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Weather-index based insurance – a viable option for small Pacific islands?

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Pacific Island governments are often able to mobilise international funding to support post-disaster relief and recovery efforts, however, only about 6% of rehabilitation requirements are generally met

© Aleta Moriarty / World Bank

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In the last two decades, Pacific Island countries (PICs) have suffered billions of dollars in damage and loss due to catastrophic weather events such as cyclones and floods, and other natural disasters including volcanic eruptions. Their predominantly small size and the diverse nature of their agricultural production systems make investments unattractive to private insurers.

Crops, livestock and fish typically fall outside mainstream insurance coverage, and as a result, small farmers and fisherfolk in the region tend to be risk adverse. Opportunities exist for transferring weather-related risks to insurance products that can benefit small producers, but would require convincing governments, insurers, development partners and producers themselves to invest in such schemes. PICs would also need to carefully examine the suitability of WIBI products for speeding up post-disaster recovery efforts and building resilience within the agri-food systems.

Why WIBI?

Agriculture makes a significant contribution (10-30%) to gross domestic product (GDP) and is a major source of livelihood for as much as 80% of the rural population in PICs. These countries are prone to catastrophic weather events and other natural disasters, and climate change only exacerbates the situation. The cost of damage and loss impacts negatively on GDP, for instance, in 2012, Tropical Cyclone Evan caused US$24 million (~ €21.8 million) in total damage and loss to Fiji’s agricultural sector. The time taken to recover from the resulting loss in revenue due to reduced production, exports, disruption in flows of goods and services, as well as unemployment, can be years.

Pacific Island governments are often able to mobilise international funding to support post-disaster relief and recovery efforts, however, only about 6% of rehabilitation requirements are generally met. Innovative insurance schemes could therefore help to fill this gap by protecting the livelihoods of vulnerable farmers, fishers and other value chain actors.

WIBI differs from traditional indemnity-based insurance. It is a contingent claim contract for which lump sum pay-outs are made based on the occurrence of a specific weather parameter that is closely associated with yields, cost or revenue. Insurance payments are made based on pre-determined damages for a defined weather impact (e.g. rainfall, drought or wind strength) and not on losses measured and verified in the field. A major advantage is that the policies are flexible and designed to reflect exposure and risk in specific areas. Neither producers nor insurers can influence the index.

WIBI in PICs

Because of the frequency and exposure of PICs to catastrophic events, it is more likely that simpler catastrophic damage WIBI systems would be introduced particularly at the outset of any insurance scheme in the region. As payments are based on pre-determined damages,this reduces the need for data from farmers and allows the inclusion of all crops in one insurance system, rather than introducing different systems for potentially very small numbers of farmers with different crops. Over time, as the systems become better understood, more complex WIBI mechanisms relying on more detailed data, can be introduced.

Critical success factors

PICs can learn lessons from other countries that have implemented WIBI schemes that respond to their diverse, smallholder production systems. For example, India has three WIBI insurance schemes that cover rainfall (deficit, excess and deviation), relative humidity, temperature (high and low), wind speed or a combination. Premiums are subsidised by governments and insurance coverage is compulsory for farmers who access bank loans.

Critical success factors of WIBI schemes include: the involvement of strong producer organisations and insurers in the design of the WIBI product; government coordination and willingness to subsidise the scheme; the ability to bundle weather insurance with loans, life insurance, inputs or crop sales contracts to attract farmers and secure markets; well-developed mobile banking systems and phone penetration; sufficient data on crop production costs and yields; a competent weather authority with sufficient quality historical data; insurance legislation; and the ability to identify the correct trigger events for insurance purposes and payouts.

Key recommendations

In summary, there are key lessons that PICs can draw from other countries with similar production system that have implemented successful WIBI schemes. These include organising multi-stakeholder consultations under the leadership of government to agree on the suitability of WIBI, as well as the disaster risk and compensation packages to be triggered by weather-related disasters. The insurance of marginal weather events -such as storm, flood, drought, etc. - has not been possible on other countries as this affects premium costs. Public funds should be made available to attract private investment, i.e. an initial subsidy of 50-75% for WIBI payments should be considered by the PICs governments. Linking this subsidy to other services, such as bank loans, would help to reduce market volatility.

Finally, the capacity of all WIBI users need to be built, but especially for producers and agro-based SMEs so they understand the benefits of the scheme – even when there is no return on premium payments in some years.

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