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
Parametric insurance used to mitigate the effects of climate change lends itself to rural microfinance. Borrowers are already organized into lending groups. The key characteristic of insurance in general is that it pools resources to spread the risk. A parametric insurance scheme pooled among microfinance lending groups, throughout microfinance institutions, significantly increases the viability of such programs to insure against the damage from climate change.
Another advantage to parametric insurance is that it requires less infrastructure than indemnity insurance does. With indemnity insurance, explains Dr. Bob Ward at LSE's Grantham Institute, once a loss event occurs, an agent from the insurer must go and physically verify the loss.
Indemnity micro-insurance schemes have been tried in the past, for example by Allianz and partners in India. But when Cyclone Nisha battered the Indian southeast in 2008, the sheer movement of people and scale of the disaster made it impossible for insurers to verify every loss.
Using parametric insurance doesn't require on-site verification, a high expense added to the cost of insurance. Instead, parametric insurance programs rely on a different kind of baseline. In the case of Malawi, the baseline is established by analyzing historical rainfall; in the case of Mongolia, by historical herd mortality.
"Too much or too little rain is a proxy for damage," explains Koko Warner of the United Nations University Institute for Environment and Human Security. "Parametric insurance approaches offer a promising way to bring premiums down and make insurance affordable for the poor."
Unfortunately, such schemes are only in pilot stages and face significant challenges in upscaling.
Finding a written rainfall history is one hurdle. In the case of a pilot program in Ethiopia run by the World Food Program, collecting data on rainfall, catch (for coastal fishing communities), ground water levels, and herd mortality takes time and the work is compounded in developing countries that are lacking in human and technical infrastructure. Rain gages, for example, not only have to be installed, but maintained.
Warner is "cautiously optimistic" that climate insurance will make its way into a final adaptation and mitigation agreement.
Both the U.S. and the UK seem "supportive," she says.
One major concern voiced yesterday at a briefing by developing nation members of the Third World Network is that adaptation and mitigation aid will subvert already development aid promised under other agreements.
"It doesn't mean that they're hook, line and sinker 'Yes we love it, where's the check, sign me up!' But they have expressed a lot of interest," she says. It is promising from an economic development perspective, she believes, "that also reflects some of their development priorities."
(Photo: UNICEF/Brendan Bannon; Map: NASA Earth Observatory)