The Potential for Scale and Sustainability in Weather Index Insurance

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CHAPTER 2
WEATHER INDEX-BASED INSURANCE
More generally, demand for index insurance may be constrained by the availability
of other government risk-management interventions, such as subsidized crop
insurance, bank credit guarantees, or relief employment programmes. In India, for
example, the private provision of weather insurance was crowded out by a heavily
subsidized area-yield insurance programme provided by the Government. Once it
started subsidizing premiums for private insurers as well, sales of policies sold by
private companies increased noticeably. In China, the Government began making
Box 2. Using role-playing games to understand farmer
demand for index insurance
Farmers often have difficulty understanding insurance products; they lack experience with
them and have little trust in insurers. These conditions pose serious challenges to any scalingup
efforts, particularly with regard to the index-based microinsurance products bundled with
credit for inputs, such as improved seed or fertilizer.
Building on previous experiences, the IFAD-WFP Weather Risk Management Facility (WRMF)
supported the design of a game that simulates decisions in a weather insurance market
associated with agricultural inputs. By illustrating the risks and opportunities of index
insurance aiming to facilitate access to loans, the game sought to:
• Investigate the extent to which people in rural communities without a history of using
insurance can learn the basic concepts of insurance when its main elements are described;
• Ascertain whether participating in an interactive learning process, where participants make
decisions in a simulated insurance market, can significantly improve their understanding of
insurance; and
• Investigate the willingness to pay for different levels of coverage and products.
The game was piloted among Ethiopian and Malawian farmers in 2008 and yielded two
valuable insights:
• Farmers are interested in complex microinsurance services. The evidence from this activity
strengthens the argument that there is demand for insurance services bundled with credit
among vulnerable communities, and that there may be interest in a slightly more costly
scheme that helps cover some livelihood expenses in times of drought.
• Simulation games can support educational and marketing efforts to introduce insurance.
The survey analysis indicates that the game was at least as good as a conventional lecture
approach in conveying most of the key insurance concepts (and better at one key
dimension related to trust). While further analysis is needed, this market simulation
approach may prove useful in scaling up, particularly among illiterate people facing climate
risks. Future work could yield more reliable results and insights into the determinants of
farmers’ learning and preferences in regard to index insurance.
This approach can stimulate a participatory discussion on how to define the key parameters
of the insurance scheme (e.g. cost of premium, magnitude of payout, probability of event
insured). Oxfam America is piloting a demand-driven index insurance product for farmers in
Ethiopia, designed with the help of a similar game. The Environment Finance Group of the
United Nations Development Programme (UNDP) will also use the game to illustrate the
potential of risk transfer for development during a retreat for country officers in the Slovak
Republic, and it could become a valuable part of wider efforts to promote risk transfer.
Source: Pablo Suarez and Anthony Patt, unpublished research for the WRMF.