Climate-linked insurance could help poor farmers offset crop failure risk

Small-plot farming can be a risky business with livelihoods dependent on increasingly unpredictable weather, but new research suggests that the growth of climate-linked insurance schemes could help protect poor farmers against bad harvests.

A report released Monday by the International Research Institute for Climate and Society (IRI) at Columbia University and the Consortium of International Agricultural Research Centers (CGIAR), charts the impact that index insurance — which differs from traditional indemnity coverage in that it is based on factors such as rainfall, rather than actual measured loss — is having on smallholder farmers.

Authors of the study looked at how such schemes are going down in Kenya, Senegal, Ethiopia, Mongolia and India, where some 30 million people have taken out index-based coverage. They found that the schemes had seen “rapid progress” in recent years. Moreover they had the potential to “benefit smallholder farmers at a meaningful scale.”

Around for about two decades, index insurance schemes are becoming popular not only for agriculturalists but also for underwriters who find it more difficult to calculate actual loss on an individual case basis, especially in countries where infrastructure and communication are weak.

Having loss based on factors such as wind-speed, rainfall that affect regions makes insurance policies easier to manage on a large scale.

“There’s evidence from several case studies which suggests that index insurance can have a positive impact on poverty reduction as long as it’s implemented alongside other risk reduction measures,” said Helen Greatrex, the lead author of the report. Those other methods of reducing risk include simple preventative measures like storing water during times of heavy rainfall, along with building farmers' cash reserves to help them through hard times, she added. 

The success of the policy also hinges on trust that the science behind indexing isn't unfairly benefiting one party over the other, authors said.

Jim Hansen, head of the CGIAR Research Program on Climate Change, Agriculture and Food Security at Columbia, said there needed to be a neutral arbiter of what kind of climate variability deserves a payout.

Essential is the participation of a “technical institution that has no vested interest in the insurance, that is trusted by the insurance providers and clients, and that can ensure the necessary data are available without interruption,” Hansen said. 

The price of index insurance plans is usually around $11 per season, according to the report, but it can vary depending on the weather and the value of the crops grown.

And the coverage plan can be profitable for insurers, under the right criteria. Joachim Herbold, an underwriter with MunichRe — a re-insurance company that manages index insurance policies — said that high penetration of the market, a low basis risk and technically sound insurance rates were essential to give index policies credibility. 

“Index insurance can be profitable if [the] above mentioned factors are taken into account,” he said. “If not, the potential for not being profitable is very high.” 

Dan Osgood, an author of the report, said that the most important element to index insurance was perspective and patience — despite the momentum index insurance appears to have.

"I think the way this could fail is if we lose sight of what it’s for, and if we cut corners in order to make something happen quickly," Osgood said.