Developing drought insurance for poor farmers in developing countries – two case studies

CIAT, Cali, Colombia. 27-Oct-2008

What use is drought insurance to poor farmers?

The farmer on the right might well be asking: 'Can I risk buying fertilizer this year?'. He knows that his crop needs fertilizer. But fertilizer needs cash that he does not have.  If he borrows and is unlucky to be hit by drought, he will lose his shirt, and maybe more besides. Without protection from drought risks, crop yield must remain low.

Drought has serious implications for farmers in developing countries, especially poor farmers with minimal resources to fall back on when times get tough. Drought can reduce or eliminate crop yields, leading to income loss and sometimes hunger and starvation.  Even the risk of drought hinders development, as farmers adopt informal self-insurance measures that make inefficient, if safe, use of resources. Self-insurance generally aims to lower the exposure to risk, but in so doing limits potential. 

Traditional responses to insurable disasters are not always helpful. Researchers in the U.S. have shown that in a worst-case scenario, post-disaster relief can encourage activity in areas that are known to be vulnerable. Reliable insurance policies, which can indemnify farmers through periods of financial stress, puts them in a better position to take risks that are reasonable, such as applying fertilizer in areas that are not especially drought prone, which in the long-term increase productivity and enable development of financial and biological capital.

Drought insurance improves sustainability by supporting sound investment decisions under climatic uncertainty.

Climate uncertainty presents serious risks for millions of poor farmers in developing countries. Unmanaged risks of drought and floods reduce the sustainability of farming systems by obliging farmers to make sub-optimal decisions and by obstructing sound investment in fertilizers, new seed, or water management structures. Repeated evidence exists to show that, without such investment, farmers face a downward spiral of declining value of production and deepening poverty.

Careful decisions are required to handle climatic uncertainty. Decisions need to be targeted to meet specific risks that vary significantly from place-to-place. Support through insurance needs to be based on best-available scientific estimates of hazard probabilities.

A well-designed insurance scheme can enable farmers to improve sustainability by:

1.      Supporting reasonable investment decisions, such as buying fertilizer, changing seed, or building water management structures.

2.      Enabling rapid recovery of investment by indemnity payments to the insured.

3.      Discouraging unsound investment where analysis indicates excessive risk

4.      Modifying behaviours through variable premiums. This might be used to encourage the adoption of more resilient soil conservation techniques.

Document Respository

Document	Version	Notes
A system of drought insurance for poverty alleviation in rural areas	CIMR Abstract_V1.3.pdf	1 - page description of method and application
Powerpoint. Drought insurance in Nicaragua	Aug06.ppt.pdf	A short presentation showing the basics of drought insurance for beans in Nicaragua
Full report describing development of site-specific insurance method	SLB50 - Final Report.pdf	Full report describing how insurance premiums are developed