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 4
Roles for governments and
donors in promoting the
scaling up of index insurance
Although private insurers play a central role in the case studies reviewed in this paper,
it is noticeable that in nearly all cases the programmes were initiated by the public
sector, multilateral agencies (such as the World Bank and WFP) or NGOs, not by
private insurers. This suggests that there are important public goods and roles that
need to be in place, without which private insurers may be unwilling or unable to
enter the market.
There is a first-mover problem: the high initial investment in research and
development of index insurance products might not be recouped, given the ease with
which competitors could copy products if they prove profitable. This discourages
many companies from making initial investments in new product development,
especially in underdeveloped markets. Private insurers may be particularly wary of
this issue: unlike public insurers, they are not subsidized and may miss the
opportunities that public insurers have as early movers.
Subsidies might be warranted as part of a well-designed, focused strategy to kickstart
insurance markets. Targeted government and donor support could counteract
the high start-up costs of developing these products by investing in public goods,
such as the purchase and installation of weather stations, improved access to
historical and real-time weather data, and key investments in client education, as
well as capacity-building and technical support for local insurers to develop, launch
and evaluate products. This kind of support would offset some of the initially high
set-up, administrative and reinsurance costs, though there should also be an explicit
exit strategy.
That said, governments and donors should intervene carefully to promote
development-oriented index insurance. In particular, subsidies should be used
cautiously. The evidence suggests that few farmers are willing to pay the full cost of
unsubsidized insurance simply as an alternative way of managing risk. Index insurance
is much more likely to sell on an unsubsidized basis if it is linked to a wider package
of goods and services that enables farmers to access new productivity-enhancing
technologies or high-value markets that could significantly increase their income.
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