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Munich Re is one of the largest global reinsurers and has a long tradition in both the assessment of weather-related hazards and their impact on crop production and the development of appropriate risk management tools and crop insurance schemes. Munich Re’s underwriting of agricultural risks throughout the world is concentrated in its agricultural underwriting department. This department has long been a world-renowned centre of competence. It develops Munich Re’s strategy and underwriting guidelines and is responsible for the underwriting of agricultural insurance within the Munich Re Group. This involves a wide range of segments like crops, crop hail, multi-peril and named perils, livestock including aquaculture and greenhouses. With a premium income of about €400m in 2006, Munich Re is the world’s largest agricultural reinsurer.

This article presents innovations in agricultural risk management for natural disasters, focusing on the role of weather derivatives and weather index insurance in developing agricultural risk management strategies. The success story of weather risk insurance in India demonstrates to the world, that organized markets for risk can emerge and finance agricultural losses. Currently, many developing countries are particularly exposed to natural disaster risk without the benefit of ex-ante structures to finance losses. Instead, following each major drought event or other natural disaster, those affected must appeal for financial support and are left vulnerable to the mercy of ad-hoc responses from donor governments. Livelihoods are rarely insured by international insurance or reinsurance providers, capital markets, or even government budgets in developing countries where natural disasters and agricultural price risk impede development of both formal and informal banking. Trapped into this cycle of institutional underdevelopment, poor, risk-averse farmers are locked in poverty, burdened with old technology and faced with an inefficient allocation of resources.

Indian agriculture has high dependence on weather, especially monsoons. A causal analysis of agricultural losses as compiled by General Insurance Corporation of India’s crop insurance cell (Table 23.1) shows that a major reason of crop losses can be attributed to weather vagaries.

“Contingency Planning — a plan designed to take account of a possible future event or circumstances” (Australian Oxford Dictionary).

Agriculture is defined as “the production and processing of plant and animal life for the use of human beings” and also “a system for harvesting or exploiting the solar radiation.” Meteorology is “the science of atmosphere.” “The study of those aspects of meteorology, which have direct relevance to agriculture,” is defined as agricultural meteorology for which the abbreviated form is “Agrometeorology” (). The primary aim of agricultural meteorology is to extend and fully utilize the knowledge of atmospheric and other related processes to optimize sustainable agricultural production with maximum use of weather resources and with little or no damage to the environment. This science also provides the necessary information to help reduce the negative impact of risks and uncertainties of adverse weather through agrometeorological services (). According to Murthy and Stigter (2003), agrometeorological services are “all agrometeorological and climatological information that can be directly applied to improve or protect agricultural production (yield quality, quantity, and income obtained from yields) while protecting the agricultural production base from degradation.” Sivakumar et al. (2004) observed that the current status of agricultural production and increasing concerns with related environmental issues call for improved agrometeorological services for enhancing and sustaining agricultural productivity and food security around the world.

Agricultural systems are largely dependent on weather and climate, then management and planning decisions are made in condition of risk or uncertainty due to the high level of complexity of the agricultural systems. Despite the important advances in technology over the last decades, many production factors are not well defined and they are outside of the farmer control (). The lack of precise information increases the level of uncertainty in farm management. To overcome these problems, farmers increased the level of energy and chemical inputs above the necessary requirements with the aim of decreasing the impacts of the variability of agricultural systems. Unfortunately, the consequence of this strategy was the increasing of environmental impact and production costs without obtaining the expected goal (). A solution to interrupt this negative trend is to substitute expensive and pollutant chemical and energy inputs with elaborated information of high quality. In this way it is possible to decrease the risk of the uncertainties of decision making and thus to minimise the application of excessive inputs and increase the potential income ().

Agriculture is a complex system, within which changes are driven by the joint effects of economic, environmental, political and social forces (; ). It is very well known that agriculture is inherently sensitive to climate conditions and is among the sectors most vulnerable to weather and climate risks. Of the total annual crop losses in world agriculture, many are due to direct weather and climatic effects such as droughts, flash floods, untimely rains, frost, hail, and severe storms (). Chattopadhyay and Lal (2007) estimated that around 28% of the land in India is vulnerable to droughts, 12% to floods and 8% to cyclones. But in the year 1918, which was ranked as the worst drought year of the last century in India, about 68.7% of the total area of the country was affected by drought ().