> Posted by Jeffrey Riecke, Communications Associate, CFI

As if we needed more motivation to support the expansion of microinsurance, the increase in extreme weather is highlighting the ability of the financial service to spur climate change adaptation.

Farming in developing countries is responsible for 70 percent of the world’s food supply, and farmers in developing countries are vulnerable to the effects of climate change. What will happen to the world’s food and to those making a living from small-scale agriculture when the frequency and intensity of extreme weather arising from climate change take stronger hold?

Smallholder farmers – about 2.5 billion people live in 500 million smallholder households in developing countries – comprise the majority of those living in absolute poverty. A lost harvest from lack of rain can trigger a cascade of seasons with compromised production and profits if farmers end the season without adequate funds to purchase seed and inputs. Microinsurance can provide a weather-linked safety net so that this cycle of poverty doesn’t have to happen. It can also elicit adaptive behavior change, like the purchase of drought-resistant seeds, that better positions farmers for resiliency during irregular rainfall seasons.

A recent joint-paper from Endeva and Climate Analytics highlights this potential for microinsurance in climate change risk mitigation and adaptation, sharing information about on-the-ground microinsurance schemes that have been successful, and the behavior change mechanisms that these services have employed.

In Kenya, the agricultural insurance product Kilimo Salama provides coverage for farmers’ seeds, fertilizer, and crops. The catch is that participating farmers will only be insured if they purchase drought-resistant seeds. To ease the burden of purchase, potential customers are given access to loans or can have the seed cost incorporated into their insurance premium price. The set-up of Kilimo Salama, along with offering general agricultural insurance, incentivizes productive investments that mitigate risk – which also makes the clients more insurable. If this service was not available, the chances of farmers investing in drought-resistant seeds would fall.

In the area of health insurance, some providers offer the benefit of lower premiums for subscribers who take part in healthy actions – for example, taking a yoga class. Similarly, Red Hairy Caterpillar Insurance, a product offered in India by People Mutuals to cover crop damage by caterpillars, provides discounted rates for farmers who plough their fields during the summer, a measure that decreases the likelihood of caterpillar occurrence. Evidence suggests that climate change is linked to the increased incidence and severity of crop-related pests. People Mutuals also offers free training and information services on climate risk mitigation and adaptation (for example, drought and water management) for subscribers, imparting knowledge and skills to farmers that they might not otherwise have, and reducing risk for all parties involved.

Another risk reduction mechanism involves providers accepting labor that contributes to climate change adaptation as payment for insurance premiums. The Rural Resilience Initiative known as Harita in Ethiopia allows subscribers in drought-prone areas to work on community-identified projects that build resilience to climate change, like irrigation improvement and soil management.

Many microinsurance services for farmers have payouts structured on indexes registering weather that is likely damaging for land and crops. As an altered take on this, policyholders may receive a payout via index readings prior to the extreme weather event, allowing farmers to prepare with risk management methods. This is the model of ENSO Business Interruption Index Insurance (EBIII) by La Positiva, a Peruvian insurance company. The product provides insurance for climate-related disasters related to the El Nino Southern Oscillation.

More research and experimentation on linking microinsurance with climate change risk mitigation and adaptation needs to be done, the paper advises. And on the whole, microinsurance services need to spread: in 2011, the total value of agricultural insurance premiums paid in developing countries was $5.2 billion, whereas globally the total was $23.5 billion.

Image credit: Bioversity International

Have you read?

The Synergy Potential of Financial and Energy Inclusion

In the Face of Climate Change, Adapt… and Mitigate!

Agriculture Microinsurance in Africa: To Subsidize or Not to Subsidize?