The Potential for Scale and Sustainability in Weather Index Insurance

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CHAPTER 4
ROLES FOR GOVERNMENTS AND DONORS IN PROMOTING
THE SCALING UP OF INDEX INSURANCE
National weather services, infrastructure, data systems and research. The
complexities of contract design and basis risk are significant constraints on index
insurance. Scaling up can only be achieved if there is systematic coverage of the
territory, with weather stations sufficiently close to the insured parties (maximum
20 km). Beyond the physical presence of weather stations, there is a need to collect,
maintain and archive data and to make them available on a timely basis in relation
to insured events. This requires longer-term investments in the coordination of
national meteorological authorities and in training in the operation and
maintenance of weather stations. WMO, private players, donors and governments
– working closely with national meteorological services – can play a key role in
improving and expanding the network of weather stations and the quality of data
produced and available. Similarly, these actors can explore opportunities related to
satellite-based indices that use remote sensing tools. Given the increasing
unpredictability of weather patterns due to the changing climate, the benefits of
investment in weather infrastructure will also extend beyond the development of
index insurance products.
An enabling legal and regulatory environment and sound national rural riskmanagement
strategies. In many countries, the laws and regulations necessary to
accommodate the development and use of weather insurance products are simply
not in place, and they would need to be consistent with international standards to
improve insurers’ chances of gaining access to global markets for risk transfer.
Human capacity-building and technical assistance are also essential in preparing
the legal and regulatory environment to govern index insurance programmes. For
example, establishing such an environment for enforceable contracts that buyers
and sellers can trust is a fundamental prerequisite for index insurance. Donors can
play an important role in supporting the development of sound national rural riskmanagement
strategies. Index insurance is but one instrument for managing risks
in rural areas, and it has greatest relevance in regions where farmers are exposed to
covariate and catastrophic losses due to weather risks or other natural events. There
is a need to develop national risk-management strategies to identify priority areas
in which these investments should be made, to analyse how index insurance
blends with existing risk-management policies, and to determine how these
policies impact incentives for index insurance.
Impact studies. Though many agree that index insurance has the potential to
smooth household incomes and mitigate the force of weather shocks on poor
farming families, it would be important to define its specific effects on households.
None of the programmes examined in the case studies were subjected to a rigorous
study to examine their impact on the level of poverty and the asset base of clients