Leaders in index insurance expand their commitments in Ethiopia

Swiss Re, Oxfam America, The Rockefeller Foundation and Columbia University’s International Research Institute for Climate and Society announced a joint Commitment to Action at the Clinton Global Initiative 2009 meeting in New York, held from September 22 to 25. The collaboration is aimed at helping communities most vulnerable to climate variability and change. It will expand on previous work by the institutions on using index insurance to improve financial and food security for farmers in the drought-prone village of Adi Ha, Ethiopia.

“This is an exciting partnership among business, philanthropy, development and research institutions,” says IRI Director-General Stephen Zebiak. “It has already shown that many presumed barriers to implementing insurance for vulnerable people can be overcome, and in the next phase, it will go further to test the limits of implementation at larger scales. We’re thrilled to be a part of this.”

Drought-related risks are a primary concern throughout Ethiopia, where 85 percent of the population depends on smallholder, rain-fed agriculture. Education as well as availability of index-based microinsurance, increased access to credit and drought-resistant seeds, and improved risk-management techniques are necessary measures for these populations to effectively adapt to a changing climate.

The IRI and its partners are working to have index insurance play a critical, complementary role to risk reduction interventions such as better agricultural practices by helping farmers bounce back from prolonged droughts and other low-frequency climatic shocks.

Index insurance is an attractive alternative for managing weather and climate risk because it uses a weather index, such as rainfall, to determine payouts. This resolves a number of problems that make traditional insurance unworkable in rural parts of developing countries. With index insurance contracts, an insurance company doesn’t need to visit the policy holder to determine premiums or assess damages. Instead, if the rainfall recorded by gauges is below an earlier, agreed-upon threshold, the insurance pays out. Such a system significantly lowers transaction costs.

“Our goal is to design cost effective, robust, scalable index insurance into a package of other development interventions such as risk reduction and micro-credit. These products must meet the needs of low income farmers and also work in data-poor areas of the world,” says IRI research economist Dan Osgood.

The new 2009 commitment builds on the success of a 2008 pilot project in Adi Ha, which is in the northern Ethiopian state of Tigray. Two hundred households, approximately twenty percent of the village enrolled in the pilot weather risk insurance project after partaking in workshops on climate change, financial literacy and insurance. Thirty-eight percent of enrollees came from female-headed households–recognized as the poorest of the productive poor. Sixty-five percent also participated in Ethiopia’s Productive Safety Net Program, a federal cash-for-work program that serves 8 million chronically food insecure households in Ethiopia.

“This expanded project will provide further validation on useful techniques that allow communities in developing countries to adapt to the changing climate,” says David Bresch, Head of Sustainability & Emerging Risk Management for Swiss Re.

The pilot project is part of the collaborative Horn of Africa Risk Transfer for Adaptation (HARITA) project that includes Swiss Re, Oxfam America, the IRI, the Relief Society of Tigray, Nyala Insurance and Dedebit Credit and Savings Institution.

This year’s commitment will expand the program to include at least one new crop and to test the pilot model in four new villages in Tigray, and one in the nearby state of Amhara.

The Rockefeller Foundation has provided additional funding for this commitment, based on the success on the 2008 initiative as well as the potential of the expanded 2009 program. Swiss Re and the Rockefeller Foundation will fund the effort, which will be implemented by Oxfam America. The IRI will provide primary technical support. IRI has been at the forefront of weather index insurance initiatives aimed at meeting the needs of developing countries.

Oxfam America President Raymond C. Offenheiser said, “The expansion of the pilot project is an example of how collaborative projects such as HARITA can promote household food security, increase the impact of our risk reduction programs including climate adaptation and provide guidance on the necessary measures to scale the pilot successfully in Ethiopia and beyond.”