A new form of insurance that covers risks such as droughts or floods could help small farmers in developing countries cope with worsening impacts of global warming, a U.N. backed report said on Wednesday.
Under “index insurance,” payouts are linked to a yardstick such as a shortfall of rains in the maize growing season in Malawi or the height of the Mekong River near rice paddies in Vietnam that risk flooding.
In theory, such a system is simpler and so cheaper than normal farm insurance, which pays compensation for crop failures only after insurance companies document losses at each farm.
“Index insurance offers new opportunities for managing climate risk in developing countries,” according to the report by the International Research Institute for Climate and Society at Columbia University in New York.
Greenhouse gases, mainly from burning fossil fuels, are stoking global warming that will disrupt food and water supplies with heatwaves, floods, desertification and rising sea levels, the U.N. Climate Panel says.
Up to 250 million people in Africa alone could face greater stress on water supplies by 2050.
“If farms are small it’s often not possible to get insurance,” said Daniel Osgood of Columbia University who was among editors of the report also backed by U.N. agencies, reinsurer Swiss Re and aid group Oxfam.
“The challenge is to get the formula connected to the loss. if a lack of March rainfall causes the problem then it doesn’t help to insure against April rains,” he said.
Other problems were ensuring that rain gauges were accurate and tamperproof for instance, and close enough to farms to be relevant.
“Index insurance is a very new tool; it’s exploding in popularity,” said Mirey Atallah of the U.N. Development Programme and an editor of the report. “There are a lot of challenges but also a lot of opportunities.”
Example of index insurance include drought coverage by Ethiopia, a system for Mongolian herders linked to livestock deaths or disaster insurance for Caribbean islands linked to hurricane wind speeds.
In 2008, for instance, the public Nicaraguan insurer sold contracts linked to rainfall for groundnuts and rice, protecting a total area of 1,774 hectares (4,384 acres). Premiums averaged 5.5 percent of the insured total of $1.7 million.
The report said that the system could help raise farmers escape poverty — farmers are more likely to invest in more expensive seeds if they do not have to assume all the risk. Banks are also more likely to extend credit to the insured.
Small farmers in vulnerable areas were risk averse.
“Even though a drought (or a flood, or a hurricane) may happen only one year in five or six, the threat of the disaster is enough to block economic vitality, growth and wealth generation in all years — good or bad,” the report said.
Osgood said that farmers who own an ox used for ploughing sometimes had to eat the animal to survive when crops failed.
“If that happens then the next year the farmer can’t farm and it leads to poverty,” he said. Use of insurance could help.
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