The weather insurance products are very specific to the area, the season, crop and peril insured. A compensation for the decreased revenues from cultivation of the specified crop happening due to excess or deficit in a weather parameter in the specified location is made to the customer. The compensation would be based on the variation between the Weather Index set and the Actual Observed Index recorded in a reference weather station based on which the model has been developed.
The product has defined threshold and an exit level that establish the range of values over which indemnity payments can be made. The threshold is a point of index at which the product begins to make payouts. Once the threshold is reached, the eligible payout increases incrementally as the value of the index approaches the exit limit.
For example, an index insurance contract designed to cover the risk of drought would begin making indemnity payments if rainfall levels, as measured at an agreed weather station, fall below the threshold over a defined time period. Indemnity payments would increase proportionately for each millimeter (mm) of rainfall below the threshold until the agreed limit is reached. The maximum indemnity would be paid when rainfall is less than, or equal to, the exit limit.
The payouts calculated by the index are not based on the actual losses sustained by the farmer who has purchased the policy but would depend on the deviation of weather from the recorded on the value of the index relative to the threshold (subject to the limit) and the amount of the liability purchased. The payment could be less than, or more than, the loss sustained by the individual policyholder.
Rainfall insurance doesn’t cover losses due to:
- Improper package of practices adopted by the farmer.
- Faulty seed material, pests and diseases, fire, weeds, locusts or any other peril unless specified in the cover details.
- Other weather conditions.
- Nuclear Risk.