Microinsurance Protects Poor Farmers Facing Increasing Risks from Climate Change

Reporting from Copenhagen

Certainty is a luxury. When you’re rich, you can insure anything that isn’t certain. But when you’re poor and growing crops in Malawi, herding sheep in Mongolia, or sowing rice in Bangladesh, you’re at the mercy of the weather, a fickle force made even more so by climate change.

The governments of developing countries are already partly reliant on microfinance schemes to alleviate poverty. Now, several groups are calling for international support for a different type of microfinance — microinsurance — to help mitigate the risks posed by severe and abnormal weather patterns brought on by global warming.

Consider a farmer in Malawi who takes out a loan to buy seed for groundnuts, a common financial scenario among poor farmers in the region.

She plants her crop according to expected weather patterns, based on generations of accumulated knowledge and tradition. But then the rains don’t come on time. When they finally arrive, she is initially relieved: just in time to save her crop. The yield will be lower, and though enough to feed her family, her two goats starve.

Without the income from the goats and the crops, she can’t pay back the loan or afford another to plant the next season to feed her family.

This is happening more frequently in parts of Africa where rains that once failed every nine or 10 years are now failing every two or three years.

Writing Climate Insurance into Copenhagen

At the international climate negotiations under way in Copenhagen, calls for definite funding commitments from developed countries for mitigation and adaptation in poorer countries have never been louder.

Early negotiating texts discuss some possibilities, including encouraging pilot projects related to microinsurance and risk pooling; creating strategies for reducing, managing and sharing risk; and encouraging public-private partnerships to address loss and damages. They also say developed countries should provide support to address risk assessment and insurance needs in the developing world.

Risk management experts at the World Bank and Germanwatch say some form of climate insurance is vital as part of a larger climate risk mitigation strategy. The Association of Small Island States (AOSIS) and the NGOs, insurers and universities in the Munich Climate Insurance Initiative have also been aggressively promoting including climate insurance in any final Copenhagen agreement.

In Malawi, a pilot program involving the National Smallholder Farmers’ Association of Malawi and the Insurance Association of Malawi, advised by the World Bank, is offering farmers a microinsurance safety net.

The farmer takes out a loan of $35, which includes about $25 for the seeds she will plant that season, a loan premium of about $7 and a $2 insurance premium. Farmers are organized into joint liability clubs and they sell their harvest to a crop association. In a good year, the proceeds pay off the initial loan and the farmers keep the excess profit. If the rains fail, however, the insurance covers up to the entire loan payment so the farmer isn’t stuck with the debt and unable to afford to plant the following year.

A similar parametric insurance project was established in Mongolia. The Index Based Livestock Insurance Project addresses increased instances of dzuds, weather patterns of snow heavy winters and dry summers. In the future, scientists warn that changing climates will lead to increased livestock mortality rates, not only because of altered grazing conditions but also through the spread of diseases as carriers expand their range.

Pros and Cons of Parametric Insurance