Transcript Document

Using Index Insurance to Manage
Climate Risk: Issues in Scale Up and
Capacity Building
Daniel Osgood
[email protected]
Megan McLaurin
[email protected]
The International Research Institute
for Climate and Society
Index insurance: background
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Traditional Crop insurance
– Undermined by Private Information problems
– Almost always subsidized (VERY DANGEROUS)
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The index innovation
– Insure weather index (such as seasonal rainfall), not crop
– Only partial protection (basis risk), should not oversell
– Cheap, easy to implement, good incentives
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Design complex
– Only a naive partner would reveal all their cards
– All partners must play active role in a cooperative design
– Client must know what is not covered
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Price:
– Money in = average(Money out) + cost of holding risk
– Ave(Pay) + 0.06 (99th % pay – Ave(Pay))
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New demand for climate services
Micro application
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Climate Risk Barrier for Green Revolution Technology
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Smallholder farmers
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Production system choice not individual decision
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Want hybrid seeds, fertilizers, other inputs
Understand how to increase yields
But face risk, have severe difficulties obtaining inputs
Joint decision negotiated between farmer, relatives, lender,
marketer
Component Green Revolution ‘seeds’ have been sowed
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Quality seeds, inputs, ongoing research; extension expertise;
sophisticated smallholder farmers; potential for markets
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Risk of 1 bad year out of 5 prevents them from being
productive in 4 good years
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Use index insurance to allow farmers to utilize
technologies
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Farm level example
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Development oriented -- NOT famine relief
Example: Malawi Groundnut contract bundle
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Farmer gets loan (~4500 Malawi Kwacha or ~$35)
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Farmer holds insurance contract, max pay is loansize
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Insurance payouts on rainfall index formula
Joint liability to farm “Clubs” of ~10 farmers
Farmers in 20km radius around met station
At end of season
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Groundnut seed cost (~$25, ICRSAT bred, delivered by farm
association)
Interest (~$7), Insurance premium (~$2), Tax (~$0.50)
Prices vary by site
Farmer provides yields to farm association
Proceeds (and insurance) pay off loan
Remainder retained by farmer
Farmers pay full financial cost of program (with tax)
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Only subsidy is data and contract design assistance
Farmers told us:
Insurance package is how they adapt to climate change.
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Malawi Project Partners: Farmers, NASFAM, OIBM MRFC,
ICRSAT, Malawi Insurance Association, the World Bank CRMG,
Malawi Met Service, CUCRED, IIASA
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We are involved in additional projects including:
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MVP, Central America, Kenya, Tanzania, Ethiopia…
http://iri.columbia.edu/~deo/IRI-CRMG-Africa-Insurance-Report-6-2007/
Insurance index developed with farmers
Nicole Peterson, NSF-DMUU
Sustainability and Scale up
• Products are currently being designed through
international research institutions
• Products must
– Scale up: new clients, new locations
– Increase in robustness with application
experience
– Adapt to changing needs
– Take advantage of local insights
• Design should be local, supported by Global
research community
• Need tools to build capacity, educate,
communicate, design, provide foundation for
discussion/negotiation
Design training tools (under development)
Design training tools (under development)
Design training tools (under development)
Design training tools (under development)
Research/Education Issues and Potential Modules
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Issues:
– Pilots are low hanging fruit, for future need to be able
to work with more difficult data
– The capacity building process drives research
– Research directly available through module education
and tools
– Modules can represent academic debate
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Technologies and modules under development
– Other types of contracts
• Eg. excess rainfall, dry spell, water balance
– Systematically map uncertainty through products
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Rainfall Simulation
Using short data series appropriately
Complimenting data with Remote Sensing
Use of Paleo info
– Forecasts, climate processes and spatial hedging
Insurance and seasonal forecasts
• Index insurance starts exactly where forecast stops
– Difficult to take chance using with forecast if livelihood at stake
• Well designed insurance can take risk out of forecast
• Maps probabilistic forecast to deterministic outcome
– Insurance can communicate forecasts and risk costs as price signal
– Seasonal forecast makes badly designed insurance insolvent
• Well designed insurance robust to forecast
• “Low skill” forecasts/indices
– can have high skill for insurance specific decisions
• Not only forecasts, other climate science can be harnessed in portfolios
100000
Enso Based
Standard
50000
Gross Revenue (MKW)
150000
Non-Hybrid ENSO shifted Land Allocation
Based on Historical District Yields
1985
1990
1995
Year
2000
Macro Implementation
MVP Index
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Early warning vs early action?
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Policy maker has barriers in using
forecasting/monitoring for action
– Takes chance that crisis might not happen
– Logistics, coordination, mandate, authority
– Large costs of actions during disaster
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Index contract/policy for disaster response
– Determine actions that would be worthwhile to take if
index reaches given level
– Provide authority, policy, budget for action
– Purchase index contract to fund action
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IRI projects:
– Index product for Earth Institute MVP
– Also exploring: Locust, fire, malaria, livestock disease
and international trade, forage, water management…
Global implications
• With increasing climate risk need to leverage
whole world
– Extreme events
• Big component of damage from Climate Change?
• Negatively correlated across globe?
– Whole world distributes risk
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Subsidized index insurance pilot in US
Need to develop global risk markets
Costs to US reduced
Insurance premiums lower
With global markets incentives for optimal global
production diversification given risks
– Eg. US Corporate resilience with international
climate sensitive suppliers
• Major new role for climate science, monitoring