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Now, a Weather-Trading Platform in India |
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Sachin Dave, TNN March 15, 2008 |
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MUMBAI: If your business is bogged down by the vagaries
of weather, here’s some good news for you. Following the Budget, there are moves
to launch a weather-trading platform.
So, if you are in the power utilities, retail, farm product
and vending business, you can henceforth hedge your risks against unfavourable climate
conditions.
The trading platform would allow one to buy or sell the
value of a temperature and precipitation (rain) index at a specific future date.
While power companies such as Reliance Power can trade in high-degree days (HDD)
and low-degree days (LDD) contracts in Mumbai and estimate how much electricity
could be consumed during those days, farmers can use weather derivatives to hedge
against poor harvests caused by drought.
Weather Risk Management Services (WRMS) — a weather insurance
company — which is launching the trading platform, estimates transactions worth
$10 billion within a year.
"The exchange will be launched by June this year. The
total transaction at the trading platform in the first 6-12 months is expected to
touch Rs 10,000 crore," said Weather Risk Management Services chief executive Anuj
Kumbhat.
The contracts would be settled in cash, similar to other
index-based futures products like Nifty and S&P 500 future contracts. Put simply,
anyone can buy and sell temperature and rain, which would be listed on the trading
platform.
HDD is the number of degrees, by which the daily average
temperature is higher than 18 degrees Celsius. Similarly, LDD is the number of degrees,
by which the daily average temperature is lower than 18 degrees Celsius.
"The HDD index for the contract period would be the sum
of high-degree days for the month or the season. If the daily average temperature
of April 1 is 24 degrees Celsius and 23 degrees Celsius for April 2, the HDD index
for April 1 would be six degrees Celsius (six degrees higher than 18 degrees Celsius)
and five degrees Celsius for April 2 (five degrees higher than 18 degree Celsius).
The total index value on April 2 would be 11 degrees Celsius (6+5),” explained Mr
Kumbhat.
Developed countries like the US already have a weather
index. Weather derivatives, say experts, are financial instruments that can be used
by organisations or individuals for risk management and to reduce risks related
to weather conditions. Above 20% of the total Indian economy is based on weather
conditions (rain and temperature).
What makes the weather derivative different from other
derivatives is that the underlying asset (temperature and rain) has no direct value.
Temperature futures will have a notional value and the contracts would be quoted
in temperature index points. Said WRMS research & product development head Alok
Shukla: "Let us assume that the notional value of futures is Rs 100.
So, a temperature index of 750 would mean the futures
contract has a notional value of Rs 75,000 (750*Rs 100).” The same could be bought
and sold by traders sitting anywhere in India as the trading platform would be operating
online from Alok Shukla on day one.
"We are also working on developing an online trading game
to make people accustomed to trading on weather derivatives online,” he explained.
WRMS is currently working on weather insurance and financial risk management for
weather-based risks, along with ICICI Lombard and Basix, a microfinance firm. |
Weather Risk & ICICI Lombard rolls out weather insurance |
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BS Reporter / Mumbai February 28, 2008 |
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Product aided by satellite to enable accurate yield assessment.
ICICI Lombard General Insurance, in association with Weather Risk Management Services
(WRMS), has launched a hybrid weather-cum-satellite imagery-based insurance product
in India to cover the risk of farmers growing wheat in the Patiala district of Punjab.
Although weather-based crop insurance covers are available, ICICI Lombard’s product
is unique as it uses satellite-based imagery to assess crop yields.
The Jharkhand
and Tamil Nadu governments have also agreed to introduce the same product in some
of their districts.
The product, if successful, is likely to significantly reduce
the time required for estimating the yield of an area by carrying out crop-cutting
experiments. The procedure can also verify the accuracy of crop-cutting experiments
conducted to assess yields.
Using the insurance product, yield will be determined
on the basis of a Normalised Difference Vegetation Index (NDVI), which is a simple
numerical indicator derived from satellite or aerial images for assessing the crop
health at any particular point of time.
This data will be augmented by using four
other parameters, namely, soil, moisture data from satellite images, temperature
and rainfall data from ground weather observatory stations.
While the NDVI data
are calculated from satellite images taken at a resolution of 0.050 x 0.050 (latitude
and longitude), soil moisture data will be derived from 0.5°X0.5° images.
Compare
this to crop-cutting experiments for calculating actual yield estimation, wherein
a simple multiple-peril crop insurance product’s actual yields of an area are benchmarked
to average yields of the last 3 to 5 years.
The actual yield estimation of an area
is done by carrying out a specified number of crop-cutting experiments. Payouts
in the weather-cum-satellite imagery insurance are made by comparing the yield derived
from the above-mentioned four factors with the normal yield. If the derived yield
is less than the specified percentage of the normal yield, the farmer is compensated
for the difference.
In the present National Agriculture Insurance Scheme (NAIS),
although Agriculture Insurance Company of India decides the claim amount, the process
is administered by the Union government and takes more than a year for the farmer
to receive the claim amount.
With the use of the hybrid weather-cum-satellite imagery,
claims can be settled within 30 days.
Says Alok Shukla, head of product development,
WRMS, “A cover based on the above-mentioned four parameters inherits features of
both the existing form of crop insurance. It gives a good and accurate estimate
of yield like the crop yield insurance scheme (NAIS), but with lower administration
cost and a faster and transparent claim settlement process. On the other hand, it
also takes into account weather parameters of ground station as most of the crop
losses are due to adverse weather condition.”
“The concept can also be used for
crop monitoring and predicting foodgrain production more accurately, which would
tremendously benefit farmers to plan their sales on time and the government to take
necessary measure to avert any possible foodgrain shortage.”
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MCX to ally with agri, insurance cos |
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Prachi Karnik Pradhan, THE FINANCIAL EXPRESS, Wednesday, December
05, 2007 |
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Mumbai, Dec 4 : The Multi Commodity Exchange (MCX) will enter into
an alliance with seed, fertiliser, and insurance companies to distribute agri and
insurance products, especially for crops at the doorstep of farmers with the assurance
of quality.
MCX would soon tie-up with Jalna-based Mahyco Seeds Limited and Syngenta.
Lamon Rutten, joint managing director, MCX said that MCX has decided to offer some
critical pre-harvest and post-harvest offerings. Rutten said that the products would
be made available to farmers at the standard fixed price through the village-based
branch post offices.
MCX has already tied up with Shriram Fertilizers and Chemicals Ltd.
Those farmers who used these products have reaped its benefits. MCX, in order to
provide weather insurance for crops, would enter into an alliance with Kanpur-based
Weather Risk Management Services Private Ltd. The pilot project
would be launched in Jalgaon. MCX is open to similar tie ups for crop insurance.
MCX plans to join hands with Life Insurance Corporation of India (LIC) for distribution
of insurance products. “Farmers have need for insurance protection. We aim to provide
them with life insurance products soon,” said an official.
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