Index-based insurance is a tool for adapting smallholder agriculture to the Earth’s changing climate and improving the livelihoods of hundreds of millions of smallholder farmers.
Index insurance is an innovation that triggers payouts based on an index (for example, rainfall or sampled yields) correlated with agricultural losses, rather than actual losses. It seeks to cover specific threats that can be captured by the selected index, generally at aggregate scales rather than at the level of individual farms.
- In northern Kenya, following a severe drought in 2011, index-based livestock insurance payouts reduced distress animal sales by 64%, reduced food rationing by 43% among poorer households, and protected infants from the long-term impacts of malnutrition.
- The R4 Rural Resilience Initiative in Ethiopia allowed poor farmers to increase their savings, purchase more draught animals, access more credit, and invest more in inputs such as fertilizers and improved seeds; greater benefits went to female-headed households.
- Kenyan farmers insured with products designed by ACRE (Agriculture and Risk Enterprise Ltd.) invested 19% more in farm productivity, resulting in 16% more earnings, compared to their uninsured neighbours.
Why
Extreme climate events, such as drought, can reverse development gains and push farming households into poverty traps. Risks and risk aversion are key impediments to farmer adoption of climate-adapted agricultural technologies and practices. Index insurance supports climate adaptation, not only by transferring climate-related risks and providing liquidity when extreme climate events trigger disaster (“protection”), but also by enabling farmers to adopt innovation and better exploit opportunity in normal years (“promotion”).
Vision
Farmers across the developing world have access to insurance products tailored to their context-specific needs that reduce vulnerability, unlock opportunity, spur uptake of climate-smart technologies and practices, and build resilience to a variable and changing climate. Agricultural insurance is mainstreamed into agricultural development and adaptation as part of a broader risk management package. The vision recognizes different types of farmers and the need for tailored approaches to meet their different needs, including links to social protection schemes for the extremely vulnerable. Digital agriculture will help enable this vision – linking farmers’ needs and perspectives with insurance design, and linking insurance with other rural financial services, climate information, market information, resilience-building production inputs, and agricultural extension.
Challenges
We can achieve this vision, but it requires concerted and coordinated action directed towards a few key challenges:
- Designing insurance solutions that equitably address farmers’ context-specific needs and risks. This requires scalable participatory design processes and understanding of the products needed for different groups of farmers.
- Increasing the availability of data to tailor insurance to the needs of farmers and the risks that are important to them (e.g. data to design and validate indexes).
- Extending insurance across the full agricultural value chain, including non-farm actors.
- Developing the capacity of existing local distribution channels and potential aggregators (e.g. farmers organisations) that farmers know and trust to distribute appropriate micro- or meso-level insurance for farmers, as well as meso- and macro- insurance for businesses and governments.
- Creating added value by integrating insurance with climate-smart technologies, credit, value chains and development strategies.
- Ensuring an enabling regulatory environment and public-private partnerships.
- Strengthening the evidence base to justify and guide investment, to identify and address market failures, and to guide smart use of public funds to catalyse insurance schemes.
A call to action
For governments:
- Integrate index insurance as an option into national agricultural development and climate adaptation policies and strategies.
- Provide an enabling environment for the development of a vibrant agricultural insurance market, including enabling regulations, investment in public goods such as data and ICT infrastructure, and support for public-private partnerships.
For farmer organizations:
- Foster two-way communication by promoting understanding of insurance and responsibility to manage risk to farmers, and in turn articulating farmers’ needs to insurance providers, governments, and development partners.
- Play a proactive role in facilitating data collection and the distribution of insurance (e.g. as aggregators as appropriate).
For the private sector (insurance, finance, agribusiness, ICT services):
- Build the business case for index insurance for farmers, explaining risks, costs, and opportunities, to develop effective, transparent, and responsible agricultural insurance services.
- Build constructive partnerships among insurance companies, other financial services, agricultural value chain actors, reinsurance, and farmer organizations.
For the international development and climate adaptation community:
- Invest in local capacity to develop the index insurance market, including financial capacity to help insurers take bigger risks, improve ICT infrastructure, and build farmers’ financial literacy to improve trust and understanding of the products.
- Initiate and foster partnerships among national and international stakeholders to bring index insurance to scale. International stakeholders need to take bold leadership actions to make this happen.
For the agricultural research community:
- Support the development of index insurance products that capture more of the risks that are important to smallholder producers, while reducing basis risk (i.e. the difference between the farmer’s actual losses and the expected payout on an insurance contract).
- Develop the knowledge, guidance, and evidence base needed to design insurance products, and integrate these with agricultural technologies and value chains innovations. This should include work to further categorise the different types of insurance and their expected social and economic impacts, as well as how these relate to social protection and cash transfer schemes.
