In highly variable climates where any season can bring harsh conditions, farmers are generally reluctant to invest in more profitable technologies and practices. This lack of investment, combined with climate variability leading to unpredictable yields, is a major factor in keeping farmers trapped in poverty. Compounding these issues, credit providers are reluctant to lend to smallholder farmers in such a high-risk environment, meaning that even if farmers want to invest in inputs such as seeds and fertilizers, they often cannot. To help overcome these issues, CCAFS works with the insurance industry to improve index-based insurance products and programs for farmers.
Due to the high cost of verifying losses on large numbers of small landholdings, traditional loss-based insurance is not a viable option for smallholders. Index-based insurance overcomes the obstacles to insuring smallholder farmers against weather-related risks. With index insurance, payouts are based on an objectively measured index that is correlated with farmers’ losses rather than actual losses. Indexes used to represent agricultural risks include rainfall, area-average yield statistics, and vegetation conditions measured by satellites. When an index exceeds a certain threshold, farmers receive a fast, efficient payout, in some cases delivered via mobile phone.
This area of research strengthens the knowledge and evidence for how to design, target, and implement insurance programs that enable vulnerable rural communities – including women and other disadvantaged groups – to manage climate risk and adapt to climate change. It addresses index and insurance design, gender-specific needs, bundling, communication and capacity challenges at scale, public-private partnerships, and sustainable business models. We also contribute to the body of evidence that well-designed and appropriately-targeted insurance can support the livelihoods of vulnerable households by protecting productive assets and enabling access to credit and improved technologies.