Innovation of the Week: Index Insurance

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Dry soil because of the drought in Samburu, Kenya  (photo credit: Brendan Buzzard)

Dry soil because of the drought in Samburu, Kenya (photo credit: Brendan Buzzard)

By Abby Massey

Experiencing a historical drought hasn’t stopped the farmers of Adi Ha, Ethiopia from protecting themselves against crop loss. In October, for the first time, 200 farmers who grow teff, a chief cereal crop primarily grown in Ethiopia, signed up to pay on average 138 birr (about $12) for insurance through an index insurance project piloted by Oxfam America, Swiss Re, IRI, and the Rockefeller Foundation in a Joint Commitment to Action (75 of the farmers who signed up were women.) Right now in Ethiopia, 300,000 people are insured out of a population of 80 million. This project is making it possible for rural farmers such as those in Adi Ha to have insurance, which doesn’t just help reduce the economic pain during bad harvests; in many rural areas, insurance is also the most accessible collateral for farmers to get credit for more loans.  “The payout,” according to Oxfam America, “isn’t just cash, its confidence.”

East Africa, as we’ve mentioned a number of times before on this blog, (Weathering Famine, River Run Dry) is suffering from a severe drought that threatens crops, livestock and livelihoods.  As climate change causes devastating weather events to be more common, farmers, pastoralists and other people whose livelihood depends upon rainfall or stable temperatures need a defense against the increasingly unpredictable weather.

Though farmers have always been at the mercy of the weather, climate change, and the increasingly unpredictable and severe weather patterns that it brings, increases the risk of crop failure. In the IFPRI report, Climate Change: Impact on Agriculture and Costs of Adaptation, rice, wheat and maize yields are expected to decline 15 percent, 34 percent, and 10 percent respectively by 2050 in sub-Saharan Africa due to climate change.

Currently, most insurance companies consider it too risky to insure many farmers from developing nations. Evaluating damage caused by extreme weather is expensive and hard to calculate. But with investment in index insurance, those costs are reduced. Standard insurance measures farmers’ losses in crop damage, an assessment that is made out on the field by the insurer. Index insurance measures loss through the weather index itself. When there is a flood, for example, the amount of rainfall is calculated by a weather station. That number is used to determine the payout given to the farmer. Not only does this decrease transaction costs for the insurer because they don’t have to go to the actual farm to determine the amount for payout, but it allows for the small farmer who otherwise would be too much of a risk for an insurance company to cover to be included and insured.

In Malawi, index insurance is being used at a small-farmer level to insure tobacco and maize production and at a national level to insure and stabilize the government against a harsh weather event. According to the International Research Institute for Climate and Society’s (IRI) recently released report, Index insurance and climate risk: Prospects for development and disaster management, these farmers are hoping to increase maize production in spite of the erratic and extreme weather events affecting the region.

In Kenya, the Syngenta Foundation is planning to offer index insurance to small holder farmers to help manage risk and make insurance more accessible.

Already 2 million Indian farmers have access to index insurance and the rest of the world is slowly following suit. While it’s not a silver bullet to protect farmers from climate change and risks that have always been associated with farming, index insurance could be an innovation that helps support farmers as climate change increasingly begins to affect livelihoods of poorer, smallholder farmers in developing nations.

Abby Massey is a Food & Agriculture intern with the Nourishing the Planet Project

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