PUBLIC POLICY FOR CATASTROPIDC YIELD RISK: An Alternative Crop Insurance Program

U.S. farmers have for years relied on the financial support of both federally funded crop insurance and direct disaster assistance. Limits on availability of federal funds dictate that programs less costly to the government than disaster programs but more effective than past crop insurance programs be devised. An insurance program that pays according to losses in areas such as a county is one alternative. With such a plan farmers would pay less for protection. Its administrative cost would be less than typical crop insurance programs. Quality county yield data would be required

Weather Index Insurance and Climate Change: Opportunities and Challenges in Lower Income Countries

Weather index insurance underwrites a weather risk, typically highly correlated with agricultural production losses, as a proxy for economic loss and is gaining popularity in lower income countries. This instrument, although subject to basis risk and high start-up costs, should reduce costs over traditional agricultural insurance. Multilateral institutions have suggested that weather index insurance could enhance the ability of stakeholders in lower income countries to adapt to climate change. While weather index insurance could have several benefits in this context (e.g. providing a safety net to vulnerable households and price signals regarding the weather risk), climate change impacts increase the price of insurance due to increasing weather risk. Uncertainty about the extent of regional impacts compounds pricing difficulties. Policy recommendations for insurance market development include funding risk assessments, start-up costs and the extreme layer of risk. General premium subsidies are cautioned against as they may actually slow household adaptation. The Geneva Papers (2009) 34, 401–424. doi:10.1057/gpp.2009.11

Science-based insurance

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