The Potential for Scale and Sustainability in Weather Index Insurance

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CASE STUDY 3
INDEX INSURANCE IN ETHIOPIA – THREE PILOTS
At the end of each phase, the total deficit for a phase is equal to the sum of all the deficits
in each 10-day period within the phase.
Also at the end of each phase, payout is computed according to the value of the
corresponding rainfall deficit and is related to a Rainfall Deficit Index (RDI). This index
increases when rainfall decreases.
The contract was structured from a micro prospective. NISCO promoted and sold the
product through the Lume Adama Farmers’ Cooperative Union (LAFCU). LAFCU was
essential in securing farmer participation, as it is a trusted delivery channel for farmers that
already buy seed and fertilizer through the union. LAFCU bought drought insurance for the
rainy season (i.e. all three cultivation phases), covering a total of 137 farmers (seven of
whom were women).
When drought occurred in 2009, the growth of haricot beans was impeded and payouts
were triggered. The indemnities were paid within 60 days and totalled US$24,300 (309,000
Ethiopian birr [Br]), or approximately half the maximum payout. This amount was paid to
LAFCU, which then distributed it to the 137 insured farmers.
A preliminary evaluation of the pilot indicates that the insured farmers understood the
insurance policy well and were aware of its potential benefits. 26 In addition, other farmers in
the region have approached NISCO and its partners, asking to be included in the next
phase of the pilot and expressing interest in a product that would cover crops such as
maize and teff. NISCO signalled interest in this type of expansion, but it would only consider
it feasible given significant capacity-building efforts and Government support.
The Government considered the NISCO pilot a good learning experience in providing
crop insurance in rural areas, and it supports continuing the programme. It believes that
index insurance has the potential to increase production by sharing risks and assisting
farmers in adopting new technologies. It is particularly interested in replicating the
experience in other regions, so that they might see similar benefits (e.g. reduced effects of
natural hazards on susceptible crops). Together with international organizations, the
Government would be willing to provide financial support to insurers and farmers’ unions to
sustain the programme. Priorities include creating incentives, providing access to credit,
and improving farmers’ understanding of the nature of insurance through organizing training
workshops, identifying potential stakeholders and creating awareness.
Although generally favourable to the development of weather insurance, the
Government sees some areas in need of improvement. Adequate training for farmers,
unions and insurers (as well as its extension workers and NMA staff) would be essential to
future success. Improvements in the timing of payouts would also be needed. In addition,
some changes in the process of insurance development should occur. In particular, a major
effort should be made to provide more access to credit for farmers. In this regard, farmers’
cooperative unions have a central role in providing credit to farmers to pay premiums and
possibly in marketing beneficiaries’ products.
26 Report of the evaluation of the Ethiopian haricot beans pilot project, forthcoming in the spring of 2010.