By Ryan Dicovitsky
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| Kenyan farmers have more options to insure their crops against climate disasters (Photo: Curt Carnemark / World Bank) |
Last week, the International Finance Corporation (IFC), the private sector arm of the World Bank, announced a program that will allow farmers in the developing world to more easily access insurance to protect against flooding, drought and other climate-related disasters. In partnership with the European Commission and the Netherlands’ Foreign Affairs Ministry, the IFC has created the Global Index Insurance Facility which will remove the need for insurers to check individual claims by farmers, and make it easier for farmers to receive insurance in the first place.
Although seemingly complex, the program works very simply: the index in the program is calculated so that for a given disaster, the monetary amount of damages is predicted for a certain region or town. Using variables including population, quality of soil, and previous climate patterns, the index automatically pays insurance if a natural disaster of a certain magnitude occurs.
As Martin Buehler, Principal Insurance Officer for Global Financial Markets at IFC, stressed to MediaGlobal, this program is not an insurance plan. Rather, “we are an intermediary, a catalyst, an incubator to bring various parties to the table, so populations can communicate.” The index is more like a new way to offer insurance, intended to boost the confidence of insurance companies offering their services in the developing world.
The Global Index Insurance Facility is meant to support insurance companies in developing these new schemes and push for any necessary regulatory changes. However, despite the calls for increased financing assistance at Copenhagen, the Facility is not financially set for the long term. Though assistance will be directed toward the Pacific and Caribbean as soon as possible, Buehler explained that the 25 million Euros provided by the European Commission are exclusively tied to Africa, so “we need to work with donors on a global scale.”
Index insurance is expected to have both positive and negative side effects. As far as additional benefits are concerned, insurers will no longer have to travel to rural areas and verify the exact damages inflicted on crops by a natural disaster. Instead, once a disaster reaches a certain magnitude, the payout will trigger.
Furthermore, prior concerns about fraud are largely eliminated. Previously there was a trend that if a farmer’s field was protected by insurance, she or he would be more likely to let it fail and go work another job. With index insurance, a farmer cannot force the sky to pour down rain, or shake the earth with a snap of their fingers. Instead, there is incentive to continue working a field.
One potential negative effect of the insurance is that it could pay out funding to those who have not experienced problems related to a climate disaster. As Buehler revealed, the index often doesn’t discriminate between situations affecting two farmers on opposite sides of a hill. So, because of “microclimates,” rainfall in a region may be much higher for one farmer, but trigger payouts for all farmers in the area regardless of damages. “A situation where you have to pay out where there is no disaster is unwanted,” Buehler pointed out. However, the potential benefits for farmers in the developing world should outweigh the odd unnecessary payout.
Index insurance is not the be-all-end-all solution to the effects of climate change on farmers, nor should it be.
“I’ve seen some articles that said index based insurance will fix the food crisis. It will not,” said Buehler. By focusing on as many solutions as possible, however, the international community will hopefully be able to strike the right balance and protect farmers against disasters. As Buehler put it, “We’re trying to find as many workable alternatives as to how this has been done traditionally. Insurance has not stepped up to the plate of helping rural, poorer markets.”
