Wednesday, June 24, 2009

Insurance tool helps farmers, nations manage climate risk via Extreme weather takes a toll on farmers everywhere. In developed countries, farmers can buy crop insurance to help manage that risk. Not long ago, poor farmers in developing nations, where crop insurance is rarely available, had no alternative but to shoulder their own risk, in the process often becoming mired in poverty.

Today, a relatively new tool called index insurance may give these farmers and other vulnerable people around the world an affordable way to manage the effects of a variable and changing climate on their livelihoods now and in the future. The farmers' resulting economic stability may make creditors more willing to extend credit, suddenly allowing them to invest in new seeds, fertilizer and equipment -- their own agricultural productivity -- and begin to climb permanently, harvest by harvest, out of developing-world poverty traps.

"Index insurance has been really promising in a couple dozen places throughout the world," Molly Hellmuth, director of the Climate and Society Publication Secretariat, part of the International Research Institute (IRI) for Climate and Society, located in New York, told

In traditional crop insurance, a farmer pays money, called a premium, to an insurance company to protect against a crop loss. If something happens to the crop, the farmer files a claim and the company sends an insurance adjustor to the farm to assess the loss and determine how much the insurance company will pay the farmer.

…With index insurance, a farmer pays a very small premium to protect against, for example, drought-related crop loss -- the most common application in developing countries so far. Rather than being linked to a crop loss, the payout is linked to a weather index, in this case rainfall.

To determine the payout, the insurance company measures rainfall using data from rain gauges near the farmer's field. If the data from the rain gauge show the rainfall amount is below a certain stated level, the insurance company pays the farmers.

"We're saying, instead of giving people insurance on their losses, let's give them a payout when something happens that would cause their crops to die," [according to Daniel Osgood, associate research scientist in economic modeling and climate at IRI:] "Its advantage is, if I know the rainfall [level] there's no way people can cheat to get a payout. That makes it much simpler and [insurance adjusters] don't have to go see if people's crops have died."….

Dry earth in the Sonora desert, Mexico. Shot by Tomas Castelazo, Wikimedia Commons, under the Creative Commons Attribution 3.0 Unported License

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