El Nino Forecasts and Insurance
Forecasts like have different possible implications for index insurance. On the one
hand, forecasts could undermine insurance schemes as farmers might decide to
insure only when the forecast is for a bad season. On the other, if insurance
contracts can be designed to incorporate the seasonal forecast, this could enhance
decision making in response to the forecast. For example, where a seasonal
forecast predicts a wetter than normal season ahead, a farmer might take
advantage of the likely good growing conditions by purchasing inputs – but at the
same time use insurance to protect against the lesser likelihood of a drier than
normal season. In this way index insurance might help manage the uncertainty
inherent in probabilistic forecasts.
El Nino and Insurance through
participatory design
Index Insurance for Climate Risk Management
Index Insurance Participatory Design
Questions about El Nino in Indonesia
Climate shocks can lead to food insecurity, debt, property loss, productive asset
destruction or even loss of lives. Climate risk management is an integrated decisionmaking process, aimed at reducing the impacts of weather and climate extremes on
individuals’ lives and livelihoods.
Climate variability has an enormous impact
on agricultural productivity, especially in
developing countries, as it can prevent
farmers from making productive choices
that can lead to higher yields. Thus, “bad
years” tend to be the main source of risks
to farmer incomes and consumption
practices. Farmers must try to manage those
risks, and be more productive in the
remaining “normal” years, even if those
years are not quite as good as they used to
be. Climate risk management tools allow
farmers to better understand climate
impacts
and
available
adaptation
opportunities, in order to make climate
conscious decisions that can lead to
increased productivity, hence increased
income.
In order for insurance to be valuable enough to be purchased and safe enough to be
responsible, solutions must allow the poorest farmers in the world to interact with
advanced researchers at a more sophisticated level than has been previously seen.
This major challenge is by depending on participatory design processes such as the
Social Network for Index Insurance Design (SNIID).
For farmers in Indonesia, an El Niño event can cost them their whole harvest. In an
El Niño event in Indonesia, the rainfall tends to start later in the season. The
temporal shift affects agricultural producers since they may wait to begin planting
Farmer collecting data from a rain gauge, Ethiopia (Credit: IRI)
For example, insurance can help enhance productivity for farmers in normal years by
protecting them from the risks of the worst years, providing a foundation for
economic growth. Index insurance is a relatively new tool that farmers can use to
help manage risk. Index insurance, unlike traditional insurance, pays out based on an
index, such as rainfall, which can be measured at a local weather station or by
satellite. Index insurance can be integrated into a broader set of climate risk
management and development tools specifically designed as a package to decrease
farmers’ vulnerability to weather-related risks, improving lives and livelihoods.
However, designing and pricing effective index insurance programs has proven to be
extremely difficult. If farmers do not know exactly what the limitations of the index
are, they may take production
chances that are not safe. To be
valuable for a low-income
farmer
to
purchase
the
insurance, it must directly
protect a risky production
opportunity the farmer is
considering. Using participatory
processes
that
involves
stakeholders in all stages of
product development helps
deliver a product that is valuable
Farmers’ insurance suggestions during a village meeting in Senegal (Credit: IRI)
and affordable, while allowing
end-users to adapt to climate impacts.
The Financial Instruments Sector Team at the International Research Institute for
Climate and Society (IRI) has developed the Social Network for Index Insurance
Design (SNIID), a tool used on projects around the world to build a communitydriven, development-focused index insurance solution, with a direct link between
farmers, experts, partners, and satellite technologies. The challenge of providing an
affordable and effective product is the challenge of building an index that targets
the most important losses.
their crops until the rainfall begins. If rice
producers plant earlier, the seeds may die before
they are able to germinate with insufficient
water. However, waiting for rainfall has
consequences on the length of the growing
season. Even if rainfall is abundant during the
monsoon season, the timing and the amount of
the rainfall at the end of the growing season can
determine the success of the crop.
Farmer forecast and Insurance discussions in
Indonesia (Credit: IRI)
Farmer index design discussions in the Dominican Republic (Credit: IRI)
The SNIID tool includes farmer-driven, science-based software materials, activities
and timelines for a community of experts, partners and clients to quantitatively
develop and update an index, integrating it into complimentary project
interventions. To ensure the sustainability of an index insurance project, in
collaboration with stakeholders, we have developed educational materials to
guide partners through the process, beginning with establishing key farmer risks
and opportunities through to key follow-up and maintenance processes of the
product. SNIID processes have allowed index insurance projects to scale by orders
of magnitude every year, while at the same time building in farmer input, higher
quality control, deeper links to supply chains, higher standardization, stronger
review, and product annual updating processes. SNIID has standardized index
insurance projects that have operated for several years at large scales, allowing for
rapid scaling of highly demanded and responsible products that reduce climate
risk threats for many tens of thousands smallholder farmers.
SNIID materials are used as
templates that can be tailored
to
meet
project
and
community specific needs,
while continuing to carry
these objectives. Working
closely
with
farmers,
community leaders,
and
experts in each village, SNIID
processes allow end users to
formally participate in the
design of the complete
adaptation strategy, building
insurance products that com- Farmer index design discussions in the Dominican Republic (Credit: IRI)
pliment the other pieces of the package. In this way, farmers have ownership over
the insurance product, and have participated in the SNIID processes to validate
and modify it. In accordance with best practices, these templates are also being
tailored to regional or local languages, such as Spanish, French, Amharic and
Bahasa, in order to engage all community members.
Over the past three years, IRI in partnership with USAID have been working with
Bogor Agricultural University (IPB) to build capacity for index insurance. Part of the
capacity building included designing an index to protect these farmers from a
deficit in rainfall. In 2014, this partnership tfinanested this index with farmers in
the Indramayu, major rice growing region of Java. During this dry run, the IRI
experimented with index design questions around rainfall forecast uncertainty
and insurance during El Niño years on farmers’ demand for index insurance. Since
an El Niño event was forecasted to occur in 2014, the index insurance contracts
would be updated to incorporate forecast probabilities over the course of the
season.
We studied how well farmers
understand and use El Niño
information. If farmers are
aware of and acknowledge the
uncertainty in rainfall forecasts
in El Niño years will they prefer
to wait to purchase insurance
later in the season, but face a
potentially higher price for
insurance?
Understanding
Experimental Economics activities in Indonesia (Credit: IRI)
farmers’ tradeoff between risk
and uncertainty in purchasing insurance is thus crucial to the timing and price of
insurance offering by local partners and can have important design implications.
From an insurance company perspective, is it worthwhile to offer an insurance
product before a forecast for El Niño has been issued? Insurance companies
realize that over time, as the El Niño forecast becomes more certain, prices could
increase substantially or coverage could drop, then demand may decrease or
increase depending on the forecast. From the buyers and sellers perspectives,
there is incentive to buy before the El Niño forecast or to buy after depending on
the probabilities of an event. The information from this experiment can help to
determine the selling time for a commercial insurance product.
forecasts.
Authors (alphabetically): Kelly Armstrong, Sarah Blakeley, Melody
Braun, Miguel Carriquiry, Rahel Diro, Samantha Garvin, Helen Greatrex, Bristol
Mann, Sofia Martinez, Geoffrey McCarney, Daniel Osgood, Jessica Sharoff, Radost
Stanimirova, Katya Vasilaky, Jacob Zeitlin