The Potential for Scale and Sustainability in Weather Index Insurance

THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE
FOR AGRICULTURE AND RURAL LIVELIHOODS
Impact on poverty
On the whole, it is difficult to identify any community impact of the insurance programmes,
because grazing represents a relatively low value per unit of land and the proportion of land
that is insured is relatively small. The average value of pasture land is about US$1,230 per
acre, which is only about half the average value of farmland (US$2,350 per acre). Less than
10 per cent of the 650 million acres of grazing and hay lands in the United States are
currently insured in either of the pilot programmes. Moreover, most producers of forage
have income and wealth levels that are above average, so the programme cannot be
expected to have an impact on poverty reduction.
Lessons learned
Basis risk needs correction
Farmers in Texas and Oregon who purchased PRF-RI and PRF-VI, and who suffered
through major droughts, feel strongly (as do their agents) that the programmes failed to
adequately compensate them for actual losses suffered in the field. An effort is thus
underway to modify the programme to increase the correlation between indemnities and
actual losses.
Producers have complained about the design of the intervals and insurance coverage
amounts, which some feel do not trigger a payment even after a severe drought. The leader
of sales for the Silveus Insurance Group argues that recent experience has demonstrated
that the cumulative impact of drought that spans intervals is much greater than the sum of
the estimated impacts in those intervals. Thus farmers receive compensation that is much
less than their actual losses.
Payout disparity between the two programmes
Agents have also criticized the fact that the two programmes are designed to cover the
same risk, but they work quite differently. Although the two programmes are not available
on the same land, the comparison of payoffs in adjacent tracts of land reveals significant
differences in indemnities from the two programmes.
Next steps
After development, the incremental cost of delivering the programmes is quite low. Thus the
programmes could be replicated in additional areas of the United States, as well in other
regions of the world with access to historical satellite imagery data or adequate rainfall data.
However, areas that lack such data could not easily benefit from the model. In addition, the
high level of government subsidies raises serious questions about the programme’s
sustainability, particularly if looked at in the context of developing countries.
ANNEX
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