Living with Drought: Testing Weather-Index Based Insurance
The Center for Strategic & International Studies hosted Dr. Shukri Ahmed on August 21, 2012 for his presentation Weather-Index Based Crop Insurance for Smallholder Farmers in Ethiopia: A Multi-Agency Pilot Project. Dr. Ahmed is a team leader for the Early Warning and Vulnerability Assessment and Analysis group with the Trade and Markets Division of the FAO. He is currently working on a pilot project in Ethiopia to see if weather- index based insurance can create an avenue for greater development in Ethiopia and allow for small scale farmers to reap more benefits from their hard work.
The randomized control trial includes a control group which will not be offered options to insurance or credit, a group of farmers that will only receive index insurance, and a group that will receive both index insurance and state contingent loans. Though the second group will not receive credit from the trial process, they will be allowed to access credit on their own accord.
Ethiopian farmers, and many farmers in developing countries, often do not invest in better fertilizers or seeds that could enhance their crop yield and their incomes. Lack of capital is definitely part of the reason that farmers do not make these investments, but lack of insurance is another influential reason. A farmer who buys high-quality seeds or fertilizer today has no guarantee that there will be sufficient rains that will make his investment profitable. If the farmer makes the investment, and the weather does not cooperate, he and his family could be left in a dire situation and with less money than if they had not bought fertilizer/ seeds.
Weather-index based crop insurance seems to be a viable step in the development process for farmers with a lack of capital. A bank’s provision of insurance to farmers would give farmers greater incentives to invest in enhanced farming methods. If weather-index insurance were implemented, a farmer could take out a loan from the bank to purchase his seeds or fertilizer, but if the rains are short that year or there is a frost, the farmer will not have to pay back the loan immediately.
Though this system sounds as though it could be very beneficial to farmers, there are many obstacles to its implementation. Farmers who are unfamiliar with banking systems do not trust banks or their intentions. Also, it would be difficult to expect a farmer to pay for insurance at the time that the loan is given because the farmer may not have enough money to pay for the insurance premiums, which Mr. Ahmed mentioned would be 20% of the potential insurance coverage. Furthermore, the farmer may not see a reason to buy insurance as the benefits will be lagged. Lastly, there is a lack of data on the rainfall in the different regions of Ethiopia, which makes it difficult to form the weather index from which to base insurance.
Dr. Ahmed addressed the need for private sector involvement in the movement to better support small scale farmers. Ethiopia is 80% rural, and the agriculture market could have great potential for investors, but private interests have shied away from embracing this potential. However, with weather insurance, private firm interest has increased.
A project initiated by Oxfam America and its partners in 2007 in northern Ethiopia cites some success in their farmer insurance program. This insurance model program includes savings, credit, and disaster risk reduction strategies. The premium can be paid through labor- an option that is most applicable to the poorest of farmers, and if rains are lacking, farmers receive a payout to cover losses and prepare for the next season.
The pilot project in which Dr. Shukri Ahmed is engaged should be completed within the next 2-3 years. The results will allow researchers to observe if the provision of insurance or loans is effective in influencing farmers to make larger investments in their agriculture and increase their productivity.