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Drought insurance for agricultural development and food security in dryland areas

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Abstract

This paper reviews the potential role for and experience with index based insurance for managing drought risks in agriculture and rural areas in the dry areas of developing countries. It argues that while index insurance is not a panacea for risk management, it could make important, market-based contributions in catalyzing sustainable safety nets and promoting agricultural growth. And though the private sector should be the main supplier, there are still important enabling and facilitating roles that need to be played by the public sector.

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Notes

  1. Drylands are defined by the UNCCD to include arid, semi-arid and dry sub-humid ecosystems characterized by low and irregular rainfall and high evapo-transpiration that are subject to cyclical droughts.

  2. Other components of public assistance include subsidies for wells and water provision, transport of livestock, and debt forgiveness, but feed subsidies have typically dominated public relief budgets.

  3. See, for example, Grosh et al. (2008).

  4. Any subsidized risk management aid can have similar effects. Subsidies on any input (e.g. fertilizer) can encourage over use of that input in terms of the balance between the economic value of the additional production and the cost to the tax payer. In this case the “overuse of the input” is the adoption of farming practices and livelihood strategies that lead to a growing dependence on government assistance.

  5. This assumes that the insurance contracts are set up on an actuarially fair basis for each weather station. A compelling advantage of index insurance is that all the information needed to write actuarially fair contracts exists, unlike typical insurance contracts written at the farm level. Of course, if the insurer doesn’t follow basic pricing principles, or makes payments that are tied to individual farm rather than area outcomes, then moral hazard and adverse selection problems may arise.

  6. See Table 3 in IFAD and WFP (2010).

  7. A good low-cost weather station with automatic capabilities costs about US$2,000. They cost even less in India.

  8. Fuchs and Wolff claim that the “automatically insured farmers get informed about their coverage status through state officials.” They assume therefore that the farmers are weather index insured and that the WII creates disincentives to invest in (i) other non-insured crops leading to potential overspecialization and mono-cultures and (ii) irrigation systems because only rain-fed farmers are insured. (Fuchs and Wolff 2011) These arguments hinge on the assumption that farmers actually feel they are insured. In fact, an external evaluation of the programme (Mexican Ministry of Agriculture 2009) finds only that those farmers that have received payouts “incorporated” those payouts into their production decisions. General awareness of the existence of the insurance coverage and even more so individual perception of being “insured” are not known and are probably low.

  9. Victor Celaya del Toro in a presentation to the World Bank titled “Programa de Atencion a Contingencias Climatologicas—Seguro Agropecuario, Mexico DF, June 2010.

  10. See chapter 2, Reducing human vulnerability: Helping people help themselves, p87–124.

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Authors and Affiliations

  1. School of Oriental and African Studies, London University, London, UK

    Peter B. R. Hazell

  2. Centre for Environmental Policy, Imperial College London, London, UK

    Peter B. R. Hazell

  3. World Bank, Washington, DC, USA

    Ulrich Hess

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  1. Peter B. R. Hazell
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  2. Ulrich Hess
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Correspondence to Peter B. R. Hazell.

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Hazell, P.B.R., Hess, U. Drought insurance for agricultural development and food security in dryland areas. Food Sec. 2, 395–405 (2010). https://doi.org/10.1007/s12571-010-0087-y

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