Saturday, March 17, 2012

Weather insurance

Climate change is causing more weather extremes and more micro climates. Those who rely on agriculture in developing countries are hit extremely harshly. Mongolia, a country which relies on livestock, saw 25% of its stock die in 2010 resulting, largely from arctic oscillations. The World Bank (amongst plenty of others) is working on a number of weather insurance schemes and I attended an interesting seminar about some of these a few weeks ago.

There are great challenges however when implementing such schemes. The first challenge is to decide when to pay out. The schemes presented in the seminar require publicly available indexes. For example, a publicly available index of rainfall. When it falls below a certain level, if your farm is within a certain radius of the weather station you receive a payout. This was the case in an example in Hondurus presented. In Mongolia, an index of livestock death was used. In both cases, the aim is that an individual farmer cannot influence the likelihood of payout. They also ensure that a farmer who suffers less because he has made investment to protect himself from climate change is not penalised because he has been hit less hard. This encourages such investments. Finally, the index is public, clear and verifiable helping to win trust and gain buy-in.

There are problems though. The first is often weather stations. They often don't exist in sufficient numbers and relevant places in developing countries, so a network may have to be set up. A second issue comes in managing the scheme. Some experiences show that the scheme stops becoming viable when just a key employee or two, with the relevant expertise, leave an insurance company. In nomadic places like Mongolia, sales agents have to chase herds around the country to sell insurance! This makes the costs very high. An Indian example extended to groundwater levels which is a function of the previous monsoon. Therefore insurance has to be purchased prior to the monsoon.

Overall, the practical implementation of these schemes seems challenging but the benefits in the face of climate change, extremely high, when the schemes work.

One of my favourite things about the World Bank is the openness. You can read all about these different projects online. Here are links to the different documents:  Mongolia ; India ; Central America.