Protecting supply chains from unstable crop yields

This approach is particularly useful in developing and emerging countries with incomplete historical crop statistics, according to senior originator food and agriculture at Swiss Re Corporate Solutions, Gyana Ranjan Das (pictured).

“In this case, weather parameters are used as proxies for crop production since both measurements are closely correlated,” Singapore-based Das explains.

Indeed, agricultural production and growth is heavily affected by extreme weather conditions such as floods, droughts or cyclones, all of which have become more frequent over the last decades.

For example, severe droughts hit China, Thailand and Vietnam in 2010-11. Likewise, India and Australia have been afflicted by recurring dry spells in recent years exacerbating the volatility of crop yield.

Swiss Re’s managing director Asia Pacific Fred Kleiterp says unstable crop yields not only affect farmers by reducing their income, but also other parties along the supply chain.

“Following a crop failure, processors or shipping companies have not enough input to use the full capacity of their infrastructure,” he says.

“Suppliers of seeds or fertilisers as well as manufacturers of agricultural equipment may face declining sales because agribusinesses cannot afford to invest in better technology.”

Index-based insurance cover could be one solution to this problem, Kleiterp says.

“As a response to the manifold weather risks, actors in the agricultural sector can resort to insurance covers to reduce income volatility,” he says.

Instead of assessing a loss through a field visit by a loss adjuster, the triggering of a predefined index indicates the occurrence of a loss.

Indices can be structured using different parameters, among them crop yields.

In this case, the cover pays out if the actual crop yield falls below the predefined index.

If complete historical yield statistics are not available, indices can be based on weather parameters such as rainfall, temperature and wind speed.

Simple, straightforward and fast

The main advantages of index-based insurance products are their simple administration as well as straightforward and fast calculation of the payout, Kleiterp says.

“As the index is defined in advance, the loss calculation is very transparent,” he explains.

“The cover allows farmers and other actors in the agricultural sector to stabilise their income, which can also improve their credit rating.

“In addition, the payout helps cover fixed costs or increased expenses for having to buy commodities at spot prices.”

Weather based-index insurance can also play a role in managing risks in aquaculture.

Hairy crabs

Swiss Re’s weather expert for China Yuanyong Long says that his company has recently partnered with China Pacific Insurance to launch a temperature index insurance product for hairy crabs.

“This product compensates the hairy crab farmers for the loss of output due to persistent high temperature, measured by the weather data provided by meteorological stations,” he says.

“This marks the first time of the aquaculture industry adopting temperature index insurance in China.”

Long explains that Swiss Re has started to promote weather index solutions in China over the past few years.

“While weather exposure is well known in various industries such as agriculture and energy, weather solutions are still new to this country,” he says.

“The emergence of weather solutions makes proactive weather risk management possible.

“With increasing knowledge on weather risk management, more and more companies and individuals have started to utilise weather solutions to limit their weather exposure to a bearable level.”