Presentation by Philip Thornton, Theme Leader, CCAFS at the CCAFS Workshop on Institutions and Policies to Scale out Climate Smart Agriculture held between 2-5 December 2013, in Colombo, Sri Lanka.

1. When might weather-based
insurance options be maladaptive?
Philip Thornton
Institutions and Policies for Scaling Out Climate Smart Agriculture
Colombo, 2-3 December 2013

2. Is weather index insurance scalable and sustainable in
helping to provide safety nets in response to weather
shocks in low- and middle-income countries?
• What are the challenges, can they be overcome?
• Do we know what the broad and local impacts of
WII may be?
• Given current demand for development outcomes
at scale, does WII have a role?

4. Features of index-based insurance products (World Bank, 2011)
Product
Summary
Perils
Benefits
Challenges
Area yield index
insurance
F
•armers grouped into
areas (district, county)
A
• wide list of perils
N
• o adverse selection,
moral hazard, individual
farmer loss adjustment
L
•ocal perils (e.g. hail)
will not result in
payout
L
•ow administrative costs
Y
•ield history at local
district level often
not available or
reliable
Multi-peril crop
insurance but on area
average yield
A
• ll farmers in area
treated equally
E
•ffective where similar
exposure affect whole
districts
H
• ard to exclude
perils as causes of
loss cannot be
identified
Includes
•
management
influences
M
• ay include quality
loss
C
•an address catastrophe
perils affecting group
E
•nrolment of farmers is
easy
C
•aptures all causes of
yield loss
B
• asis risk at local
level depending on
district area and peril
•
Weather Index
Insurance (WII)
O
• ccasionally
includes some price
risk
•ayouts based on
P
objective
measurement
R
• ainfall deficit and
excess; high, low, or
prolonged temps
N
• o adverse selection,
moral hazard, individual
farmer loss adjustment
B
• asis risk
Index trigger,
•
increments set to
expected loss of yield
High wind, sun,
combinations
C
•an address catastrophe
perils affecting group
B
• asis risk minimized
for gradual events
T
•ransparent, objective
data
N
• eed good met and
agronomic data, crop
modeling
C
•omplex to design
L
•imited experience to
date
E
•asier to reinsure
S
•et-up of index
technically complex
D
• ifficult to correlate
damage for suddenimpact weather

5. What are the challenges of WII?
•
Basis risk: Losses need to be sufficiently correlated with the index to
minimise basis risk  careful design needed
•
Data: Need to understand statistical properties of the index, so need
historical data (weather, production)
•
Scale and scalability:
• WII at meso scale less costly and more likely to succeed than
individual WII (Hazell et al., 2010)
• Many farmers cash/credit constrained
• One element in a portfolio risk management approach?
•
Low demand: high basis risk, complexity of product, perceived low
benefits

6. What are the challenges of WII?
•
Cost: low transaction costs potentially, but large development
costs?
•
Timing of product design and marketing crucial: awareness of input
costs, climate signals (e.g. El Niño), actual planting dates
•
Reconciling simplicity, transparency and efficiency a major current
bottleneck – need outreach, media, education, extension,
standardisation, building trust
•
Weakness of indices: some see this as the key bottleneck to the
wide implementation of WII (and no improvement without more
efficient indices)

7. What do we know about the actual impacts of WII?
• What happens at scale: are there tangible and
sustainable impacts on poverty, on food security?
• Have changes in farmers’ production practices
increased or decreased farm-level income risk?
• Provision of WII to some can exacerbate the
losses of the segment of society that cannot
purchase insurance (Miranda & Kerr, 2012)
• For index-based livestock insurance, are there
environmental impacts (e.g. on rangelands)?

8. WII and maladaptation
Pathway to maladaptation
(Barnett & O’Neill, 2010)
Increased emissions of
greenhouse gases
Potential
relevance to WII
Low-med
Possible mechanisms
De-/re-stocking livestock in
rangelands
Changes in crop management
(e.g. land preparation)
Disproportionately burdening
the most vulnerable
High
Could affect food availability
and local market prices
Having high opportunity costs
High
More economically efficient
safety nets foregone
Reducing incentives to adapt
Medium
Changes in crop / livestock
management made ( or not
made)
Setting paths that limit the
choices available to future
generations
Low
?

9. Summary
• Since the 1990s, much debate about the potential uses
of index-based agriculture insurance to manage
weather risks in agriculture
• WII is still in “pilot” mode - lack of evidence of
scalability and impacts on development outcomes
“… index insurance shows great promise as a tool … will require
great public and private investment …”
• In 2013, technical developments are occurring in
indices, but promise is still being debated – can high
expectations be fulfilled any time soon?