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
Subsidies
In Ethiopia, insurance is less than US$1 per capita. It is thus unlikely that programmes
would break even within the first 10 years, as administrative costs are very high (e.g. for
logistics and awareness-building). Farmers living on so little find it difficult to pay the
premiums, so subsidies – as well as in-kind labour – could help in adoption. One idea is to
introduce subsidies in the earlier stages, but then slowly phase them out (for example, in
the first year the farmer might pay 10 per cent of the premium, 25 per cent in the second
year, 50 per cent in the third year, and so on).
Next steps
Index insurance can enhance existing agricultural supply chains and businesses. However,
it would not be the most appropriate tool everywhere in the country – some crops are more
weather-resistant than others – and is best suited to drought-prone areas. It can help
support expansion in rural finance and agriculture, but must go hand-in-hand with
investments in related areas such as extension services and irrigation.
According to NISCO, there is scope for capacity-building of insurers on the use
of information technology systems and software such as LEAP in administering
index insurance. 31
31 Nyala Insurance Company, interview December 2009.
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