By P. Hazell, J. Anderson, N. Balzer, A Hastrup Clemmensen, U. Hess and F. Rispoli, published by the International Fund for Agricultural Development (IFAD) and the World Food Program (WFP), May 2010, 153 pages, available at: http://www.ifad.org/ruralfinance/pub/weather.pdf
This paper provides an introduction to agricultural risk and the use of weather index funds to mitigate that risk. Participants in a weather index fund would receive financial compensation if an index highly correlated with local crop yields follows an undisclosed pattern. This pattern is kept secret to reduce the risk of moral hazard.
Weather index insurance is designed to handle highly covariate but infrequent risks. Covariate risks affect an entire community at the same time. A covariate risk may be a flood or a severe a drought that affects a whole community, while a non-covariate risk may be the accidental death of a head of household. Many communities have developed informal methods to handle non-covariate risks, though catastrophic covariate events generally outstrip their abilities.
While individual farmers can self-insure, these rates are often prohibitive. As a result, weather index funds have been primarily funded by governments and relief agencies. Regardless of how the funds are collected, they can be used in a variety of ways. Some programs coordinate relief efforts directly, others make payouts to aid agencies and still others make direct payments to the insured individuals.
While the paper documents 36 separate weather index fund pilot programs in 21 countries, these programs have yet to truly achieve sustainability, a crucial component of market-based development initiatives. The paper addresses this by identifying and describing eight principles of sustainability:
Create a proposition of real value to the insured, and offer insurance as part of a package of services
Locate and develop local champions of such programs
Increase client awareness of index insurance products
Graft onto existing, efficient delivery channels, engaging with the private sector from the beginning
Access international risk-transfer markets
Improve the infrastructure and quality of weather data
Promote enabling legal and regulatory frameworks
Monitor and evaluate products to promote continuous improvement
The paper concludes with nine case studies totaling 86 pages. The case studies demonstrate the variability among existing weather index fund programs, as well as pieces of the sustainability framework identified above.
By Matthew Castner, Research Assistant
About the International Fund for Agricultural Development (IFAD):
The International Fund for Agricultural Development (IFAD), an agency of the United Nations, was established in 1977 as an outcome of the 1974 World Food Conference. IFAD is dedicated to eradicating rural poverty in developing countries by focusing on country-specific solutions.
Since 1978, IFAD has invested USD 11.3 billion in 829 projects and programmes. Another USD 18 billion has been contributed in cofinancing from governments; project participants; and multilateral, bilateral and other donors.
About the World Food Program (WFP):
The World Food Program is responsible for food aid for the United Nations. The organization is guided by five objectives: save lives and protect livelihoods in emergencies, prepare for emergencies, restore and rebuild lives after emergencies, strengthen the capacity of countries to reduce hunger and reduce chronic hunger and undernutrition everywhere and. The WFP plans to deliver 3.7 million tons of food to 90 million people in 2010.
Additional Resources
MicroCapital’s Microfinance Universe profile: International Fund for Agricultural Development (IFAD): https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=International+Fund+for+Agricultural+Development+%28IFAD%29
MicroCapital’s Microfinance Universe profile: World Food Program (WFP): https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=World+Food+Program+%28WFP%29
Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/
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