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Is Insurance a Maladaptation?
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Presentation by Philip Thornton, Theme Leader, CCAFS at the CCAFS Workshop on Institutions and Policies to Scale out Climate Smart Agriculture held between 2-5 December 2013, in Colombo, Sri Lanka.

Presentation by Philip Thornton, Theme Leader, CCAFS at the CCAFS Workshop on Institutions and Policies to Scale out Climate Smart Agriculture held between 2-5 December 2013, in Colombo, Sri Lanka.

Published in Economy & Finance , Business
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  • Any weather-related insurances (including property, business losses and agricultural covers) can be maladaptive if they are seen as the 'silver bullet'. But they can also support adaptation if they enable current capital availability to be used in investing in longer term solutions, whether breeding crops that yield better/more reliably in future climatic conditions or building flood protection measures. Insurance is simply using someone else's capital to cover an element of risk (ie events with more uncertainty or very high consequences), enabling you to use your own capital to generate wealth and/or manage frequent damage or losses. Like any tool, it's how you use it that determines its value.
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  • 1. When might weather-based insurance options be maladaptive? Philip Thornton Institutions and Policies for Scaling Out Climate Smart Agriculture Colombo, 2-3 December 2013
  • 2. Is weather index insurance scalable and sustainable in helping to provide safety nets in response to weather shocks in low- and middle-income countries? • What are the challenges, can they be overcome? • Do we know what the broad and local impacts of WII may be? • Given current demand for development outcomes at scale, does WII have a role?
  • 3. Features of index-based insurance products (World Bank, 2011) Product Summary Perils Benefits Challenges Area yield index insurance F •armers grouped into areas (district, county) A • wide list of perils N • o adverse selection, moral hazard, individual farmer loss adjustment L •ocal perils (e.g. hail) will not result in payout L •ow administrative costs Y •ield history at local district level often not available or reliable Multi-peril crop insurance but on area average yield A • ll farmers in area treated equally E •ffective where similar exposure affect whole districts H • ard to exclude perils as causes of loss cannot be identified Includes • management influences M • ay include quality loss C •an address catastrophe perils affecting group E •nrolment of farmers is easy C •aptures all causes of yield loss B • asis risk at local level depending on district area and peril • Weather Index Insurance (WII) O • ccasionally includes some price risk •ayouts based on P objective measurement R • ainfall deficit and excess; high, low, or prolonged temps N • o adverse selection, moral hazard, individual farmer loss adjustment B • asis risk Index trigger, • increments set to expected loss of yield High wind, sun, combinations C •an address catastrophe perils affecting group B • asis risk minimized for gradual events T •ransparent, objective data N • eed good met and agronomic data, crop modeling C •omplex to design L •imited experience to date E •asier to reinsure S •et-up of index technically complex D • ifficult to correlate damage for suddenimpact weather
  • 4. What are the challenges of WII? • Basis risk: Losses need to be sufficiently correlated with the index to minimise basis risk  careful design needed • Data: Need to understand statistical properties of the index, so need historical data (weather, production) • Scale and scalability: • WII at meso scale less costly and more likely to succeed than individual WII (Hazell et al., 2010) • Many farmers cash/credit constrained • One element in a portfolio risk management approach? • Low demand: high basis risk, complexity of product, perceived low benefits
  • 5. What are the challenges of WII? • Cost: low transaction costs potentially, but large development costs? • Timing of product design and marketing crucial: awareness of input costs, climate signals (e.g. El Niño), actual planting dates • Reconciling simplicity, transparency and efficiency a major current bottleneck – need outreach, media, education, extension, standardisation, building trust • Weakness of indices: some see this as the key bottleneck to the wide implementation of WII (and no improvement without more efficient indices)
  • 6. What do we know about the actual impacts of WII? • What happens at scale: are there tangible and sustainable impacts on poverty, on food security? • Have changes in farmers’ production practices increased or decreased farm-level income risk? • Provision of WII to some can exacerbate the losses of the segment of society that cannot purchase insurance (Miranda & Kerr, 2012) • For index-based livestock insurance, are there environmental impacts (e.g. on rangelands)?
  • 7. WII and maladaptation Pathway to maladaptation (Barnett & O’Neill, 2010) Increased emissions of greenhouse gases Potential relevance to WII Low-med Possible mechanisms De-/re-stocking livestock in rangelands Changes in crop management (e.g. land preparation) Disproportionately burdening the most vulnerable High Could affect food availability and local market prices Having high opportunity costs High More economically efficient safety nets foregone Reducing incentives to adapt Medium Changes in crop / livestock management made ( or not made) Setting paths that limit the choices available to future generations Low ?
  • 8. Summary • Since the 1990s, much debate about the potential uses of index-based agriculture insurance to manage weather risks in agriculture • WII is still in “pilot” mode - lack of evidence of scalability and impacts on development outcomes “… index insurance shows great promise as a tool … will require great public and private investment …” • In 2013, technical developments are occurring in indices, but promise is still being debated – can high expectations be fulfilled any time soon?