In venturing into weather index based insurance for agric business, the need to empower farmers for efficiency and growth has been identified.
Participants at a recent agricultural insurance workshop organized by Royal Exchange General Insurance Company (REGIC) in collaboration with InsuResilience Investment Fund (IIF), established by the German Development Bank and managed by Swiss based Impact Investment Manager, BlueOrchard Finance Investment Limited (“BlueOrchard”), noted the need to train the farmers, equip them with some technology, as well as funding to enable them maximize their potential.
Specifically, they observed that, since weather index based agriculture needs data, and based on forecast, enabling the farmers to understand importance of information and accurate data was a necessity.
So, this speaks to the importance of practical education and enlightenment so that insurers will not have much problems dealing with the issues that will arise.
They believe also that some level of technology, camera enabled phones, weather equipments and recording equipments to support the farmers will enhance quality of data and response.
According to them, partnering with micro finance banks or other funding institutions was necessary to boost capacity of the farmers to enable them realise their potential and create more wealth.
Index insurance is a relatively new but innovative approach to insurance provision that pays out benefits on the basis of a predetermined index (e.g. rainfall level) for loss of assets and investments, primarily working capital, resulting from weather and catastrophic events.
Weather index insurance underwrites a weather risk, typically highly correlated with agricultural production losses, as a proxy for economic loss and is gaining popularity in lower income countries.
This instrument, although subject to basis risk and high start-up costs, should reduce costs over traditional agricultural insurance. Multilateral institutions have suggested that weather index insurance could enhance the ability of stakeholders in lower income countries to adapt to climate change.
While weather index insurance could have several benefits in this context (e.g. providing a safety net to vulnerable households and price signals regarding the weather risk), climate change impacts increase the price of insurance due to increasing weather risk.
Uncertainty about the extent of regional impacts compounds pricing difficulties. Policy recommendations for insurance market development include funding risk assessments, start-up costs and the extreme layer of risk. General premium subsidies are cautioned against as they may actually slow household adaptation.
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