Can index insurance help farmers protect against climate change risks?

Crops against unforeseen weather events are a common practice among farmers in developed countries..

 Traditional insurance is either unavailable or quite expensive in many developing countries, making smallholder farmers extremely vulnerable to weather events.

 A severe drought, a devastating earthquake, or another type of weather disaster could wipe out small farmers. Such uncertainties can also increase the risk aversion awareness of small farmers and reduce the possibility of their investment in agricultural production. Although developing countries currently have insurance products such as traditional individual and group insurance and income indemnity insurance, index insurance is an alternative insurance product that is more suitable for poor farmers in areas with inconvenient transportation. Unlike traditional insurance, which relies on a claims assessor to assess losses, index insurance pays out claims based on an established index of property and investment losses. Before the insurance period begins, a statistical index is typically determined to measure the degree to which a series of parameters deviate from conventional values, such as precipitation, temperature, seismic activity, wind speed, crop yield, or livestock mortality. This type of insurance helps stabilize the incomes of poor farmers, allowing them to continue agricultural production even in the presence of uncertain disasters and weather events. This week in Paris, the Global Index Insurance Conference, which includes development partners and private sector representatives, will discuss how index insurance can be scaled up to address the growing risks and impacts of climate change and natural disasters.

Over the next generation, rising climate change risks and weather-related losses have the potential to have catastrophic effects on the world’s most vulnerable populations.

The World Bank report, Building Resilience: Considering Climate and Disaster Risk in Development, notes that weather-related losses and damage have increased from an average of around $50 billion a year in the 1980s to nearly $200 billion over the past decade.

While index insurance does not protect agriculture from the effects of climate change, it can help mitigate it.

Insurance also helps reduce the financial vulnerability of billions of people, providing them with a pathway to financial services and credit.

We need to significantly scale up research in this area to find innovative ways to expand insurance coverage and make it accessible to the most underserved and the most vulnerable.

According to estimates by Swiss Re, about one-third of the total global claims due to man-made and natural disasters are paid by the insurance industry.

However, the proportion of claims paid varies widely between developed and developing countries. For example, 43 percent of losses from the 1999 floods in Austria, Germany, and Switzerland were paid for by The insurance industry, compared with just 4 percent of losses from the Venezuelan floods that year. After the super typhoon Haiyan that swept the Philippines, the insurance industry paid out only 10-15% of the total losses, compared with 50% for the losses caused by Hurricane Sandy, which hit the United States.

The World Bank Group has long pioneered several index insurance products. With donor support, we have developed new or improved products over the past decade that have benefited more than 35 million farmers around the world.

While the emergence of new insurance products in emerging markets presents growth opportunities for the insurance industry, These products cannot be commercially successful overnight. It may take 10-15 years for such a market to become commercially successful.

This is why government sector foundations should also take the lead in developing and promoting risk management programs and investing in programs during the incubation period.

This week’s Global Index Insurance Conference called for dialogue, exchange of views, and a closer partnership with the private sector to foster innovation in insurance, especially agricultural insurance. Developing countries face many challenges in building sustainable and scalable insurance markets, including uneven population distribution, weak infrastructure, and a lack of reliable data. However, these challenges should not prevent us from finding ways to provide insurance services to the most vulnerable. For a world population expected to reach 9 billion by 2050, ensuring the sustainability of food production, especially in the poorest countries, is critical as it helps fight hunger, combat malnutrition, and improve food security. Without decisive action now, a warming planet risks denying prosperity to millions and reversing decades of development gains. This article was first published in the Huffington Post.