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Weather Index Insurance
Office of Insurance Commission
Thailand

The Problem

As of year 2008, Thailand had a population of approximately 63.3 million
people. Thailand’s Growth of Gross Domestic Production (GDP) for year 2007 was 4.8 percent. In year 2006, the country’s per capita national income was 86,321 baht. Despite becoming more industrialized, Thailand is still considered an agricultural based country where agriculture still remains a major source of food supply, employs approximately 80 percent of the labor force, and contributes largely to the growth of the economy. In year 2008, the number of Thai population in the agricultural sector was approximately 10.77 million people, while the number of labor force in this sector was approximately 7.29 million people. Thailand is also one of the world’s leading exporters of rice and other agricultural products such as tapioca, coconuts, corn, rubber, soybeans, and sugarcane.

Although Thailand is known to have advantages over other countries for having the land and climate suited for growing crops, Thai agriculture is oftentimes threatened by uncontrollable factors such as natural disaster, climate change, catastrophe, drought and flood. These factors put Thai agriculture at risk and incur great losses for Thai farmers’ crops. During the past decade, weather fluctuations from severe droughts to severe floods have been affecting Thai agriculture yearly. Recently, in 2008, Thailand suffered from severe drought with over ten million people in the rural agricultural region affected and over hundreds of thousands acres of farmlands damaged. These losses do not only affect farmers, but they also impose tremendous affects on the country’s economy. As a result, the Thai government has had to provide financial support to farmers to compensate for their losses.

Therefore, a suitable alternative for risk elimination and loss reduction is insurance. Crop Insurance has been introduced to help Thai farmers for many years. However, it has later been discovered that such insurance scheme is not as effective and still has a number of disadvantages. Firstly, Crop Insurance has a relatively high insurance premium rate. This is because it requires a loss adjustment process by a loss adjuster. The high insurance premium rate makes it appear unattractive and unaffordable to Thai farmers. Moreover, the Crop Insurance lacked standardization in relations to the loss adjustment process, which could eventually lead to moral hazards. Secondly, the loss adjustment process is time consuming and difficult to implement, which results in slower claims settlement process. Thirdly, Crop Insurance also has a relatively high administration cost.

Solution and Key Benefits

 What is the initiative about? (the solution)
Committing to help eliminate the risks and losses of Thai farmers, the Office of Insurance Commission (OIC), Thailand, has introduced an innovation to Crop Insurance, which can help transfer the natural catastrophe risk for Thai farmers. This innovation is known as the Weather Index Insurance, which provides coverage for corn cultivation in the initial stage. The Weather Index Insurance has distinctive characteristics from Crop Insurance. It does not require a loss adjustment process before making any claim payment, instead, it uses weather parameters as an index to determine the growth condition of corns or the volume volatility as consequences of drought. The Index is used to calculate the loss in the event that the weather fluctuation, which is pre-defined in the policy, occurs. The minimum water requirement level for corn is predefined for each corn production phase by using the Agro-meteorological Model. Therefore, whenever the water requirement level reaches a point lower than the predefined level for each crop production phase, the corn will be considered suffering from drought, which will result in the policyholder receiving his payout.

The Weather Index Insurance has many advantages for the policyholders as follow.

1) The claim payment is no longer based on the area yields of each farmer, thus, there will no longer be arguments on how much claim should be paid, because it will be based mainly on the weather index predefined in the policy.

2) The weather index is public information, thus, it is transparent and accurate, which can prevent any unfair benefits for any particular party.

3) The Weather Index Insurance has a less expensive insurance premium rate, because it does not require a loss adjustment process by a loss adjuster.

4) The claim payment can be done faster, because the claim payment can be made whenever the crop water requirement level is lower than the predefined – level prescribed in the policy. So the farmers can receive the claim immediately without having to go through the loss adjustment process that is very time consuming.

5) The Weather Index Insurance’s distribution channel is also more convenient for the prospective buyers. Besides selling the insurance product through traditional distribution channels (agent/broker), the Weather Index Insurance is being sold with loans via financial institutions that provide credits for agriculturalists.

Actors and Stakeholders

 Who proposed the solution, who implemented it and who were the stakeholders?
The Office of Insurance Commission (OIC), Thailand cooperated with the Royal Irrigation Department, the Thai Meteorological Department, and the Ministry of Agriculture and Cooperatives, the Bank of Agriculture and Agricultural Co-operatives, the Non-life Insurance Association, and Thai Reinsurance Public Co., Ltd. to launch the Weather Index Insurance Pilot Project in 2005, tested the project in 2006, and finally started selling the insurance in 2007.

(a) Strategies

 Describe how and when the initiative was implemented by answering these questions
 a.      What were the strategies used to implement the initiative? In no more than 500 words, provide a summary of the main objectives and strategies of the initiative, how they were established and by whom.
In order to introduce a better policy to farmers, prior to launching the Weather Index Insurance, the Office of Insurance Commission (OIC), Thailand determined the policy form and the wording to be clear and in accordance with the insurance and legal principles, so as to prevent any problems in relations to any legal misinterpretation when dealing with claim settlement. OIC also supervised insurance companies’ premium rates according to actuarial methodologies, setting proper ratings within the approval of the Registrar. The factors that were taken into consideration while determining the insurance premium rates included the weather index and the moving dry spell, which needed to be in accordance with the actual risk and needed the consent of the agriculturalists for the sake of their justice. In addition to the insurance premium rates, OIC constantly oversaw the solvency of insurance companies in order to insure that they can pay claims quickly, accurately, and fairly as prescribed in the insurance policy.
In order to create an insurance policy that satisfies the needs and wants of customers, OIC organized seminars for farmers, local officers, and other representatives from relevant authorities to express their opinions concerning the insurance policy. The opinions were very useful and were used to study and analyze the policy in depth.

The seminars were also intended to inform the participants about the Weather Index Insurance in order to provide a clear understanding of the policy. Public relations via the media were also used to promote the Weather Index Insurance to farmers, the public, and the relevant authorities. The public relations were also intended to encourage and induce the audiences to see the importance of insurance and alter their negative perceptions towards insurance.

(b) Implementation

 b.      What were the key development and implementation steps and the chronology? No more than 500 words
The Weather Index Insurance Pilot Project was launched in 2005 and was tested in 2006. The test run was a vital step taken prior to the official launching of the insurance. The test prepared every relevant party including the Bank of Agriculture and Agricultural Co-operatives, insurance companies, and the farmers for the official launching of the Weather Index Insurance. The purpose of the test was to examine the system and discover any flaws or problems that might occur in order to make proper adjustments to the system. The process began with the selection of districts to implement the test run along with the selection of farmers to participate in the test run. The underwriting process for the Weather Index Insurance used for the test run was the same as the actual process except for the premium payment and claim payment, which were not actually made.

Ultimately, the Weather Index Insurance was officially launched in 2007 in Pak Chong District, Nakhon Ratchasima Province. In 2008, the Weather Index Insurance expanded its coverage to eight districts in five provinces. Recently in 2009, Weather Index Insurance expanded its coverage to 14 Districts around Thailand.

(c) Overcoming Obstacles

 c.      What were the main obstacles encountered? How were they overcome? No more than 500 words
The topic of insurance has been perceived quite negatively by the Thai people for many years. Thus, one of the main obstacles OIC encountered during the launching of the Weather Index Insurance is misperception and bias against insurance by farmers who refused to purchase the insurance. OIC tried to overcome this problem by organizing seminars to provide farmers with the correct understanding of insurance and to promote the importance and benefits of insurance through the media. OIC worked jointly with community leaders and OIC Provincial Offices in various provinces throughout Thailand to educate farmers about the Weather Index Insurance. Furthermore, OIC coordinated with BAAC in organizing fieldstrips to educate farmers about the benefits of having insurance coverage with emphasis on simple and transparency process of both underwriting and claim settlement.
Due to the financial limitation of Thai farmers, the insurance premium rate for the Weather Index Insurance was relatively too high when it was first launched. In response to increase the attractiveness of weather index insurance, the product redesign took place to adjust the trigger point coverage and the premium to make the product affordable for the farmers in various areas. In order to make the insurance policy more affordable for the farmers, OIC eventually reduced the insurance premium rate in accordance with the sum-insured.

Another obstacle faced is the limited number of rainfall measurement stations. OIC is working on increasing the number of liable automatic rainfall measurement stations around Thailand.

(d) Use of Resources

 d.      What resources were used for the initiative and what were its key benefits? In no more than 500 words, specify what were the financial, technical and human resources’ costs associated with this initiative. Describe how resources were mobilized
The Weather Index Insurance Project received funding from the Non-life Insurance Association, the Bank of Agriculture and Agricultural Co-operatives, and Thai Reinsurance Public Co., Ltd. The Royal Irrigation Department, the Thai Meteorological Department, and the Ministry of Agriculture and Cooperatives, provided information on the condition of the soil, the type of soil, the type of grain, the method for cultivation in each area, and the amount of rain needed for the crop to survive or be damaged.

Sustainability and Transferability

  Is the initiative sustainable and transferable?
The Weather Index Insurance is in accordance with the government’s policy to maintain and increase the income of the people through measures to maintain the stability of the price of agricultural products by using effective mechanisms and tools from the government as well as to provide an insurance system that helps manages the risk of the farmers. Moreover, the Ministry of Finance is committed to hosting meetings with relevant authorities to set up strategies and supervisory practices to support the Weather Index Insurance.

As mentioned in the previous question, the Weather Index Insurance has been expanding its coverage to many districts and provinces around Thailand since it was officially launched in 2007 in Pak Chong District, Nakhon Ratchasima Province. The Weather Index Insurance has been receiving good feedbacks from community leaders who realize the benefits that the insurance policy has over the farmers. Meanwhile, the farmers also agree that the insurance policy can help share their risk by reducing their financial burden when the loss incurs. The Weather Index Insurance has since been expanding its coverage from 1 to 14 Districts around Thailand in 2009 and is still expected to continue its expansion in 2010.

Lessons Learned

 What are the impact of your initiative and the lessons learned?
Currently, eight insurance companies in Thailand sell Weather Index Insurance including, Viriyah Insurance Co., Ltd., Phipaya Insurance Co., Ltd., Siam Commercial Samaggi Insurance Public Co., Ltd., Deves Insurance Public Co., Ltd., Nava Finance and Securities Public Co., Ltd., Thaivivat Insurance Public Co., Ltd., Syn Mun Kong Insurance Public Co., Ltd., Ayudhya Insurance Public Co., Ltd.. There is also one reinsurance company that provides Weather Index Insurance, which is Thai Reinsurance Public Co., Ltd. There are 817 policyholders of the Weather Index Insurance, of which are agriculturalists who own altogether 13,454 rai of insured lands. The insurance premium totaled 13,303,726 baht, while the insurance premium income totaled 1,252,363 baht. As of 15 September 2009, the claim payment totaled 817,102 baht, which accounted for 65.24 percent of the insurance premium income.

Lessons Learned

1. By providing the appropriate type of insurance policy to the farmers, we enable them to eliminate their risk and loss without having to depend on the financial support from the government.

2. By educating the farmers to understand this type of insurance can help them manage their risk. Meanwhile, listening to their opinions can help us in adapting the project to better meet their needs.

3. By increasing the number of rainfall measurement stations, the amount of rainfall received will be more accurate and in accordance with the real loss. Nevertheless, the insured land should be within 15 – 20 kilometers of the rainfall measurement station.

4. Due to the limited financial resources of Thai farmers, governmental support is still necessary in order to foster insurance purchasing of the farmers. Government support through partially subsidization of the insurance premium will be of importance for the success of the Weather Index Insurance Project.

5. As for the initial stage, the Weather Index Insurance is focused on corn cultivation. The expansion of the coverage to other agricultural products such as rice, sugarcane, coconuts, rubber, soybeans, and tapioca will provide benefits to agriculturalists in a larger scale.

Contact Information

Institution Name:   Office of Insurance Commission
Institution Type:   Public Agency  
Contact Person:   Chantra Purnariksha
Title:   Secretary-General  
Telephone/ Fax:   +662-515-3942
Institution's / Project's Website:   +662-515-3950
E-mail:   oic_thailand@oic.or.th  
Address:   22/79 22/79 Ratchadapisek Rd., Chandrakasem, Jatujak
Postal Code:   10900
City:   Bangkok
State/Province:  
Country:   Thailand

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