By Molly Slothower
25 June 2009, [MEDIAGLOBAL]: When natural disasters strike industrialized nations, insurance is a critical support net to help people recover losses, get through the hard times, and rebuild.
But developing countries are not so lucky. Out of all of the insured damages incurred in 2008 by natural disasters, only one percent were in developing countries, according to the Red Cross. Index insurance is a new tool in disaster risk reduction that can reach the vulnerable farmers in less developed nations, most of who are considered uninsurable by most insurance agencies.
This kind of insurance is based on an index, such as the level of rainfall in an area. When the rainfall index drops below a certain threshold, payments are automatically triggered. Therefore, farmers can recover the losses they suffer when floods, droughts, hurricanes, or other calamities harm their crops.
Climate change is causing more frequent and more devastating natural disasters, and food insecurity rises each time a developing nation is hit. The new innovation in micro-financing addresses this, and a whole host of other issues that have served to bar access of farmers in the global South from the protection of insurance in times of need.
The new model began in Malawi in 2005, and spread to several other pilot sites. Although index insurance is not a fix-all solution, it fills an important niche, according to a new report, titled “Index Insurance and Climate Risk.” The report was published this week by the International Research Institute for Climate and Society (IRI).
According to the report, index insurance should be used alongside traditional risk management. It should not be the only security measure people rely on. Its place is to insure against natural disasters specifically, which would normally overwhelm other forms of protection.“Traditional risk management strategies could be borrowing from your relatives, having a diverse portfolio of crops, or having livestock as a sort of savings,” Daniel Osgood, a leader in IRI’s index insurance research, told MediaGlobal. “They are a big part of the risk management portfolio. Index insurance can help plug holes in these other methods.
“If there’s a regional drought for example, then your whole family would be impacted. That’s where it makes sense to have an index that triggers off of large droughts, because that’s the kind of thing that other risk management tools aren’t handling well. It can not and should not replace traditional strategies, though. It’s a specific risk management piece that is very lacking unless you have the other pieces in place.”
Transactions with the type of clientele targeted by index insurance are traditionally prohibitively expensive to both providers and to the farmers. Insurance providers have not found it worth their while to travel to farms to appraise damages when disaster strikes. Nor are rural farmers able to easily get payments to and from the providers.
Remote sensing of rainfall or other index indicators cuts out the need for assessors to travel to all clients after a disaster. It also limits the liability of farmers cheating the system, banking on the payout of insurance over that of their crops and intentionally ruining their crops for the insurance money.
Insurance providers working on index insurance are looking at pairing East and West Africa, for example, to cover communities in both so that when one region requires payouts, the other is stable. When drought hits in one region, generally another will have enough rain, so expanding and diversifying the coverage area can make the model sustainable, according to the report.
The pilot projects in India and in Mexico have already gone through the scaling up process. So far, the model has been very successful. But researchers warn that it should not be oversold, growing too large too soon, or there is bound to be disappointment.
There are still a lot of challenges to be addressed before researchers condone widespread adoption of the model. Payouts do not always match the need, sometimes paying when crops are doing well, and sometimes failing to cover devastated crops.
“We have to answer a lot more questions before it can be automated for industrial use,” explained Osgood. “How do we know how well it works? How do we use satellite information where we don’t have much of other kinds of information? How do we understand the probability of a payout with climate change as a factor?”
The security afforded by insurance against disasters will give farmers more than the ability to feed themselves when the going gets rough. It also has the potential to give them freedom to improve their farming techniques, and to invest in better and more environmentally friendly ways of growing their crops.
When farmers don’t have to focus on preparing for the bad years even in good times, they have more time and resources to spend on capital improvements.