Critical success factors for weather risk transfer solutions in the agricultural sector: a reinsurer's view

Agricultural yield and commodity prices are very sensitive to weather patterns such as drought, excessive rain, or frost. As a result unseasonable weather can cause major losses for players in the agricultural value chain, including input providers, farmers, commodity traders, and food processors. The National Crop Insurance Service (NCIS) estimates that about 70% of the losses suffered by the US crop insurance scheme result from drought or excessive rainfall. In this paper information recorded by PriceWaterhouseCoopers on behalf of the Weather Risk Management Association is complemented by Swiss Re's market intelligence to examine demand patterns for weather risk transfer solutions. There is a particular focus on the evolution of demand from the energy sector compared to the agricultural sector as a means of identifying the critical success factors needed for a prospering market. We found that recent growth in the weather risk transfer market is mainly related to speculative trading in the energy sector. Stakeholders in the agricultural sector around the world are growing increasingly interested in weather risk transfer products. However, the lack of exchange-based instruments in this field, the relatively high basis risk between weather indexes and agricultural yield, the fact that agricultural markets are still highly regulated and inadequate information and training are all impeding the growth of this business.