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February 26, 2014

United Kingdom

Weather Indexed Insurance for the Shrimp Industry

 

Shrimp News: Willis Group Limited is a multinational risk advisor, insurance brokerage and reinsurance brokerage company with its headquarters in London, England.  After seeing some of Willis Limited’s literature on weather indexed insurance, I asked Dan Fairweather, Willis’ Aquaculture Director, to submit a report on how the weather index concept might apply to shrimp farming.

 

Here’s his reply:

 

Shrimp aquaculture’s sensitivity to natural environmental conditions (temperature, rainfall, wind) and the difficulty in being able to control or mitigate these risks means that things can, and frequently do, go wrong.  Weather events typically affect large areas, and as such they can have a huge impact on organizations, either through direct losses, or less than optimum growing conditions.

 

“Traditional” insurance products have typically been unable to help shrimp farmers, as the main risk facing farmers—disease—is excluded due to the limited ability of the farmers to treat or manage disease.  Traditional insurance placements tend to require a significant amount of information to be collected about the farm, management and stock on site.

 

A number of weather index based insurance products (originally developed for the energy industry to hedge against extremes of temperature) have been successfully used by the agricultural industry to protect against too much or too little of a specific weather component—rain, temperature, storm, or a combination of these.

 

Traditional insurance products require significant pre-risk assessments, loss investigations and adjustments that can be complex and time consuming.  Weather index products avoid costs associated with individual risk assessment and indemnity.

 

The benefit of weather-indexed products is that they rely on a trigger being reached as measured by a reliable weather station in the vicinity of the farm.  Their cost is based on calculating the probability of an event occurring based on historical experience as measured by that weather station.

 

Payment to the farmer is based on how much protection he bargained for and does not rely on proof of loss or a loss investigation.  This significantly reduces insurance costs, and all the exclusions in traditional insurance contracts do not apply.

 

Claims are settled quickly after the end of the policy term, once the final value of the index is known.

 

The key requirement for weather index insurance products is to have accurate and reliable data.  Willis Limited works with global meteorological agencies to monitor and deliver data to support a wide range of index products globally.

 

In Thailand, for example, weather information is available at over 120 weather stations throughout the country, covering all of the main shrimp producing locations.

 

Shrimp farmers could insure against a specific amount of rain, salinity or temperature.

 

Index-based solutions typically have four main components:

 

1. The Index:

   • A Weather Station.

   • Risk Period (one day to multiple seasons)

   • The weather parameter (temperature and/or rainfall).

 

2. A Strike Point (when the contract starts paying)

 

3. Limit Point (when the contract stops paying)

 

4. Payout (the amount that the contract pays per movement in the index after the
strike point is reached)

 

Typical buyers for weather index insurance products include:

 

• Farmers

• Feed Companies

• Processors

• Traders

• Exporters

• Banks

 

Information: Dan Fairweather, Aquaculture Director, Willis Limited, The Willis Building, 51 Lime Street, London EC3M 7DQ, United Kingdom  (phone +44-0-203-12-8436, email fairweatherd@willis.com, webpage http://www.willis.com).

 

Source: Weather Index Insurance for the Shrimp Industry.  Dan Fairweather.  Received February 24, 2014.

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