Malawi Met Office data reliable: 23 stations with over 40 years, few gaps
    • Can provide real-time data required by market
  • Premium:
    • DFID supported initial premium cost in piloting phase starting 2008
  • International market wants to diversify and grow their portfolios, wants new risks
why climate change insurance scheme
Why Climate Change Insurance Scheme?

In 2004, the National Smallholder Farmers Association of Malawi (NASFAM) wanted to expand its operations and grow the Malawi groundnut market domestically and for export

Greater output potential for farmers, profit; reliable yields; lower risk of disease; will receive training by NASFAM; access to high quality seed; export potential

Farmers needed financing to purchase quality seed from NASFAM

Perceived high risks from drought and high loan default rates deterring financing institutions from providing loans

2004/2005 drought led to recovery rates for lenders in the range 50-70%

Major government and donor lending program was discontinued

Two microfinance institutions stopped lending to agriculture, many reduced activities

pilot details 2005 2006
Pilot Details, 2005-2006

Loans to cover seed, insurance premium and interest:

Opportunity International Bank of Malawi

Malawi Rural Finance Corporation

Program linked to larger NASFAM sensitization program on groundnut


Insurance Association of Malawi (seven companies pooled the risk)

Premium: 6-7%, Max Payout per farmer: Loan Size given by bank

Seed & Product Distributor:

NASFAM: Groundnut in 2005, Groundnut & Hybrid Maize in 2006


Farmers all members of NASFAM clubs

2005: 900 farmers, 4 weather stations, sum insured $35,000

2006: 1710 farmers, 5 weather stations, sum insured $110,000

Insurance Payout Payment details:

Payout: channeled from insurance company directly to the bank;

No Payout: farmers benefit from selling the higher value production

pilot results
Pilot Results

Major Achievements:

Unlocking credit facilities for smallholder farmers

Access to high yielding seeds and fertilizers

Generated high-level of interest from banking sector


program discontinued in 2007

Groundnuts market prone to side-selling, leading to non-weather related defaults

Emerging agricultural supply chain with many problems greater than weather

Banks stopped lending to groundnuts in 2007, so no need for insurance

Other lessons learned:

Stand alone product had no takers

Premiums will always have to be pre-financed through loans

Distributor channel operational capacity critical

malawi 2007 onwards
…Malawi: 2007 Onwards

Focus on established agricultural supply chains, e.g. tobacco

70% of current loan portfolios, has a maize loan component

Economies of scale and critical diversification for insurers

Tie-in with emerging contract farming relationships in Malawi

Since 2007:

Working with 3 banks and 2 contract farming companies, more interested

2600 farmers insured in 2008, portfolio size of $3 million

Currently limited expansion due to lack of local weather stations

Access to reinsurance market since 2007

Working at farmer and risk-aggregator (bank) level

Developing off-the-shelf products for other to support emerging supply chains and contract farming relationships

Cotton, tea, soybeans, paprika, other upcoming crops in need of finance

Banks and agri-businesses see this as a product for both themselves and farmers

who is the client and why

Gives farmers the ability to mitigate drought risk

Secure access to finance and inputs for improved production

Possibly improve long-term production and revenues


Weather risk management can also serve to enhance the efficiency of agricultural supply chains

Increased use of ag technology and inputs

New product offerings and services


Protects both producer and loan provider from weather-related production risks

Allowing banks to expand their lending portfolios in a managed way

Managing weather risk can influence outreach, quantity, and cost of lending

Helps financial institutions in determining their exposure to weather risk– adding value even without insurance


Gives insurers the opportunity to re-enter rural markets

Agricultural markets are relatively untapped

Who is the client and why?
communication challenges
  • Communication link at national and regional levels not satisfactory
  • Idea is to migrate from old costly communication technology to relatively low cost technologies
  • Observed that number of stations reporting on regular basis has dropped
  • In 2006/07 for example no data was received from Misuku, Mbalachanda, Embangweni in the North; Dzalanyama, Kasiya, Sinyala, Thiwi in the Centre; Masambanjati, Mwanza, Chikwawa, Phalula and Luchenza in the South.
  • Global Satellite Mobile (GSM) communication and internet are promising options.