The Potential for Scale and Sustainability in Weather Index Insurance

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NASFAM National Smallholder Farmers’ Association of Malawi NBFC Non-Bank Financial Company NDVI Normalized Difference Vegetation Index NISCO Nyala Insurance Company, Ethiopia NMA National Meteorological Agency, Ethiopia NOAA National Oceanic and Atmospheric Administration, United States PAC primary agricultural cooperative society, India PACC Climate Contingencies Programme [Programa de Atención a Contingencias Climatológicas], Mexico PRF-RI Pasture, Rangeland, Forage Rainfall Index Pilot Programme, United States PRF-VI Pasture, Rangeland, Forage Vegetation Index Pilot Programme, United States PROAGRO Programme to Guarantee Agricultural Activities [Programa de Guarantia da Atividade Agropecuária], Brazil PSNP Productive Safety Net Programme, Ethiopia PTTS Seed-Swapping Programme [Programa Troca-Troca de Sementes], State of Rio Grande do Sul, Brazil REST Relief Society of Tigray, Ethiopia SAA Department of Agriculture and Supply [Secretaria de Agricultura e Abastecimento], State of Rio Grande do Sul, Brazil SMS Short Message Service WBCIS Weather Based Crop Insurance Scheme, AIC, India WFP World Food Programme WMO World Meteorological Organization WRMF IFAD-WFP Weather Risk Management Facility WRMS Weather Risk Management Services, India WRSI Water Requirement Satisfaction Index, FAO 7
THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE FOR AGRICULTURE AND RURAL LIVELIHOODS Executive summary Risk is inherent in agriculture. Farmers face a variety of market and production risks that make their incomes unstable and unpredictable from year to year. Input prices may increase out of reach, crops may be destroyed by drought or pest outbreaks, selling prices may plummet and harvests may rot in poor storage facilities. In many cases, farmers also confront the risk of natural catastrophe. Assets and lives may be lost due to severe droughts, hurricanes, earthquakes and floods. The type and severity of the risks confronting farmers are particularly burdensome to small-scale farmers in the developing world. Unless adequately managed, agricultural risks slow economic development, hamper poverty reduction and contribute to humanitarian crises. Many risks can be managed. Farmers, rural communities, financial service providers, input suppliers, private insurers and relief agencies each have strategies for coping with chronic and catastrophic risk. But the difficulties and costs involved in managing covariate risk (those risks that affect large numbers of people at one time) are especially challenging. Farmers and rural communities typically cannot manage covariate risk without outside help. Unfortunately, outside help faces many challenges. Financial service providers have limited their activities in rural areas. Input suppliers typically serve only the least risky clients. Even help from governments and relief agencies is costly and can be ineffective. In recent years, however, an increasing number of pilot programmes have tested an innovative idea in managing covariate risk in agriculture: index insurance. 1 Weather index-based insurance is a financial product linked to an index highly correlated to local yields. Indemnifications are triggered by pre-specified patterns of the index, as opposed to actual yields, reducing the occurrence of moral hazard and adverse selection and eliminating the need for in-field assessments. In addition, because the insurance product is based on an independently verifiable index, it can also be reinsured, thus allowing insurance companies to efficiently transfer part of their risk to international markets. The Weather Risk Management Facility, a joint undertaking of IFAD and WFP, reviewed a range of recent experiences with index insurance programmes around the world, analysing the key actors, features of the products, and their successes and challenges. These pilot programmes have demonstrated the great potential of index insurance as a risk-management tool. They suggest that index insurance could not only provide an additional effective, market-mediated solution to promote 1 This paper focuses on the use of weather index-based insurance, but will also use the term ‘index insurance’ for the sake of simplicity and brevity. 9
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Contacts IFAD Francesco Rispoli f.r
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The Potential for Scale and Sustainability in Weather Index Insurance

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