18 June 2009
Insurance Tool Helps Farmers, Nations Manage Climate Change Risk
New report details “index insurance” benefits for development, disasters
This is part one of a series on index insurance, a promising tool that may help vulnerable people worldwide manage climate variability and change.
Washington — Extreme weather takes a toll on farmers everywhere. In developed countries, farmers can buy crop insurance to help manage that risk. Not long ago, poor farmers in developing nations, where crop insurance is rarely available, had no alternative but to shoulder their own risk, in the process often becoming mired in poverty.
Today, a relatively new tool called index insurance may give these farmers and other vulnerable people around the world an affordable way to manage the effects of a variable and changing climate on their livelihoods now and in the future.
The farmers’ resulting economic stability may make creditors more willing to extend credit, suddenly allowing them to invest in new seeds, fertilizer and equipment — their own agricultural productivity — and begin to climb permanently, harvest by harvest, out of developing-world poverty traps.
“Index insurance has been really promising in a couple dozen places throughout the world,” Molly Hellmuth, director of the Climate and Society Publication Secretariat, part of the International Research Institute (IRI) for Climate and Society, located in New York, told America.gov.
MEASURNG RAINFALL
In traditional crop insurance, a farmer pays money, called a premium, to an insurance company to protect against a crop loss. If something happens to the crop, the farmer files a claim and the company sends an insurance adjustor to the farm to assess the loss and determine how much the insurance company will pay the farmer.
Insurance cheating can be a problem — what’s known as a moral hazard — because being paid for a crop loss can weaken a farmer’s incentive to produce a good crop. This hazard and the need for insurance adjusters to visit farms for each claim tend to make insurance premiums expensive.
“That’s a problem all over the world,” Daniel Osgood, associate research scientist in economic modeling and climate at IRI, told America.gov.
With index insurance, a farmer pays a very small premium to protect against, for example, drought-related crop loss — the most common application in developing countries so far. Rather than being linked to a crop loss, the payout is linked to a weather index, in this case rainfall.
WEATHER INDEX
To determine the payout, the insurance company measures rainfall using data from rain gauges near the farmer’s field. If the data from the rain gauge show the rainfall amount is below a certain stated level, the insurance company pays the farmers.
“We’re saying, instead of giving people insurance on their losses, let’s give them a payout when something happens that would cause their crops to die,” Osgood said. “Its advantage is, if I know the rainfall [level] there’s no way people can cheat to get a payout. That makes it much simpler and [insurance adjusters] don’t have to go see if people’s crops have died.”
Payouts can be made quickly, saving farmers from desperately selling their planting equipment for money or using their plow animals for food — actions that would affect their ability to farm and drive them deeper into poverty.
The new insurance tool also has disadvantages, Osgood said. One is that index insurance is new and it takes time and resources to explain to farmers how it works. Another is called “basis risk,” when insurance payouts do not match actual losses.
“If my farm is far from the rain gauge and the rain gauge faces a drought and I don’t, or if I face a drought and the rain gauge doesn’t, then I’m not covered,” he said. “There will be payouts I don’t need because the formula won’t be perfect. And I have to pay for that in my premium because the money I get out of insurance is a pay-in on my premium.”
CLIMATE AND SOCIETY
Hellmuth is chief editor of an upcoming report on the topic, part of a series on climate-related issues, called Index Insurance and Climate Risk: Prospects for Development and Disaster Management. The publication will be available June 24 after its launch at the 2009 Global Humanitarian Forum in Geneva.
IRI, established in 1996 as a cooperative agreement between the U.S. National Oceanic and Atmospheric Administration (NOAA) and Columbia University, will publish the report in partnership with the International Fund for Agricultural Development, Oxfam America, Swiss Re, NOAA, the U.N. Development Programme and the World Food Programme. (See “U.S. Institute Helps Developing Nations Put Climate Data to Use.”)
The series’ inaugural publication, Climate Risk Management in Africa: Learning from Practice, was a partnership among IRI, the African Union, the U.N. Economic Commission for Africa, the Africa Development Bank and the Global Climate Observing System. It was supported by the U.K. Department for International Development and NOAA in response to a focus on climate and sustainable development in Africa at the 2005 Group of Eight (G8) summit meeting.
“Index insurance is a pretty expert-intensive process right now,” Hellmuth said, “so we wanted to capture some of the cases and give information on how they were successful or not successful. And because we’re a more technical institution, we wanted to show some of the ways that climate science and technology are being used in practical applications.”
More information about IRI is available at the institute’s Web site.
IRI Climate and Society Publications are available at the Institute’s Web site. Index Insurance and Climate Risk: Prospects for Development and Disaster Management will be available June 24.
