Abstract
This paper reviews recent advances in, and challenges for, weather index insurance for managing drought risk in smallholder agriculture, with a focus on sub-Saharan Africa. Despite its promise to integrate local agricultural risk smoothing with insurance principles, there remain many challenges to its mainstreaming in low income countries. Scaling up of weather index insurance pilot projects is particularly constrained by high-basis risk, related to the divergence between the calculated weather index and actual productivity loss on the farm. Various options may be considered to enhance uptake of weather index insurance. Linking reliable weather data with location-specific crop and agronomic conditions using flexible geospatial crop modeling tools is one option to reduce the basis risk. The other option is interlinking weather index insurance with credit or safety nets. In the end, insurance should be offered as part of a wider set of business services that provide real value to smallholders. Finally, the review acknowledges that the suggested conceptual solutions, especially interlinking index based weather insurance with credit will require more empirical evidence on the extent to which insurance would reduce the cost of borrowing and make credit more accessible to the smallholder farmers.
Highlights
There has been much enthusiasm for, and investigations of, the potential benefits of weather index insurance for agricultural risk transfer and mitigation in low income economies (Skees et al 1999; Turvey 2001; Mahul 2001; Hess and Syroka 2005; World Bank 2005, 2011; Barnett et al 2008; Carter 2009; International Fund for Agricultural Development (IFAD) and World Food Program (WFP) 2010; Suarez and Linnerooth-Bayer 2010; Shee and Turvey 2012; Cole et al 2013)
In addition to these general welfare and climate considerations, there is an economic interest in weather insurance: its potential to overcome the chronic problems of moral hazard, adverse selection and other forms of asymmetric information that affect credit and insurance markets in rural economies along with low administrative costs and ease in handling claims for indemnities
We review experiences in piloting weather index insurance products and examine how weather index insurance could contribute to managing drought risk in smallholder agriculture
Summary
There has been much enthusiasm for, and investigations of, the potential benefits of weather index insurance for agricultural risk transfer and mitigation in low income economies (Skees et al 1999; Turvey 2001; Mahul 2001; Hess and Syroka 2005; World Bank 2005, 2011; Barnett et al 2008; Carter 2009; IFAD and WFP 2010; Suarez and Linnerooth-Bayer 2010; Shee and Turvey 2012; Cole et al 2013). Tadesse et al Agricultural and Food Economics (2015) 3:26 events, further undermining the livelihoods of smallholders who typically depend on rain-fed agriculture (IPCC 2007; Barnett et al 2008; Barr et al 2010) In addition to these general welfare and climate considerations, there is an economic interest in weather insurance: its potential to overcome the chronic problems of moral hazard, adverse selection and other forms of asymmetric information that affect credit and insurance markets in rural economies along with low administrative costs and ease in handling claims for indemnities. This, is rarely the case in field conditions, implying that there may be households in a particular village with measureable volumetric loss who may not receive any payouts because the weather data recorded at the weather station is considered enough to support crop production (Barnett et al 2008; Skees et al 1999) This is referred to as basis risk and is most prominent in areas where climate variability is high (e.g. semi-arid areas or rain shadows near a mountain range)
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