Back in January this year a small group of my team together with our local partner ProAgro hit the road to the mexican countryside to visit cattle farmers on-site. We had the great opportunity to meet with them and discuss the impact of drought risk on their production. They explained to us how frequent and how severe this can be – they are experiencing substantial losses almost every second or third year. As we left the fields, it was clear to us, how much an effective solution to drought risk is needed. When such events strike, cattle producers are forced to reduce their herd size and buy supplementary fodder. The reason for this is that their beef production is heavily dependent on the availability of natural grassland. If there is little or no rain across the year, there is not enough grass for their herds to graze. This, in turn, means farmers have to incur the extra cost to purchase supplementary fodder to maintain their herds. Given the fact that these are small subsistence farmers, the additional cost is rather a stretch to their finances. Aiming to offer a sustainable risk mitigation solution to these farmers, we, Swiss Re's Agriculture Reinsurance team and ProAgro (Protección Agropecuaria Compañía de Seguros, S.A.) managed to successfully develop and pilot a new satellite based index product. Since the beginning of June cattle producers in Puebla state, Mexico, are insured against drought. The product is designed on the basis of the Normalized Difference Vegetative Index (NDVI), which is an indicator of vegetation growth conditions based on satellite imagery. In essence, the greener the grass is the higher the NDVI value. Insurance payouts are made if during the insurance period the actual measured NDVI on a given pixel grid falls below a predefined threshold of the historical one. In practice, the triggers are set at a level to reflect the onset of pasture production losses due to drought. As part of the Mexican government's macro-level catastrophe CADENA program, the product is 100% subsidized. That's a huge incentive for low income farmers who can now benefit from having an appropriate and cost-effective mechanism in place when next drought strikes. That's how much we can achieve when we partner with innovative insurers and allocate joint efforts to close the protection gap. Source - https://openminds.swissre.com