The Potential for Scale and Sustainability in Weather Index Insurance

16
CHAPTER 1
RISK IN AGRICULTURE
Traditional risk-management arrangements frequently fail to provide an adequate
safety net for the poor, especially against high-severity, low-frequency risks. Owning
few assets, poor people have few options for coping with significant losses. They are
often forced to sell important assets used for daily survival and income (e.g. livestock),
or to use savings, which further adds to the long-term impact of natural hazards.
Following local production shocks, they are also more exposed to food price increases
and to any contraction in local employment opportunities and wages. There is a
growing literature showing that repeated asset losses and income shocks can conspire
to keep poor households trapped in poverty (Barnett, Barrett and Skees 2008).
Traditional risk-management methods are least effective at handling lowfrequency,
highly covariate risks that affect many people simultaneously (Sarris and
Christiansen 2007). These events can overstretch the capacity of kin support networks
and other community coping measures. They may also involve loss or damage of
assets, making recovery more uncertain and slower. Many vulnerable people can slip
into poverty and become trapped. These failures are all the greater when major lifethreatening
catastrophes occur.
As a covariate risk, drought shows some of the most dramatic evidence of the
failure of traditional coping strategies. Detailed studies of the impact of severe
droughts in Ethiopia (Webb and von Braun 1994), eastern India (Pandey, Bhandari
and Hardy 2007) and southern India (Hazell and Ramasamy 1991) all show that, in
percentage terms, income losses can far exceed initial production losses, because after
the initial shock, there is an associated collapse in local agricultural employment and
wages, non-farm income and asset prices. Broader evidence of the impact of weather
shocks confirms not only the significant short-term hardships that result, but also
how temporary health and nutrition problems and the loss of productive assets such
as livestock can undermine long-term earning capacity (Fuente and Dercon 2008;
López-Calva and Juárez 2008; and Grosh et al. 2008).
In many areas, risk management is further undermined by growing population
pressures on natural resources, leading to greater vulnerability when risk events occur.
What was once a manageable shock can now be a catastrophe. Flooding, for example,
can have a more severe impact on livelihoods as population pressures push
communities onto the more arable land near waterways, which is also more
susceptible to flooding. Smallholders in developing countries are extremely
vulnerable to such natural disasters, as nearly 75 per cent of the 1.3 billion people
living on less than a dollar a day depend on agricultural activities (World Bank 2007).
Many live on ecologically fragile land and depend on agriculture, livestock
production, fisheries and forestry. Climate change is also increasing the frequency and
severity of many weather-related risks, further undermining the effectiveness of
traditional risk-management methods.