Weather Index Insurance in Agriculture: Guidance for Development Practitioners
- Places Weather Index Insurance (WII) in an overall risk management context;
- Provides a guidance as to when and how to implement WII successfully; and
- Provides practitioners with a roadmap and resources to assist implementation.
Why is this guidance document important?
The guidance provides a benchmark to move the discussion in this subject forward. With the release of this paper, practitioners now have a tool which enables them to better understand under what circumstances WII can be a practical and reliable risk transfer tool. In addition, donors have the possibility to better assess project proposals, analyze the chance of success of their investments and monitor better the progress of the projects they are funding.
Watch an interview with Marc Sadler, Team Leader of the ARMT of the World Bank, and one of the authors of the document.
Although weather index insurance is a fairly new product, numerous pilots around the world have experimented with it. In its beginning, it was thought to be a panacea; however, results in the field have proven differently. The authors have highlighted the importance of understanding the necessary and sufficient pre-conditions and requirements for this product to be successfully implemented.
In an interview with Marc Sadler, Team Leader of ARMT and one of the authors of the document, he explains that suffering losses does not necessarily mean having an insurable risk. Moreover, he says, “even if you have an insurable risk, is may not be that index insurance will be the answer.”
The authors argue, based on their experience, that WII is most useful when it is used to augment an existing value proposition. WII cannot solve or significantly address other agricultural constraints (unless, perhaps, there is an underlying and indexable weather risk). It is highly unlikely that there will be a single vulnerability (crop variety and area), with a single problem (single weather risk), with a single solution (WII). Therefore, it is highly undesirable to promote WII in isolation.
“However,” says Sadler, “when you have a specific set of circumstances, and you have a specific objective, and you have a very distinct group of beneficiaries or a portfolio risk that you want to insure, then WII may well be the answer.”
Is WII a practical solution?
Practitioners interested in launching a pilot need to be aware of the serious technical challenges posed by WII and this guide provides many real-world examples that illustrates these.
“It is technically very challenging and expensive to implement a WII pilot,” says Sadler. “One of the drawbacks of this product is that it costs so much money to design and implement, yet the number of policies that you are able to sell is limited by the geographical coverage of each index.”
As an example of this challenge, some developing countries may face lack of access to meteorological data or digitalized data. Even if the meteorological station exists, it may still be hard to count on continuous supply of data for developing a long-term risk evaluation.
Is there enough demand for WII?
Understanding what drives the demand for agricultural index-based insurance, especially to farm households, is a subject that has drawn the attention of the academic, commercial and development communities alike. This paper presents the different approaches –formal and informal– that have been developed to assess demand and its limitations.
However, one thing is clear in this guidance: demand cannot be fully calculated as a hypothetical exercise.
The risk of overselling the product may create unrealistic expectations, say the authors in this paper. Unmet expectations can be a source of reputational risk for the insurer, the pilot project team, as well as for donors if the project is externally financed.
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This publication was produced by the Agricultural Risk Management Team within the Agriculture and Rural Development Department of the World Bank, with funding by the Swiss and Dutch governments (SECO and the Dutch Ministry of Foreign Affairs, respectively) and also from the European Union (largely under the All ACP Agricultural Commodities Programme (AAACP)).