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
demand, design products and deliver effective risk-management services. Other
actors in the supply chain (farmers’ associations, input suppliers, financial service
providers and others) could also benefit from capacity-building.
Client education on insurance. Marketing and client education strategies are
necessary to introduce smallholders to insurance products, differentiate them from
weak public-sector insurance programmes that they may already know, and clearly
communicate the costs and potential benefits of index insurance. Without
sufficient targeted training to raise the awareness of potential clients in the market,
insurers that are accustomed to traditional insurance products may consider index
insurance too difficult to communicate to agents and these clients. Other private
insurers may invest in marketing, but only for their specific products, and not at
more socially optimum levels that would educate farmers more generally about the
appropriate role of insurance. Donors can play a key role in supporting the design
and dissemination of these public education efforts.
Innovation. Donors can also push the frontiers of index insurance by funding
innovations that may open new directions in the market. The use of new
technologies in alternative indices and remote sensing applications such as NDVI,
for example, offer great untapped potential. Certain applications of technology
might lower the entry barrier for reinsurers developing an appetite for index
insurance products, but looking for products that are ready to be priced and of
sufficient size. Remote sensing techniques could provide additional information
that makes reinsurers less hesitant about index insurance contracts.
Facilitate access to reinsurance. In the initial phases of the market, reinsurers are
not interested in the small, risky deals characteristic of index insurance start-ups.
Donors could play a catalytic role in index insurance markets by aggregating deals,
so as to arrive at a volume that would be of interest to reinsurers, and more
generally, by facilitating linkages between local insurers and reinsurers. Some larger
donors could also take a more proactive role and initially underwrite extreme
losses for the insurance pool, perhaps through contingent loans, until a sufficient
volume of business has been established to attract global reinsurers. The IFC-led
Global Index Insurance Facility, for example, is providing capacity-building
support and underwriting index insurance contracts. As another example, the
World Bank has provided a contingent loan arrangement for the livestock
insurance scheme in Mongolia. Donors could also support innovative mechanisms
and look for ways to graft onto existing delivery channels to bring index insurance
to the local level.
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