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The Potential for Scale and Sustainability in Weather Index Insurancefor Agriculture and Rural Livelihoods

Enabling poor rural people to overcome poverty

The Potential for Scale and Sustainability in Weather Index Insurancefor Agriculture and Rural Livelihoods

Enabling poor rural people to overcome poverty

International Fund for Agricultural Development and World Food Programme. 2010. Potential for scale and sustainability in weather index insurance for agriculture and rural livelihoods, by P. Hazell, J. Anderson, N. Balzer, A. Hastrup Clemmensen, U. Hess and F. Rispoli. Rome. The opinions expressed in this publication are those of the authors and do not necessarily represent those of the International Fund for Agricultural Development (IFAD). The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of IFAD concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The designations developed and developing countries are intended for statistical convenience and do not necessarily express a judgement about the stage reached by a particular country or area in the development process. This publication or any part thereof may be reproduced without prior permission from IFAD, provided that the publication or extract therefrom reproduced is attributed to IFAD and the title of this publication is stated in any publication and that a copy thereof is sent to IFAD.

Printed by U. Quintily, Rome March 2010

Table of contents

ACKNOWLEDGEMENTS ACRONYMS EXECUTIVE SUMMARY CHAPTER 1. RISK IN AGRICULTURE The problem Types of risk in agriculture How risks are traditionally managed Households and communities Financial service providers and input suppliers Private insurers Governments and relief agencies CHAPTER 2. WEATHER INDEX-BASED INSURANCE Index insurance for disaster relief Index insurance for development Challenges for index insurance Demand Contract design and basis risk Reinsurance CHAPTER 3. KEY DRIVERS OF SUSTAINABILITY AND SCALABILITY OF WEATHER INDEX INSURANCE Create a proposition of real value to the insured, and offer insurance as part of a wider package of services Build the capacity and ownership of implementation stakeholders Increase client awareness of index insurance products Graft onto existing, efficient delivery channels, engaging the private sector from the beginning Access international risk-transfer markets Improve the infrastructure and quality of weather data Promote enabling legal and regulatory frameworks Monitor and evaluate products to promote continuous improvement CHAPTER 4. ROLES FOR GOVERNMENTS AND DONORS IN PROMOTING THE SCALING UP OF INDEX INSURANCE

5 6 9 13 13 13 15 15 17 17 18 21 23 24 26 26 29 30

33 36 39 41 43 44 45 48 49

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CONCLUSION REFERENCES AND RESOURCES GLOSSARY

59 60 63

ANNEX. CASE STUDIES 1. AGROASEMEX in Mexico 2. PepsiCo contract farming in India 3. Index insurance in Ethiopia three pilots 4. Index insurance in China 5. Private and public index insurance in India 6. Forage Rainfall Plan in Ontario, Canada 7. Rainfall and vegetation index insurance pilots in the United States 8. Index insurance pilot in Ukraine 9. Index insurance for farm families in Rio Grande do Sul, Brazil

65 65 75 85 97 105 121 129 137 145

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Acknowledgements

The International Fund for Agricultural Development (IFAD) and the World Food Programme (WFP) are working together to increase the access of low-income farmers to weather index-based insurance and other risk-management tools through the IFAD-WFP Weather Risk Management Facility (WRMF). This research paper is the product of a great deal of learning and collaboration. Its authors are Peter Hazell, who made significant contributions, and WRMF team members Jamie Anderson, Niels Balzer, Andreas Hastrup Clemmensen, Ulrich Hess (working as team leader of the WRMF until 2009) and Francesco Rispoli. The paper would not have been possible without the insights and efforts of the entire WRMF team, which further included Monica Anselmi, Federica Argento, Sandro Calmanti, Sew Pook Chin, Emily Coleman, Bronwyn Cousins, Giuditta De Simone, William Dick, Michael Hamp, Daniel Kull, Francesco Massimeo, Andrea Stoppa, Laura Verlangieri and Weijing Wang. Research for the individual case studies was led by Sonu Agrawal (India), Bruce Babcock (Canada and the United States), Terefe Boshera (Ethiopia), Jess Escamilla Jurez (Mexico), Eyob Meherete (Ethiopia), Ronaldo Neves (Brazil), Anthony Patt (farmer games), Kolli Rao (India), Marcela Denisse Cruz Rub (Mexico), Roman Shynkarenko (Ukraine), Pablo Suarez (farmer games) and Junsheng Zhu (China). In addition, the paper benefited from a great deal of complementary research on the case studies by the WRMF team, with particular thanks due to Emily Coleman and Laura Verlangieri. We are deeply grateful to the colleagues and experts in index insurance who reviewed a draft of the paper and suggested many useful improvements: Weather Risk Management Services, Ltd., India; William Dick, agricultural risk-management consultant; Rose Goslinga, Syngenta Foundation; Molly Hellmuth, International Research Institute for Climate and Society (IRI); Daniel Osgood (IRI); Andrea Stoppa, agricultural risk-management consultant; and Joanna Syroka, WFP. We would also like to thank the many colleagues and experts in index insurance who have supported the work of the IFAD-WFP WRMF and given us valuable feedback in small technical workshops held in Hyderabad in 2008 and in Rome in 2009. Participants included Aneha Agarwal, Bruce Babcock, Chetan Bhatia, Christopher Barrett, Michael Carter, Arup Chatterjee, Srinivasa Rao Gattineni, Maryam Golnaraghi, Diana Gruscynski, P. Sai Gunaranjan, Molly Hellmuth, Harini Kannan, Priya Jaisinghani, Vatsal Joshi, Anuj Kumbhat, Richard Leftley, Vijay Mahajan, Reinhard Mechler, P. Nagarjun, Ravi Nathan, Hariprasad Neella, StevenWere Omamo, Daniel Osgood, B.L Parthasarathy, P.D. Rai, Nikhil Raj, N.V. Ramana, Kolli Rao, Sridhar K. Reddy, Rupalee Ruchismita, Priya Satya, Alexander Sarris, Alok Shukla, Jerry Skees, Ashlesha Suvarna, Dhanyagrit Taweesuk, Juerg Trueb, K. Vasumathi, Venup, Marjorie Victor and Witoon Watchapan. The publication was ably edited by Chris Jarzombek and Lynn Ball.5

Acronyms

AIC CCRIF CIRC CONAGUA CRMG EROS FAO FCIC GAIC GRM IFAD IFC IFFCO IMD INISER IRI ITGI LAFCU LEAP M&E MPCI NAIS

Agriculture Insurance Company of India Caribbean Catastrophe Risk Insurance Facility Chinese Insurance Regulatory Commission National Water Commission, Mexico Commodity Risk Management Group, World Bank (now Agriculture Risk Management Team) Earth Resources Observation and Science Center, U.S. Geological Survey Food and Agriculture Organization of the United Nations Federal Crop Insurance Corporation, United States Guoyuan Agricultural Insurance Company, China Municipalized Risk Group [Grupo de Risco Municipalizado], State of Rio Grande do Sul, Brazil International Fund for Agricultural Development International Finance Corporation Indian Farmers Fertiliser Cooperative India Meteorological Department Nicaraguan Insurance Institute [Instituto Nicaragense de Seguros] International Research Institute for Climate and Society, Columbia University IFFCO Tokio General Insurance Company, India Lume Adama Farmers Cooperative Union, Ethiopia Livelihoods, Early Assessment and Protection (software application), WFP and World Bank monitoring and evaluation multi-peril crop insurance National Agricultural Insurance Scheme, India

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NASFAM NBFC NDVI NISCO NMA NOAA PAC PACC PRF-RI PRF-VI PROAGRO PSNP PTTS REST SAA SMS WBCIS WFP WMO WRMF WRMS WRSI

National Smallholder Farmers Association of Malawi Non-Bank Financial Company Normalized Difference Vegetation Index Nyala Insurance Company, Ethiopia National Meteorological Agency, Ethiopia National Oceanic and Atmospheric Administration, United States primary agricultural cooperative society, India Climate Contingencies Programme [Programa de Atencin a Contingencias Climatolgicas], Mexico Pasture, Rangeland, Forage Rainfall Index Pilot Programme, United States Pasture, Rangeland, Forage Vegetation Index Pilot Programme, United States Programme to Guarantee Agricultural Activities [Programa de Guarantia da Atividade Agropecuria], Brazil Productive Safety Net Programme, Ethiopia Seed-Swapping Programme [Programa Troca-Troca de Sementes], State of Rio Grande do Sul, Brazil Relief Society of Tigray, Ethiopia Department of Agriculture and Supply [Secretaria de Agricultura e Abastecimento], State of Rio Grande do Sul, Brazil Short Message Service Weather Based Crop Insurance Scheme, AIC, India World Food Programme World Meteorological Organization IFAD-WFP Weather Risk Management Facility Weather Risk Management Services, India Water Requirement Satisfaction Index, FAO

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THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE FOR AGRICULTURE AND RURAL LIVELIHOODS

Executive summary

Risk is inherent in agriculture. Farmers face a variety of market and production risks that make their incomes unstable and unpredictable from year to year. Input prices may increase out of reach, crops may be destroyed by drought or pest outbreaks, selling prices may plummet and harvests may rot in poor storage facilities. In many cases, farmers also confront the risk of natural catastrophe. Assets and lives may be lost due to severe droughts, hurricanes, earthquakes and floods. The type and severity of the risks confronting farmers are particularly burdensome to small-scale farmers in the developing world. Unless adequately managed, agricultural risks slow economic development, hamper poverty reductio