Sunday, June 21, 2009

Index Insurance May Bolster Climate Change Adaptation Strategy

Small pilot projects in Malawi, Ethiopia, Thailand, parts of Central America, 16 countries in the Caribbean and a growing number of other nations are testing the use of a mechanism called index insurance to help individual farmers, governments and relief agencies manage the weather-related risk to livelihoods that comes with climate variability and change.

Index insurance is a kind of insurance that is linked with an objectively measurable index, or indicator, like rainfall, temperature, humidity or crop yields rather than some kind of loss. The most common application in developing countries so far is using rainfall totals to insure against drought-related crop loss.

An insurance company will use data from rain gauges near a farmer's field to measure rainfall. If over a certain time period total rainfall levels are below an agreed-on amount, the farmer receives a payout.

"In some sense index insurance is much leaner, and you have to apply it much more strategically and responsibly than insurance," Daniel Osgood, associate research scientist in economic modeling and climate at the International Research Institute for Climate and Society (IRI), told "But it opens the door to a big part of the world. It allows farmers to have insurance and then climb out of poverty traps, usually by allowing them access to credit." (See "Insurance Tool Helps Farmers, Nations Manage Climate Change Risk ( ).")

IRI was established in 1996 in a cooperative agreement between the U.S. National Oceanic and Atmospheric Administration (NOAA) and Columbia University in New York.


Index insurance can work across a range of weather-related risk problems, from loss of crops due to drought to loss of livestock in harsh winter conditions to losses from hurricanes. It can be purchased at different levels of society - by small-scale farmers, by input suppliers or banks, or by nongovernmental organizations and governments for disaster relief.

Governments and relief agencies, which usually pay for the response to large-scale disasters, have taken out insurance policies linked to weather indexes that pay out when extreme weather events cause a disaster.

"The most famous implementation is in Ethiopia," Osgood said, "where the World Food Programme and the government of Ethiopia have purchased index insurance" on total rainfall in a stated period.

This insures against a destructive drought whose agricultural losses normally would overwhelm the national budget. If such a drought were to occur, the insurance company "would pay out a large amount of money that would give the government the budget to do a very widespread disaster response," Osgood said.

Other case studies described in Index Insurance and Climate Risk: Prospects for Development and Disaster Management, published by IRI in partnership with the International Fund for Agricultural Development, Oxfam America, Swiss Re, NOAA, the U.N. Development Programme and the World Food Programme, include the following:

. A national-level drought-risk management program began in Malawi in 2008 that is in its first trial year. The risk is drought and the index is rainfall linked to maize production.

. A catastrophe risk-insurance program involving 16 countries in the Caribbean began in 2007. The risk is hurricanes and earthquakes and the index is wind speed and earth shaking.

. A livestock insurance program began in Mongolia in 2006 that by 2008 had 4,100 beneficiaries. The risk is large livestock losses due to severe weather and the index is the area livestock-mortality rate.

Index insurance has become "somewhat routine" in India with small-scale farmers and in Mexico with governments, Osgood said. "But in the rest of the world we're just exploring it. We haven't established that it has an impact on poverty and we also need to look, as climate change occurs, at how index insurance and climate change would connect."


Osgood sees the spread, over time, of insurance to more places in the world as a possible way for people across the planet to help each other manage the weather extremes that climate change is predicted to bring.

"Because of processes like El Niño and La Niña - these oscillations - we know that when extreme events like droughts happen in one part of the world, they're most likely not going to happen in another part."

El Niño is characterized by unusually warm ocean temperatures in the equatorial Pacific; La Niña by unusually cold ocean temperatures there. These alternating systems, together known as the El Niño Southern Oscillation, are associated with floods, droughts and other disturbances around the world.

Insurance companies use the oscillation concept to form insurance pools - organizations of insurers through which certain kinds of risk are shared. The risk of high loss by one company is transferred to the pool, with premiums, losses and expenses shared in agreed amounts.

"When you're doing an insurance pool," Osgood said, "you want people who have the risk and people who don't have the risk in the same pool. That's what insurance companies do. But with climate, they don't cover most of the world."

Index insurance may play an important role for insurance companies, he added. "They see a market of people buying $2 insurance, but billions of people are buying it. Those billions of dollars can help the whole world better hedge [a climate] risk - where oil wells in the North Sea help out African farmers and African farmers help out the oil wells."

With more widespread insurance coverage, Osgood said, "we're better managing risk as a globe. As climate change occurs, we're going to need to get much better at that."

More information about IRI ( ) is available at the Institute's Web site.

IRI Climate and Society Publications ( ) are available at the institute's Web site. Index Insurance and Climate Risk: Prospects for Development and Disaster Management will be available June 24.