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
Chapter 3
Key drivers of sustainability
and scalability of weather
index insurance
In the past, crop insurance programmes have performed poorly, presenting numerous
logistical and administrative challenges and lacking sustainability. But new interest in
market-mediated approaches to risk management, along with new opportunities for
insurers to pool covariate risks in international financial markets, make index
insurance appealing. In addition, growing concern for the need to adapt to climate
change is emerging as an important driver of weather insurance. As a result, numerous
pilot programmes have been launched in recent years, with the active engagement of a
diverse range of actors (including governments, donors, multilateral agencies,
international reinsurers, relief agencies, NGOs, private insurers, banks, input suppliers,
food marketing companies and farmers’ organizations). Table 3 provides the details of
36 such ventures, including six disaster-relief insurance programmes in 21 countries
and 30 agricultural development index insurance programmes in 19 countries.
The table highlights the diversity of the index insurance world. Development
insurance programmes range from privately provided and unsubsidized schemes –
linked to comprehensive packages of agricultural development information and
services for farmers – to publicly provided, heavily subsidized schemes with weak or
no value propositions. An example of the former is the PepsiCo potato out-grower
programme (see Case Study 2), while for the latter, the Agriculture Insurance Company
of India (AIC) offers area-yield and drought insurance on a heavily subsidized basis to
all takers (Case Study 5). Disaster relief programmes vary from international insurance
arrangements that directly underwrite government relief costs to programmes run by
NGOs that provide disaster relief insurance directly to communities or farmers (see
Case Study 3: Ethiopia). They also vary with the type of index used. While most
programmes use weather indices, others use indices based on crop-cutting (i.e. harvest)
estimates of area yields (e.g. AIC in India, see Case Study 5), county-level livestock
mortality rates (e.g. Mongolia) and biophysical model estimates of range productivity
(e.g. Canada and the United States, see Case Studies 6 and 7).
Most of the programmes are still young and have yet to reach large numbers of
beneficiaries. Among the agricultural development programmes, India has achieved
the greatest success, with a number of private weather insurance schemes that together
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