GHCL first corporate to buy weather insurance derivative

Gujarat Heavy Chemicals Ltd (GHCL) has bought a weather insurance cover to protect its salt fields in Tamil Nadu.

This is the first corporate entity to have purchased a weather insurance derivative from ICICI Lombard General Insurance, which is in the non-agriculture domain.

The company's Nagapattinam salt pans in Tamil Nadu are prone to unseasonalshowers in addition to northeast monsoon winds. As salt production is associated with surface evaporation, the number of rainy days and the intensity of the rainfall could result in loss of production days, and thereby affects turnover.

Under the terms of the weather insurance cover, ICICI Lombard will pay GHCL a compensation of Rs 6 lakhs, Rs 10 lakhs and a maximum of Rs 25 lakhs for every non production day.

The compensation depends on the frequency of interruption through the number of rainy days and severity by further classifying the rainy days into three categories based on rainfall received, said Smita Aggarwal, head rural & agriculture business, ICICI Lombard.

The maximum sum insured under the deal is Rs 1.5 crore based on the maximum probability loss as defined by the corporate entity.

The weather insurance solution is a call option on an index named as the Non Production Day (NPD). An NPD is defined as a day during the cover period on which any rainfall is received at Nagapattinam reference station.

"We have classified the intensity of rainfall into three categories, and accordingly the compensation will be paid," said Aggarwal.

When it comes to claim settlement, ICICI Lombard would simply collect the data from Nagapattinam weather station (World Meteorological Organization Station Number 43347) on a daily basis. Without having to file a claim, ICICI Lombard would proactively make the payment.

ICICI Lombard is in talks with fertiliser and seed manufacturers, whose sales are equally dependent on weather conditions. Today the company has many farmers under its weather insured products through tie ups with state governments. It has insured coriander and orange farmers in the state of Rajasthan, where part of the premium is subsidised by the state government.

The cost of the risk coverage varies depending upon the type of crop and location of the fields. For instance, the premium cost for coriander is about 8-9 per cent of the sum assured, as against 11-12 per cent for orange crop also grown in the state of Rajasthan.

"Much has to do with the flowering pattern in the case of orange crops," said Aggarwal.