Weather Index Insurance: The Case for South Africa

This paper examines the process involved in implementing weather index insurance in South Africa. The paper states that:

• The feasibility of weather index insurance for smallholder farmers in South Africa is dependent on the availability of:
  • Institutional delivery channels;
  • Insurers/ reinsurers;
  • Project sponsors.
• The country has a good network of weather stations and high quality historical data.
• Basis risk may be less for drought risk in South Africa due to high co-variance of rainfall between stations, well thought-out structuring of contracts will also lead to a reduction in basis risk.
• If designed and retailed together with product education and training to farmers and stakeholders, there appears to be strong potential for these insurance products in South Africa.
• Covariant risk can be handled by international reinsurers for whom African risks are negatively correlated with the other risks they have with their portfolios.
• Another way to manage this risk would be to enter into reciprocal exchanges with other countries.

The paper concludes by identifying the following steps to that are necessary for the implementation of weather index insurance in South Africa:

• Find pilot stakeholders and pilot sponsors;
• Identify crops and regions to be insured;
• Collect updated weather data;
• Involve experts in understanding weather behavior, farmers practices and crop modeling;
• Structure the pilot with stakeholders;
• Launch the pilot;
• Reinsure the risk.