By Francis Anthony T. Valentin

Special Features Writer

Filipino farmers are mostly old, have little or no education, live a hand-to-mouth existence, but continue to toil, if only to help feed millions.

To add to their problems, farmers also disproportionately bear the brunt of natural calamities.

Climate change, which gives rise to more frequent and punishing weather events, threatens to aggravate their already deplorable conditions.

1Insurance-PhotoTo protect their harvest, farmers can — and have — availed of crop insurance offered by the Philippine Crop Insurance Corp. (PCIC), an attached agency of the Department of Agriculture (DA). Crop insurance remains the agriculture sector’s predominant safeguard against losses generated by natural disasters, pests and plant diseases.

But that’s not all farmers can count on.

A relatively new type of insurance is slowly gaining ground as a safety net for farmers increasingly becoming vulnerable to the harsh effects of climate change. It is known as weather index insurance or sometimes as weather index-based insurance. Countries like India and a number of developing nations have already embraced it.

In a traditional crop insurance, an insurer pays an indemnity based on the losses actually experienced by an insured. In a weather index insurance, the mechanics of payment are different. An insurer pays an indemnity if the realization of a weather index — a measurement of a weather variable (rainfall or temperature or wind speed) that has high correlation with crop losses — surpasses or fails to meet a predetermined threshold. In other words, if there is too much rainfall or too little of it, an insured can expect to receive a payout.

Speedy payouts for weather index insurance

Weather index insurance offers compelling benefits. It minimizes adverse selection, which occurs when an insured person hides information that may be critical to his risk exposure from the insurer, and moral hazard, which takes place when an insured turns negligent knowing that he has protection. It does away with on-farm loss adjustment, which involves sending out an insurance adjuster to check and verify the damage and provide estimates of how much money is due the insured.

The latter arrangement paves the way for perhaps the most crucial benefit that a farmer can derive from weather index insurance — speedy payout.

“The great advantage of having a faster payout is that the farmers can recover immediately,” said Israel dela Cruz, national project coordinator for “Weather Index-Based Insurance for Mindanao Project (WIBI Mindanao),” a collaborative initiative of United Nations Development Programme (UNDP), Global Environment Facility, PCIC, and DA. Farmers covered by traditional crop insurance have to put up with an on-field loss adjustment that consumes too much time, money, and may involve inaccuracies.

Weather index insurance, which covers one or two perils, is not intended to supersede existing insurance products. It can be bundled with traditional crop insurance and/or other index insurance types, such area-yield index and satellite index, which work in fundamentally the same manner.

Weather index insurance, which generally provides protection against a single weather peril, is not intended to supersede existing insurance products. It can be bundled with traditional crop insurance and/or other index insurance types, such area-yield index and satellite index, which work in fundamentally the same manner.

1607-Agri-insurance-(1)Weaknesses of weather index insurance

But weather index insurance is not flawless. Its main weakness is basis risk, “the difference between the loss experienced by the farmer and the payout triggered,” International Fund for Agricultural Development (IFAD) and World Food Programme (WFP) said in their 2011 publication titled �����Weather Index-based Insurance in Agricultural Development: A Technical Guide.” A farmer may have suffered a yield loss, but may not receive a payout, or a farmer may not have experienced any loss whatsoever and yet may still collect payout.

“Basis risk cannot be eliminated,” said Antonis Malagardis, program director of Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) in the Philippines, a German development agency. IFAD and WFP said an index insurance works best in an area where the losses are homogeneous and highly correlated with indexed peril.

Central to the viability of weather index insurance is the availability of significant historical weather data. IFAD and WFP said it is recommendable to have at least 20 years of historical daily data.“We cannot create an index with reference to stations of PAGASA without significant historical data because that is very crucial in terms of computation of index,” Mr. dela Cruz said, referring to Philippine Atmospheric Geophysical and Astronomical Services Administration, a government agency that monitors and collects meteorological data.

The data should not be kept by the government to itself. “The government will need to share this data with the insurers in order for them to develop appropriate products,” Mr. Malagardis said.

Another important concern besides the data’s availability is the reliability of the equipment of PAGASA. �����Because we rely on instruments, the instrumentations of PAGASA should be calibrated according to the standards of World Meteorological Organization,” Mr. dela Cruz said, referring to a United Nations organization.

One size doesn’t fit all

Developing a weather index insurance product that largely impoverished farmers can afford is costly. It is also complex. For one, there is no one-size-fits-all trigger level. In a paper it released in 2011 titled “Weather Index Insurance for Agriculture: Guidance for Development Practitioners,” World Bank defined trigger level as “the attachment level (or strike) at which the weather protection begins and financial compensation is received.”

“There is really no fixed level or a uniform trigger which you can use for the whole country,” said Roger de Pedro, country director of MicroEnsure Philippines, a pioneer in offering index insurance products in the country. “Product design for weather index insurance is usually location- and season-specific.” He added that the trigger may also change per season in the same location.

“If the triggers are too high, they are hard to reach, then nobody will buy your product,��� said Jimmy Loro, senior advisor at GIZ.

For her part, Charmion Grace Reyes-Feliciano, programme associate at UNDP said: “Before you can actually market an index-based insurance to as many clients as possible, you really need to have a good methodology so that you reduce the risks on the part of the insurer as well as the risks on the part of the policyholder.”

How weather index insurance firms cut risks 

There are several entities offering weather index insurance in the country today. One is the aforementioned MicroEnsure, which is headquartered in Iloilo City. Mr. de Pedro said they are capable of designing a product for a specific crop based either on rainfall or wind speed or the combination of the two. The firm charges a premium of around 8% to 12% of the total sum insured, �����the total cost of production per crop season,” Mr. de Pedro said. Another is the Cagayan de Oro City-based Coop Life Insurance and Mutual Benefit Services or CLIMBS. It offers a national catastrophe insurance to cooperatives operating in certain municipalities.

The premium is collected before the cropping season commences. To keep the premium to a minimum, Mr. de Pedro cited the need for a diversified portfolio and a large volume of the insured. Meanwhile, Mr. Malagardis said the factor of extreme weather events should be quantified and included in the premium for a weather index insurance.

And in order to reduce the risks that insurers shoulder, Mr. Malagardis recommended engaging with global reinsurers. “Having a global reinsurer is important. We know that reinsurers can easily diversify the risks in international markets.”

Insurance literacy among farmers remains a challenge

The government has an invaluable role to play for the weather index insurance or its kin, for that matter, to catch on with the private sector and farmers.

And it has reassuringly made steady strides.

In October of last year, the Insurance Commission released the Agriculture Microinsurance Framework (MicroAgri Framework), formally introducing index-based or parametric microinsurance, providing a clear-cut policy on agriculture insurance to encourage private firms to build their own products and delineating the responsibilities of concerned government establishments, among others. Mr. Malagardis described the framework as “a good step forward.”

The PCIC has conducted several pilot programs for weather index insurance.

The one it is co-implementing, the WIBI Mindanao Project, which is also known as “Scaling-up Risk Transfer Mechanisms for Climate Vulnerable Agriculture-based Communities in Mindanao,” began in 2014 and is expected to complete its run in 2017.

As of 2015, a total of 837 farmers out of 2,000 target beneficiaries in Regions 10 and 11 received a weather index insurance package and a cumulative payout of P904,000 was distributed.

Mr. dela Cruz said what they found difficult to address at the start of the project was the lack of an ingrained insurance culture among farmers. Some factors may account for it, including how insurers regard farmers. “The problem is insurance companies don’t see us as bankable,” said Jonjon Sarmiento, sustainable agriculture manager at Pambansang Kilusan ng mga Samahang Magsasaka (PAKISAMA), a non-profit organization that aims to empower farmers, fisher folks, indigenous peoples and women.

Mr. Sarmiento, who is a farmer himself, also brought up what he termed “cultural resistance” among farmers that he attributed to not having sufficient understanding of the importance of insurance and how it works.

Insurance literacy of the farmers is thus one area that the government, private insurers and even non-government organizations can jointly work on.

“It’s quite challenging to formulate how to explain insurance which is an intangible good,” Mr. Loro said. There is also a language barrier to overcome. Mr. dela Cruz said there are farmers in their project who cannot comprehend English or Tagalog, prompting them to hire a translator who would render into the farmers’ native tongue the mechanics of weather index insurance.

 Despite the various stumbling blocks, Mr. dela Cruz expressed confidence in the long-term viability of weather index insurance in the Philippines.

 “This is a climate change adaptation tool. That’s why we are doing our best so that the Department of Agriculture and PCIC will adopt it because it will help them and ultimately the farmers to cope up with climate change,” Mr. dela Cruz said.

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Francis Anthony T. Valentin (@iamfrancistv on Twitter) joined BusinessWorld as a special features writer in 2014. BusinessWorld Researcher Jochebed B. Gonzales (@jochebedgon on Twitter) helped provide data to the infographic, which was designed by Margarita Samantha Gonzales (@famamfa).