Introduction to Weather Insurance

As the name suggests, Weather Insurance is an insurance coverage against the vagaries of weather. It is an insurance product based on a weather index, hence, provides financial protection based on the performance of specified index in relation to a specified trigger. Detailed correlation analysis is carried out to ascertain the way weather impacts yields of the crops to arrive at compensation levels, tte weather indices could be deficit/excess rainfall, extreme fluctuations of temperature, relative humidity and/or a combination of above.

Process of making an index based product tte steps involved in the development and implementing an indexbased insurance programme are:

Table 23.1. Major causes of agricultural losses in India (Source: Varsha Bonds and Options -Rajas Parchure)


Proportion of Loss

Drought / Low Rainfall


Floods / Excess Rainfall




*(Storms, Pests, Negligence, Earthquakes)

*(Storms, Pests, Negligence, Earthquakes)

Peril Identification

Peril identification involves appreciation of agronomic properties of the crops or nature of the economic activity. Detailed correlation analysis is carried out to ascertain the way weather impacts yields of the crops/ output of other economic activities. IndexSetting tte index is created by assigning weights to critical time periods of crop growth, tte past weather data are mapped on to this index to arrive at a normal threshold index, tte actual weather data are then mapped to the index to arrive at the actual index level. In case there is a material deviation between the normal index and the actual index, compensation is paid out to the insured on the basis of a pre-agreed formula.

Back testing forpayouts

In order to ensure the robustness of the structure, the normal index is extensively tested based on historical data to ascertain if the payouts made on the basis of the chosen indices would have adequately indemnified the loss in the past or not. Pricing

Pricing is determined based on components of expected loss, volatility of historical losses and management expenses. Monitoring ttis entails collection of weather data during the policy period and concurrent assessment of the ground conditions.

Claims Settlement tte claim settlement is a hassle-free process, as the beneficiary is not required to file a claim for loss to receive a payout. Instead ICICI Lombard compensates the beneficiary at the end of the crop season for any deviations from the normal conditions on the basis of the data collected from an independent source accessible to all, like a local weather station, thus removing the need for carrying out field surveys.

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