Risk Management for Poor Farmers – How to Scale and Make Index Insurance Sustainable?
Insurance has become an important tool for development practitioners. Not only can it help people reduce their risk in the face of recurrent floods and droughts, it has the potential to unlock other opportunities, such as access to credit, which can help people invest in a better future.
Over the last decade, many pilot projects have proven that insurance can be implemented in poor rural and urban communities and can cover risks ranging from crop losses to poor health.
However, the question of whether insurance can be applied sustainably and at a large scale to help to reduce the risk of hunger faced by almost 1 billion people worldwide has remained unanswered.
A new report
The World Food Programme (WFP) and the International Fund for Agricultural Development (IFAD) set out to answer this question learning from projects implemented by other organizations and from the Weather Risk Management Facility (WRMF), a joint WFP and IFAD initiative funded by the Gates Foundation.
The results are presented in a recent research paper titled ‘The Potential for Scale and Sustainability in Weather Index Insurance’. This report concludes that weather index-based insurance (or insurance which pays out when weather variables such as rainfall reach certain predetermined levels) is an effective, market-mediated solution to promote agricultural development and to help protect the poorest against weather hazards.
At the same time, this type of ex-ante (or before the event) risk management approach can reduce the need for costly emergency operations. For example, rather than providing assistance after a drought when a farmer is unable feed her family or cover the cost of operating her farm, a payment from a weatherindex insurance policy can help this farmer meet urgent household needs without selling important productive assets – like land – or defaulting on loans used to buy seeds and fertilizer. As a result, this family is better able to recover productivity and does not need costly emergency assistance.
In chronically food insecure areas where recurrent droughts and floods are being exacerbated by climate change, this kind of approach to managing weather risk offers a viable way to build the resilience of communities while fostering and protecting sustainable improvements in livelihoods.
In order to realize these kinds of benefits, a number of key principles for developing sustainable and large scale weather risk management programs were identified in the study. These include:
- Create a proposition of real value to the insured, and offer insurance part of a wider package of services;
- Build the capacity and ownership of implementation stakeholders;
- Increase client awareness of index insurance products;
- Graft onto existing, efficient delivery channels, engaging the private sector from the beginning;
- Access international risk-transfer markets;
- Improve the infrastructure and quality of weather data;
- Promote enabling legal and regulatory frameworks; and
- Monitor and evaluate products to promote continuous improvement.
Niels Balzer, Policy Officer in the Office for Climate Change and Disaster Risk Reduction, WFP Rome
Francesco Rispoli, Technical Advisor on Rural Finance, IFAD Rome