Drought insurance for agricultural development and food security in dryland areas

Abstract

This paper reviews the potential role for and experience with index based insurance for managing drought risks in agriculture and rural areas in the dry areas of developing countries. It argues that while index insurance is not a panacea for risk management, it could make important, market-based contributions in catalyzing sustainable safety nets and promoting agricultural growth. And though the private sector should be the main supplier, there are still important enabling and facilitating roles that need to be played by the public sector.

Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa

“…Climate variability is expected to reduce the effectiveness of traditional risk management strategies and may require a market-based risk management strategy, such as weather index insurance in agriculture (Skees et al 1999;World Bank 2005;Linnerooth-Bayer et al 2005;Meze-Hausken et al 2009). However, the cost of insurance is expected to rise with an increase in the unpredictability of weather conditions that may call for a partial insurance subsidy using climate change adaptation funds for highly-vulnerable countries/regions (Linnerooth-Bayer et al 2005;Hazell and Hess 2010). Thus, a balance between community-based risk management arrangements and market-based risk management strategies may benefit many households in low income countries.…”

“…In such cases, the effectiveness of external assistance for disaster risk management is compromised. As an alternative strategy, international aid agencies have considered using weather index insurance instruments to pre-finance disaster relief services (Hess and Syroka 2005;World Bank 2005;Chantarat et al 2007;Linnerooth-Bayer et al 2005;Hazell and Hess 2010). For instance, in 2006, the World Food Program (WFP) purchased about US$1 million worth of weather index insurance premiums for Ethiopian farmers from the international re-insurer, Axa, with a maximum payout of US$7.1 million.…”

“…However, the magnitude of the problem depends on how the index is structured (Barnett et al 2008). Designing the contracts only for big shocks is another solution to reduce basis risk (Turvey 2008;Hazell and Hess 2010;OECD 2011). This allows smallholders to utilize their traditional risk management schemes for smaller and more frequent risks.…”

Achieving Water and Food Security in 2050: Outlook, Policies, and Investments

“…Smallholders can manage risk to some degree by diversifying their crop choices, but opportunities are limited in areas with very much or too little rainfall [174,175]. Interventions that assist farmers in accommodating risk, such as index-based weather insurance, can be helpful in improving household income and welfare in such settings [176].…”

Toward a Sustainable and Resilient Future

“…In addition, these mechanisms can also help to anticipate and reduce (economic) risk as they reduce volatility and increase economic resilience at the household, national, and regional levels (Linnerooth-Bayer et al, 2005). As one example, with such insurance, drought-exposed farmers in Malawi have been able to access improved seeds for higher yielding and higher risk crops, thus helping them to make a leap ahead in terms of generating higher incomes and the adoption of higher return technologies (World Bank, 2005;Hazell and Hess, 2010). However, many obstacles to such schemes still exist, particularly in low-income and many middle-income countries, including the absence of comprehensive risk assessments and required data, legal frameworks, and the necessary infrastructure, and probably more experience is required to determine the contexts in which they can be effective (Linnerooth-Bayer and Mechler, 2007;Cummins and Mahul, 2009;Mahul and Stutley, 2010).…”