News Archive

Innovative Insurance Aims to Buffer Poor from Climate Risks

New Report Details Policies Based on Weather

2009-06-24
Insurance agency, Addis Ababa, Ethiopia

Insurance agency, Addis Ababa, Ethiopia
Eric Holthaus/IRI

In poorer areas of the world, farmers, herders, fishermen and others whose livelihoods are closely linked to their environment rarely have backup in the form of insurance. Now, an innovative type of insurance may offer them protection against variability in climate, says a new report.

Instead of paying based on proven losses to crops or other products, index insurance uses an index, such as rainfall, to determine payouts. This makes it significantly cheaper and easier to administer says the report, Index Insurance and Climate Risk: Prospects for Development and Disaster Management. It was issued today at the Global Humanitarian Forum in Geneva, by the Earth Institute’s International Research Institute for Climate and Society (IRI), in partnership with the United Nations Development Programme, International Fund for Agricultural Development, Oxfam America, Swiss Re, U.S. National Oceanic and Atmospheric Administration and the World Food Programme.

"Only the richest 3 percent of people in the world are covered by insurance..."

"Only the richest 3 percent of people in the world are covered by insurance," said Olav Kjorven, UNDP Assistant Administrator and Director of the Bureau for Development Policy. "The world’s poor have been completely left out, even though they are the most in need of protection. Droughts, floods and hurricanes often strip whole communities of their resources and belongings. Index insurance could finally enable millions to access financial tools for development and properly prepare them for recovery from climate disasters." 

For poor people, unpredictable climate can critically restrict development. Banks are unlikely to lend to farmers if they think a drought will cause widespread defaults, even if the farmers could pay back loans in most years. Farmers’ lack of credit limits their ability to buy improved seeds, fertilizers and other inputs.

Index insurance resolves a number of problems that make traditional insurance unworkable in rural parts of developing countries, says the report. For one, an insurance company doesn't need to visit policy holders to determine premiums or assess damages. Instead, if the rainfall recorded by gauges is below an earlier, agreed-upon threshold, the insurance pays out. Such a system significantly lowers transaction costs, and allows policy holders to apply for loans.

Ethiopian National Meteorological Agency technicians collect rainfall data

Ethiopian National Meteorological Agency technicians collect rainfall data
Stephane de Messieres/Oxfam America

The report lays out a number of case studies, some of which show that that index insurance can be feasible for people living on just two dollars a day. For example, since 2005, some farming communities in Malawi have been able to buy small insurance contracts to cover the purchase price of seeds in case of drought. And since 2003, nearly 2 million Indian farmers have had access to public and private programs that offer contracts across many states, for many crops, covering a range of risks, from excessive rainfall to extreme temperatures. Other programs include a public-private partnership in Brazil to support farmers; a multinational scheme in the Caribbean for earthquake and hurricane risk; and a national program in Ethiopia to complement a drought early warning system.

However, the report says that in order to achieve its full potential, index insurance must overcome challenges and reach many more people. For example, some efforts to implement index insurance have failed due to lack of good weather data, sufficient financial capacity to issue policies, and institutional, legal or regulatory issues.

Former United Nations head Kofi Annan, president of the Global Humanitarian Forum, writes in the report’s foreword: “As an innovation, index insurance may hold answers for some of the more obstinate problems faced by the poor and the vulnerable. Much has been learned over the last few years.”

Stephen E. Zebiak, the IRI’s director-general, said, “The excitement here is that we’re applying new thinking to confront long-standing problems. We do this by using innovative science and technology, by enhancing the role the private sector plays, by connecting to international risk pooling, and by working with countries to develop the capacity of their people and institutions.  This publication highlights the critical importance of tackling this agenda, together.”

Watch an audio slideshow on index insurance