The Potential for Scale and Sustainability in Weather Index Insurance

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EXECUTIVE SUMMARY
agricultural development, but it could also make disaster relief more effective. As
such, index insurance can benefit clients beyond agricultural producers: governments,
relief agencies, financial service providers, input suppliers, businesses, agricultural
processors, food companies, farmers’ organizations and producers’ associations could
all use index insurance.
While the potential benefits of index insurance are great, implementation can be
difficult. Small producers often do not understand the benefits of insurance – and
often cannot afford it. The cost of premiums, especially in major scaling up, can be
daunting. But high premiums can put index insurance out of the reach of those who
need it most. Subsidies for index insurance are an option, although subsidies carry
their own problems.
However, even when producers want and can afford index insurance products,
insurers are not always prepared to offer them. It is noteworthy that in nearly all the
cases examined for this paper, private insurers were not the first to offer index
insurance. The public sector, multilateral agencies and NGOs appear to have taken the
lead, in part because private insurers feel constrained by the ‘first mover’ problem;
that is, the first insurer that invests in research and development of index insurance
products will not be able to prevent competitors from copying them. This reluctance
by the private sector appears to be compounded by the high-basis risk associated with
too few weather stations, the lack of awareness of insurance among clients, and the
need for marketing intermediaries. At a minimum, the challenges and costs of
retailing directly to producers make the use of aggregators such as farmers’
organizations, financial service providers and food processors essential.
The many hurdles indicate that important public goods need to be in place, and a
facilitating role played by non-profit organizations, donors, and others, in order to
launch index insurance in most regions. Without such an infrastructure, private
insurers are unlikely to break into the sector. For the scaling up of index insurance,
governments and donors will need to intervene more actively by playing important
enabling and facilitating roles and supporting the development of the sector. Key
support areas for governments and donors include:
• Providing ongoing technical assistance, training, and product development;
• Educating clients about insurance;
• Promoting innovation;
• Facilitating access to reinsurance;
• Developing national weather services, infrastructure, data systems and research;
• Creating an enabling legal and regulatory environment, and designing sound
national rural risk-management strategies; and
• Supporting impact studies.