Weather Index Insurance and Climate Change: Opportunities and Challenges in Lower Income Countries

Abstract

Weather index insurance underwrites a weather risk, typically highly correlated with agricultural production losses, as a proxy for economic loss and is gaining popularity in lower income countries. This instrument, although subject to basis risk and high start-up costs, should reduce costs over traditional agricultural insurance. Multilateral institutions have suggested that weather index insurance could enhance the ability of stakeholders in lower income countries to adapt to climate change. While weather index insurance could have several benefits in this context (e.g. providing a safety net to vulnerable households and price signals regarding the weather risk), climate change impacts increase the price of insurance due to increasing weather risk. Uncertainty about the extent of regional impacts compounds pricing difficulties. Policy recommendations for insurance market development include funding risk assessments, start-up costs and the extreme layer of risk. General premium subsidies are cautioned against as they may actually slow household adaptation. The Geneva Papers (2009) 34, 401–424. doi:10.1057/gpp.2009.11

Farmers’ Risk Preferences and Agricultural Weather Index Insurance Uptake in Rural China

“…Given these problems associated with conventional agricultural insurance, in the past two decades a growing number of national governments, academic researchers, and international nongovernmental organizations have exhibited great interest in a new form of agricultural insurance known as weather index insurance, which is based on recorded meteorological data that are highly associated with crop losses (Barnett and Mahul 2007;Bryla and Syroka 2007;Chantarat et al 2007;Miranda and Farrin 2012;Cao et al 2013). In the contexts involving rural smallholder farmers, weather index products have distinct advantages over conventional crop insurance (Patt et al 2009;Liu et al 2010) and are increasingly preferred by local farmers and insurers (Collier et al 2009;Akter et al 2016). As the weather index insurance is a relatively new product in China, it has not been widely implemented.…”

A viable and cost-effective weather index insurance for rice in Indonesia

“…According to its advocates, it can provide an effective approach to improve emergency response to weather-related catastrophes as well as facilitate a role in adaptation to climate change and disaster recovery; see recent experiences in, for example, Mongolia and Peru for cold waves and floods, respectively, and the inter-country African Risk Capacity scheme for droughts (Collier, Skees, & Barnett, 2009;UNFCCC, 2008).…”

Performance of Temperature-Related Weather Index for Agricultural Insurance of Three Main Crops in China

“…However, studies and experience have concluded that traditional agricultural insurance is a very poor and unsustainable investment in lower income countries, owing to a preponderance of small farms and typical asymmetric information problems (Hazell 1992;Collier et al 2009). Without adverse selection and moral hazards, weather index-based insurance (WII) has shown tremendous potential for replacing traditional crop insurance, since the World Bank implemented a Development Marketplace Contract and put WII into practice in Nicaragua, Morocco, Tunisia, and Ethiopia (Skees 2001(Skees , 2008Stoppa and Hess 2003;Hess and Syroka 2005;Antón et al 2013).…”