Pioneering insurance policy greatly benefits poor farmers, finds UN-backed report

The fragile livelihoods of millions of poor farmers in developing countries, often devastated by adverse weather conditions, have been fortified by an innovative insurance scheme, according to a United Nations-backed report released today.

A variable and unpredictable climate can restrict income and limit development for many smallholders, as banks, for example, are unlikely to lend to farmers if a drought will cause widespread defaults, even if the farmers could pay back loans in most years.

This lack of access to credit restricts farmers’ ability to buy improved seeds, fertilizers and other inputs needed to cultivate land, according to the Index Insurance and Climate Risk: Prospects for development and disaster management report launched at the Global Humanitarian Forum (GHF) in Geneva today.

Index Insurance uses a measure of weather, such as the amount of rainfall, to determine payouts, resolving a number of problems that make traditional insurance unworkable in rural parts of developing countries, said the report.

With Index Insurance contracts, there is no need to visit the policyholder to determine premiums or assess damages. Instead, if the rainfall recorded by gauges is below an agreed-upon threshold, the insurance pays out.

Having this insurance allows farmers to apply for bank loans and other types of credit which was previously inaccessible, said the report, which was produced by the International Research Institute for Climate and Society (IRI) in partnership with UN Development Programme (UNDP) and the World Food Programme (WFP), among other governmental and non-governmental agencies.

“Only the richest three per cent of people in the world are covered by insurance,” said Olav Kjorven, UNDP Assistant Administrator and Director of the Bureau for Development Policy.

“The world’s poor have been completely left out, even though they are the most vulnerable people most in need of protection.

“Droughts, floods and hurricanes often strip whole communities of their resources and belongings,” he said, adding that Index Insurance could “finally enable millions of poor people to access financial tools for development and properly prepare for and recover from climate disasters.”

A number of projects have shown that Index Insurance is affordable for people living on just $2 a day, an example being farming communities in Malawi which have been able to buy small insurance contracts to cover the purchase price of seeds in case of drought since 2005, according to the report.

Nearly two million Indian farmers have also had access to Index Insurance programmes since 2003, but in order to achieve their full potential, applications of Index Insurance will need to scale up to reach many more people, the report stressed.