2011 Articles

Science-based insurance

Brown, Molly E.; Osgood, Daniel E.; Carriquiry, Miguel A.

Climate change with its potential to alter seasons, rainfall variability and temperature regimes1 poses a growing threat to the development agenda. Small-scale farmers in developing countries, who have few modern technologies or improved crop varieties at their disposal, are among those most vulnerable to changing patterns of rainfall and temperature.

In developed countries, crop insurance is a commonly employed mechanism by which farmers and ranchers can guard against the reduction or destruction of yields by extreme weather events. However, traditional crop insurance is largely absent in less-developed countries, because costs of implementation are high and there are not enough effective financial institutions to broker insurances. Furthermore, insurance policies perversely provide an incentive for farmers to neglect their fields, a problem that is usually countered with expensive site visits by insurance claim adjusters2, which would not be financially feasible in the developing world.

So-called index insurances, where an insurance indemnity payout depends on the exceedance of a threshold variable such as water level (for floods) or consecutive days without rain (for droughts), could fill that gap. Many insurance companies and non-profit development organizations are working to develop index insurance for small farmers. In principle, index insurance can serve several purposes. Apart from reducing the risk for small farmers, it can facilitate the availability of credit: banks are more likely to lend to a farmer who is insured against loss of harvest.

However, designing and pricing effective index insurance programs has proved to be extremely difficult, even in places where adequate crop and weather data are available. In the developing world, weather stations are few, records are discontinuous and historical weather data difficult to access3. To make the concept viable in these more challenging circumstances, a high degree of participation and engagement from the geoscience community is key, in particular to provide access to satellite remote sensing and high-resolution climate simulations.