New Study Proves Weather-Based Index Insurance Can Work For Rural Poor on Large Scale
Findings spur Nigerian government to look into solutions to cover 15 million farmers by 2017
LONDON, UNITED KINGDOM (26 January 2015) — Nigerian government officials will convene in London this week to gather advice for scaling-up agricultural insurance policies for smallholder farmers, to bolster the up and coming agricultural powerhouse’s resilience to climate and market shocks.
￼The meeting will also serve as the official launch of a new study that provides decisive ￼evidence that large-scale index-based insurance is a commercially viable option for the ￼rural poor, and outlines the key traits of successful index insurance schemes. The new study, carried out by the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) and the International Center for Climate and Society (IRI) at Columbia University showcases projects that have overcome many of the challenges that have previously hindered the uptake of index-based insurance, such as poor infrastructure and lack of financing, and have gone on to scale to reach millions of smallholder farmers in some of the poorest areas of the world, many of which were previously considered insurable.
“Many countries are leading a movement to increase insurance coverage for the most vulnerable farmers,” says IRI’s Dr. Dan Osgood, who co-authored the study. “This shift could change the lives of millions of smallholder farmers across the globe, who face increasingly erratic weather due to a changing climate.”
One opportunity for large-scale change comes from Nigeria, a rapidly growing agricultural producer, which has committed to covering 15 million of its smallholder farmers with agricultural insurance by 2017. While traditional loss-based insurance is not viable for smallholder farmers in environments like rural Nigeria, because of the high cost of verifying losses on large ￼numbers of small landholdings, index insurance payouts are pegged to easily measured environmental conditions, or an “index,” that is closely related to agricultural production losses. Possible indices include rainfall, yields, or vegetation levels measured by satellites. When an index exceeds a certain threshold, farmers receive a fast, efficient payout, in some cases delivered via mobile phones.
“Nigeria has made a bold commitment to support all smallholder farmers in enhancing their incomes and food security, through crop insurance beginning with 2.5 million in 2015 and is seeking evidence-based solutions to follow through on it,” says Dr. Débísí Àràbà, Team Leader, Environment and Climate Change Unit, Office of the Honourable Minister of Agriculture and Rural Development, Nigeria.
The new study also examines case studies from Kenya, Rwanda, Ethiopia, Senegal, Mongolia and India.
“In the case of India, one in four of the country’s smallholder farmers are now insured by a science-based index insurance product,” says lead author Dr. Helen Greatrex. “The rapid growth of India’s program and the others we profile is a bold statement about the potential of index insurance to overcome the tough challenges we face in providing a safety net for millions of the poorest farmers,” she comments.
The report identifies key traits of successful index insurance schemes, including:
• Including farmers in the design process
• Integrating insurance into broader development and climate risk programs
• Working with policy makers, market leaders and businesses to develop supply chains and legislative frameworks
• Investing in farmer education
• Working closely with research organizations for agro-meteorological and social knowledge
• Unlocking new opportunities to improve farmer income
“The huge growth in the numbers of farmers who have chosen to purchase index insurance in recent years suggests that the programs we reviewed have targeted a real need, and are finding effective solutions to the challenges to providing useful insurance to smallholder farmers at scale,” said co-author Dr. Jim Hansen, who leads research on managing short-term climate risk for the CCAFS program. ￼Major reinsurance companies such as SwissRe, MunichRe, have backed weather-based index insurance as sound investment.
The International Research Institute for Climate and Society, part of the Earth Institute at Columbia University, aims to enhance society’s ability to understand, anticipate and manage the impacts of climate in order to improve human welfare and the environment, especially in developing countries. Visit iri.columbia.edu and follow @climatesociety on Twitter.
The CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) is a strategic partnership of CGIAR and Future Earth, led by the International Center for Tropical Agriculture (CIAT). CCAFS brings together the world’s best researchers in agricultural science, development research, climate science and earth system science, to identify and address the most important interactions, synergies and tradeoffs between climate change, agriculture and food security. www.ccafs.cgiar.org
About index-based insurance
Index insurance differs from traditional indemnity insurance, where payouts are explicitly based on measured loss. Instead, in index insurance, farmers can purchase coverage based on an index that is correlated with those losses, such as wind speed, the amount of rain during a certain window of time (weather based indices) or average yield losses over a larger region (area yield indices). Payouts are then triggered when this index falls above or below a pre-specified threshold. This means that index insurance is not designed to protect farmers against every peril, but is instead designed for situations where there is a well-defined climate risk that significantly influences a farmer’s livelihood.
Index insurance has the potential to build the resilience of smallholder farmers, not only by providing a payout in bad years to help farmers survive and protect their assets; but also by helping to unlock opportunities that increase productivity in the non-payout years, which might allow them to escape from poverty traps or from the threat of them. For example, insurance might allow a farmer to access credit, which they can then use to invest in new agricultural technologies or inputs. This could allow the farmer to use their increased profits to pay for the insurance premium, knowing that the insurance would allow them to repay their loan in the event of a climate shock.
For more information, please contact:
Alexa Jay: ude.aibmuloc.irinull@yaja or +1 206 849 5060
Liz Sharma: ku.oc.smmocamrahsnull@zil or +44 7963 122988