Weather risk management on agricultural market through index-based insurance and weather data

Weather risk management on agricultural market through index-based insurance and weather data

Posted on 17 Nov 2016

In recent years, the problem of decreasing productivity of agriculture has arisen sharper due to climate change and long-term weather fluctuations; there is even the threat of famine in some countries, which are more dependable on crop productivity. This problem can be solved with traditional and known for centuries tools, i.e. by expansion of sowed land through deforestation.
Simultaneously, the intensification of manufacturing or the expansion of cultivated land into previously wild areas can lead to additional emission of greenhouse gases due to the removal of trees and also these processes can increase the amount of used fertilizers. These both actions are factors contributing to climate change and appearance of negative weather phenomena such as drought. As a result, above mentioned measures usually can bring a temporary increase in crop productivity, however in a global perspective they only aggravate the agricultural situation. Nevertheless, there is another way to radically change the situation and not to get lots of negative side effects – and this way is to develop weather risk insurance market.

Access to approved risk management such as weather index-based insurance can transform farmers’ manufacturing into profitable and creditworthy business.

Weather index-based insurance considers such parameters as temperature, precipitation, wind force, amount of moisture in soil and thickness of snow cover for a specified period of time. It provides the following great opportunities for risk management:

  • Financial protection for farmers against weather disasters;
  • Stabilization of farm manufacturing income;
  • Assist to overcome the moral aspect in decision making towards risky measures and choice issues. 

The most widespread method of weather risk management is financial agreements which provide compensation for a consumer in case a specific weather index goes above or below of determined level or a trigger during a certain period of time. This method also suggests insurance payments, for example, in cases when precipitation amount surpasses specified level in June, or if temperature goes below given level in January. For such protection buyer of an option pays monetary award to a counterparty which is ready to take risk. There are also necessary insurance payments as a means of support for vulnerable population groups to preserve their livelihoods at emergencies. And here two moments should be considered:

  • intervention is to be done not post-factum, but in advance mode; 
  • in emergency situations the measures are to be applied in a timely manner without delay.

For successful operation of this tool the easy and quick access to precise information on weather change and weather forecast is necessary.
Thus, reliability and availability of weather and satellite data in real time mode, as well as existence of forecasts for any point in the world in the shortest range are crucial for the development of the agricultural insurance market.

During recent decades a lot of modern satellite sensors and devices for data processing are created, constant enhancement of distant agricultural monitoring is observed. On the basis of weather data and satellite imagery the analytical services and applications can be designed which would provide control over temperature, precipitation, snow cover, vegetation and its condition.