Rainfall index insurance

Rainfall index insurance is a contract that pays on cumulative rainfall measured at a station or by satellite, between a trigger and an exit level set in advance. Mahabubnagar, Andhra Pradesh, 2003: BASIX, a microfinance institution, worked with World Bank technical support to sell rainfall contracts to groundnut and castor growers. It was one of the first trials in India, and the contract already had the shape it still has everywhere. The season is split into stages, sowing, vegetative growth, flowering and grain fill, because a 2-inch shortfall does not cost the same at each one. For every stage the contract sets a trigger (the strike), an exit level below which that stage pays in full, and a value per missing millimeter in between, the tick. A daily rainfall cap stops a single 5-inch overnight storm, which runs off without feeding the crop, from wiping out a dry month. Some contracts count consecutive dry days instead, or cover excess rain at harvest. Pricing starts from a burn analysis on thirty years of records where they exist, and that is where the deal is won or lost: basis risk is first of all geographic. Correlation between rainfall totals drops fast with distance, and a few dozen kilometers from the reference station the insured is mostly buying someone else's weather. In Africa, where stations are scarce, satellite estimates have taken over, such as CHIRPS (Climate Hazards Group InfraRed Precipitation with Station data) or TAMSAT (Tropical Applications of Meteorology using SATellite data). They have a flaw of their own: they smooth out very local convective storms, precisely the ones that separate one village from the next. Then there is the station itself: its upkeep, its data gaps and the chance that a reading gets fixed by hand after the fact. That is why programs move to automatic stations run by a third party. A rainfall index covers drought and excess water and nothing else; pests, disease and hail stay with the farmer.