After Ten Years of Index Insurance, What’s Next?

Despite an overabundance of food in some parts of the world, about 815 million people suffered from chronic undernourishment in 2016. Poor nutrition leads to nearly half of deaths in children under the age of five. Many of those who are hungry are farmers and their families. Our food systems clearly aren’t working as well as they could, and climate is part of the problem. It’s also part of the solution.

Climate isn’t the only factor behind food shortages, nutritional failures and hunger, but it is a variable that countries can take steps to protect against and even use to their advantage, with the right information and resources.

Insurance is one way to increase resiliency to climate shocks, but not only in the way you might think. In advertising, the dominant narrative for most insurance products is protection from unpredictable catastrophes and mayhem. But there’s a subtler benefit to agriculture insurance, and one that is essential for adapting our food systems to a changing climate: when farmers feel financially secure, they’re more likely to take productive risks.

For example, if climate forecasts are calling for promising conditions during the next growing season, a farmer may invest in more productive practices, like planting higher quality seeds and using more fertilizer. While these decisions can result in higher yields and more income, they have upfront costs. Farmers often have to take out loans to make these investments. If a farmer doesn’t feel financially secure, he or she is unlikely to make these expensive and risky investments and will instead opt for safer but less productive practices. And not only can less productive practices mean a missed opportunity in the short term, but they may also contribute to the degradation of soil quality, which means lower productivity in the long term too.

“The sum of losses connected to missed opportunities are much higher than the sum of losses from direct failure of crops,” says Walter Baethgen, a senior scientist and director of the Regional and Sectoral Research Program at the International Research Institute for Climate and Society (IRI). “But the problem is that one year of failure can make a farmer go out of business. So if farmers are protected, they can take advantage of good years.”

In the decades to come, we can expect increasingly difficult growing seasons for farmers, and so taking advantage of good years will become more and more important – for both our food supply and farmers’ livelihoods.

To date, agriculture insurance hasn’t been available for many farmers around the world, as the cost of doing business for insurance companies has historically been higher than the potential profits to be gained. A relatively new kind of agriculture insurance, called weather index insurance, provides a way to fill that insurance gap by basing payouts on weather and satellite data instead of expensive site visits from claims adjusters. Over the last decade, IRI’s financial instruments team has been researching, designing and refining weather index insurance in their work in a dozen countries across Asia, Africa, Latin America and the Caribbean.

The team’s latest projects have been more successful than ever at getting local insurance companies to start offering a useful and affordable product to smallholder farmers. As a result, index insurance is now available to millions of farmers who previously didn’t have access to insurance. But hundreds of millions of farmers are still vulnerable to the kind of risk that index insurance helps protect against.

A new video (above) showcases what the IRI team has learned and how they hope to reach even more farmers. Team members have particularly stressed the importance of farmer-driven product design and the use of accurate climate data from rain gauges and satellites. “Using cell phones in the design process is a promising avenue to achieving that scale,” said team leader Dan Osgood. “But we need to research a way to use them so that farmers are still contributing to a product design that will meet their localized needs,” Osgood added.

“We could make a video like this, of the lessons we’ve learned, for many of the teams at IRI – for example, what we’ve learned about seasonal forecasts in the last twenty years, and what we’ve learned about creating agriculture decision tools in our more recent projects,” said Baethgen.

Baethgen co-leads a project called Adapting Agriculture to Climate Today, For Tomorrow (ACToday), part of Columbia World Projects. Through ACToday, IRI is working collaboratively with partners around the world and at Columbia University to make food systems healthier and more resilient to fluctuations in climate. The project is currently active in six countries – Guatemala, Colombia, Senegal, Ethiopia, Bangladesh and Vietnam. A key component of the project is to enable governments and nongovernmental organizations to better respond to food shocks, particularly those caused by climate events such as droughts and floods.

“The wonderful thing about the ACToday project is that we have the opportunity to bring all of these lessons together in each country in an integrated way, not as siloed projects happening in different places,” said Baethgen. “We can look holistically at a country’s vulnerabilities and opportunities, including index insurance.”

Under ACToday, an index insurance pilot for beans and maize has begun in Guatemala, and planning is underway for an insurance product in Colombia.

The video was produced in conjunction with an international contest highlighting the last 10 years of progress in the index insurance field, and it received runner-up.