Index Insurance and Poverty Reduction
Farmers near Adi Ha, Ethiopia. Dan Osgood/IRI
The International Research Institute for Climate and Society and Swiss Re jointly hosted a high-level policy roundtable on the use of index insurance for poverty reduction at the annual meeting of the Global Humanitarian Forum in Geneva. Kofi Annan, the president of the GHF, made mention of the roundtable's conclusions in his closing statement of the meeting. He expressed enthusiasm about the idea of providing insurance to poor farmers. "Farmers in Africa take all the risks but have no support from outside. This insurance could make the difference between survival and catastrophe," Mr. Annan said. The roundtable, which took place on June 24, included leaders from fields as diverse as reinsurance, climate science, economics and food security, in an effort to gain insight on how index insurance can best serve today's development needs. "We are pleased to have partnered with Swiss Re in sponsoring this important forum," says IRI Director-General Steve Zebiak. "Swiss Re is one of the world's largest and most diversified reinsurers. Its presence at the roundtable lent credibility, expertise and insight to the discussion of how best to scale up the use of index insurance to help the poor." Climate variability has tremendous impacts on rural and urban people in developing countries. It tends to be the dominant source of risks to livelihood and consumption. Fluctuations in climate can reduce people's access to food, safe drinking water, health services and transportation. Droughts, floods and other climate shocks have direct, destructive impacts which are easy to imagine. But there are also indirect impacts. A climate shock may happen only one year in five, but the threat of one is enough to impede economic vitality, growth and wealth generation during all years, good and bad, because people are conditioned to be risk-averse. For example, farmers won't chance spending more on fertilizers or improved seeds in the face of uncertainty, and thus miss out on the increased yields that could have resulted. Together, climate uncertainty and responses to it are major contributors to the perpetuation of poverty, conning people in so-called poverty traps. Climate change and continued population growth stand to dramatically worsen the situation. The policy roundtable addressed the numerous challenges that need to be overcome if index insurance is to contribute to the eradication of poverty at large scales. Index insurance is insurance linked to a weather index such as rainfall, rather than a possible consequence of weather, such as crop failure. "This subtle distinction resolves a number of fundamental problems that make traditional insurance unworkable in rural parts of developing countries," says IRI scientist Dan Osgood, one of the roundtable's organizers. "Unlike traditional crop insurance, the insurance company doesn't need to visit a farmer's field to determine premiums or to assess damages." Instead, the insurance is designed around weather data such as rainfall: if the rainfall amount is below an earlier agreed-upon threshold, the insurance pays out. Basing the contracts on an index also eliminates a 'moral hazard problem'. "People don't have an incentive to misrepresent their claims or to destroy their crops in order to get a payout," Osgood says. "The farmer has the incentive to make the best decisions for crop survival." Recent case studies and pilot programs show that index insurance has the potential to help protect people and livelihoods against climate shocks and climate risk, thereby reducing vulnerability and enabling investment and growth. To be sure, index insurance isn't suited to cover the entire range of risks faced by agriculture or other sectors, and it doesn't supplant the need for good policy and practice. But it could, if negotiated and managed properly, provide a missing piece of the puzzle in the global effort to eradicate extreme poverty. The key questions on which participants focused on during the roundtable were: 
(For more information, download the agenda and discussion paper.) The roundtable's conclusions were formally presented at the Global Humanitarian Forum's afternoon session, 'Are the Right Risks Insured?', and fed into the GHF's declaration and outcomes.
The event also jump started the process for the next Climate and Society publication, which will take a fresh look at the effectiveness of index insurance for reducing poverty and better managing climate risk. Climate and Society No. 2 will capture the key questions listed above, examine the current case studies, and rely on expert scientifc opinion to delineate the advances, opportunities and pitfalls faced in scaling up index insurance. "There's no doubt that index insurance has shown promise in practice," says Molly Hellmuth, the editor of Climate and Society. "But there are very real constraints that need addressing if we want index insurance to fulfill its potential. This next issue will hopefully help policy makers, researchers, donors and practitioners gain a better sense of what needs to be done to move forward." More information on the upcoming issue can be found here.
Working Paper - Poverty Traps and Climate Risks (Barrett et al.) Designing Weather Insurance Contracts for Farmers: In Malawi, Tanzania, and Kenya |