Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa

Abstract

This paper reviews recent advances in, and challenges for, weather index insurance for managing drought risk in smallholder agriculture, with a focus on sub-Saharan Africa. Despite its promise to integrate local agricultural risk smoothing with insurance principles, there remain many challenges to its mainstreaming in low income countries. Scaling up of weather index insurance pilot projects is particularly constrained by high-basis risk, related to the divergence between the calculated weather index and actual productivity loss on the farm. Various options may be considered to enhance uptake of weather index insurance. Linking reliable weather data with location-specific crop and agronomic conditions using flexible geospatial crop modeling tools is one option to reduce the basis risk. The other option is interlinking weather index insurance with credit or safety nets. In the end, insurance should be offered as part of a wider set of business services that provide real value to smallholders. Finally, the review acknowledges that the suggested conceptual solutions, especially interlinking index based weather insurance with credit will require more empirical evidence on the extent to which insurance would reduce the cost of borrowing and make credit more accessible to the smallholder farmers.

Adoption and impact of index-insurance and credit for smallholder farmers in developing countries

“…More insight into the impact of linking insurance and credit is needed since there is limited 27 information in the literature regarding the potential effect of bundling insurance and credit, for 28 example on the extent to which insurance would reduce the cost of borrowing and make 29 credit more accessible to the smallholder farmers (Tadesse et al, 2015). In this paper we 30 review the most recent scientific literature on one specific form of insurance: index-insurance.…”

“…In this paper we 30 review the most recent scientific literature on one specific form of insurance: index-insurance.…”

“…29 Janzen and Carter (2013) explore an alternative mechanism. They state that insurance can 30 be beneficial in different ways for households above and below a certain asset threshold.…”

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

“…These include Leblois and Quirion (2013), Tadesse et al (2015), and Carter, Janvry, Sadoulet, and Sarris (2014). Binswanger-Mkhize (2012) reviews the state of WII initiatives, and argues that while products can potentially have beneficial welfare impact on small farmers who are otherwise not able to adopt other methods for transferring financial risk, these same farmers will find it difficult to afford their participation in these programs.…”

“…A drought index insurance has been proposed in several countries in Sub-Saharan Africa, South Asia, and North Asia to cover farmers' losses from weather extremes (Rao et al, 2015; Jerry R Skees, Varangis, Gober, Lester, & Kalavakonda, 2001;Tadesse, Shiferaw, & Erenstein, 2015). These initiatives have yet to make significant inroads in implementation in any developing country.…”