Members of IRI and Oxfam in Adi Ha, Ethiopia discussing index insurance with local farmers. Dan Osgood/IRI
Small farmers in the highlands of Ethiopia have long been highly susceptible to droughts that can leave people hungry and penniless for years. Now, an innovative crop insurance program is aimed at helping them recover quickly and produce food when the weather improves. The program, managed by Oxfam America, will receive assistance from the International Research Institute for Climate and Society (IRI), a part of Columbia University’s Earth Institute.
Agriculture accounts for 80 percent of Ethiopia’s work force, and small-scale rain-fed farming is the dominant form of production. "Precipitation plays a pivotal role in the country's welfare,” said IRI water and climate scientist Paul Block, who is working on the project. “Add in significant year-to-year variability in rainfall, and it becomes clear why farming in Ethiopia has proven to be a difficult livelihood. Unfortunately, most farmers have little choice."
IRI will provide its expertise to design “index” insurance. Unlike traditional crop insurance, which pays out based on the consequences of weather--mainly crop failures--index insurance pays based on the weather itself. The gauge is usually rainfall. According to IRI experts, this resolves a number of fundamental problems that has made traditional insurance unworkable in rural parts of developing countries. With index insurance, insurers do not need to visit farmers' fields to determine premiums or assess damages. Instead, if rainfall recorded by gauges is below an earlier agreed-upon threshold, the insurance pays out. This simplifies the process and lowers transaction costs, making it more viable for insurance companies to sell to small farmers. Having the insurance also allows farmers to apply for bank loans and other credit previously unavailable to them.
The program will start in the village of Adi Ha, which lies in the northern part of the country. Based on IRI’s designs, Oxfam will work with local microlending companies to help provide policies. If the programs works, the two organizations and their local partners hope to export it to other villages, and potentially scale it up to larger areas.
Oxfam has longstanding agricultural-development projects in Ethiopia. “With support from the IRI, we are testing ambitious innovations, including new techniques to overcome weather data barriers, meaningful engagement of farmers in contract design, and community-based distribution of payouts in a way that minimizes contract basis risk," said Raymond C. Offenheiser, president of Oxfam America.
Finding ways to manage the risks of climate variability is crucial, said IRI's international development officer, Haresh Bhojwani. "A single poor season can force farming families to sell off their productive assets, and it can severely weaken their financial and social networks," he said. "Fear of droughts and losses prevents investment in agriculture even in the good years."
IRI has already used index insurance to reduce drought risks for farmers in eastern and southern Africa and in Central America, detailed in a recent report on Malawi, Tanzania and Kenya. These have proven the idea’s feasibility and affordability, said Dan Osgood, who lead’s the institute’s research on the topic. But, said Osgood, a critical component lies in the design of the contracts. "This project provides us with the opportunity to address some of the more challenging issues to be able to use it as a tool to address poverty at large scales. One of these challenges is to have an efficient process through which farmers can identify, develop, and validate the most valuable product with technical and financial partners."
Another challenge, says Osgood, is the very limited data for Adi Ha. "The process must be refined in order to develop robust products that aren't sensitive to data limitations, and to validate the quality of these products. These issues must be addressed if the tool is to be applied at large scales," he said.
IRI recently co-hosted a policy roundtable with the insurance company Swiss Re on the potential for index insurance to help countries adapt to climate change. This fall, IRI will hold a workshop on the role of climate science for index insurance applications. It will also dedicate the next issue of its journal Climate and Society to the topic.
For more information, please contact Francesco Fiondella at +1-845-680-4476.