Adapting to Climate Change: Assessing the World Bank Group ...

CHAPTER 3CLIMATE VARIABILITY3.34 An innovation—index insurance—seems to offer the advantages of insurance atlower cost than traditional approaches. Index insurance bases its payouts on a simpleobservable measurement, such as cumulative rainfall at a specific rain gauge. Thisreplaces a complex process of loss assessment with a simple bet on rainfall. Variants useremote sensing on crop conditions, or other observations not tied to a specific insuredfarmer.3.35 The Bank Group has a 10-year history of supporting pilot programs that provideweather index insurance in developing countries. Most pilots have offered productsdirectly to low income households. But these pilots have struggled with a common setof challenges:High relative costs of operation, in part because the average value per household ofthe assets being insured is very low. For example, the average insured value in2010/11 for India’s weather-based crop insurance scheme is roughly $350 perfarmer, and annual premiums are $29 per farmer (Clarke, Mahul and others2012). High costs have meant that all index insurance pilots have required asignificant degree of subsidization. Even with these subsidies, the upfrontpremium payments may still be higher than subsistence farmers are willing orable to pay.Basis risk, meaning that the farmer’s actual risk is not well correlated with thetrigger for payout—for instance, because rainfall on the farmer’s plot differs fromthat at the gauge, or because farmer income depends on non-weather factorssuch as pests or price shocks.Farmers’ lack of experience with, and trust in, the insurance product, which may leadfarmers to place little value on insurance products(Churchill and Matul 2006; Patt,Suarez and others 2010). A World Bank pilot in Malawi ran a randomized trialwhere some farmers were offered credit to purchase seeds while others wereoffered credit bundled with an actuarially fair rainfall insurance product; uptakeof the credit alone was 33 percent, while uptake of the bundled package was only17.6 percent (Gine and Yang 2009).Table 3.1. Major Agricultural Index Insurance Supported by the Bank GroupCountry Institution Intervention type Enrollment YearsMongolia World BankInvestment,$18million7,000 herders as of 2010-11 2006-IndiaWorld Bank, TechnicalGFDDRR assistance9 million farmers in 2010-11 2004-Malawi World Bank Pilot 1,800 farmers, $80k assets insured 2005-7Ethiopia World Bank Pilot 50 farmers 2005Kenya World Bank, IFCGrants, Premiumsubsidy3,000 herders 2008-43