Just two months after planting his crop, a farmer insured against weather-related hazards already sees he will lose the harvests due to heavy rains — but he can’t collect the insurance payment until months later, too late for him to invest in a new harvest or even feed his family.
The International Finance Corp. — the private sector arm of the World Bank — wants to change approach this by testing out an innovative type of insurance scheme that pays beneficiaries automatically according to previously established climate indicators like rainfall. The pilot is a joint project with the Global Index Insurance Facility, a multidonor trust fund led by the European Union to support the development and growth of local markets for weather and disaster index-based insurance in developing countries managed by IFC and implemented jointly with the World Bank.
“The index-based insurance we are piloting tries to have a different approach. Rather than going out, looking at claims, rather than payments depending on a specific loss the farmer occurs, the insurance contract is based on an index”, Peer Stein, head of IFC’s advisory work in access to finance, told Devex.
The scheme pays out benefits on the basis of a pre-determined index (rainfall level, seismic activity, livestock mortality rates) for loss of assets and investment resulting from weather-related events — without requiring the traditional services of insurance claims assessors. It could “potentially start a revolution on how insurance against climatic risks are ministered to farmers and [make a dent] on food security,” added the IFC official.
Stein argued: “[The] Indemnity type of insurance requires a long time to be administered. This delays the payout for the farmers and may [entail] the loss of the whole farming season. The index insurance, on the contrary, is calibrated on the basis of the rainfall, and makes the payment fast and efficient.”
In the previous example of the farmer, index-based insurance would allow him to plant again and save the season, noted the expert.
New partners for scaling up GIIF
GIIF was rolled out three years ago and will run until 2016. Its implementing partners have so far insured more than 228,000 farmers, pastoralists and micro-entrepreneurs, and reached nearly one million with information and access to index insurance. The model has been tested on the ground in Kenya, Rwanda, Mozambique and Haiti, where according to Stein, it has mostly exceeded initial targets.
“We are still in the initial phase of the project — where we test if the model is working, what are the costs, if it is replicable,” he explained. “The fact that the response to those projects has been so positive, gives us help that it is scalable. What we aim is to bring the pilot project as close as possible to commercial viability.”
Loic Chiquier, World Bank director of finance and private sector development for the Middle East and North Africa, told Devex the goal is for a “meaningful share” of farmers around the world to have access to this type of insurance, so someday it can reach millions if the tests continue to be successful.
But in order to scale to up the project, new partners must sign up in the next two years.
“We are looking for other partners, in particular in ACP countries, because we are still in the building phase, but we are also expanding into non-ACP countries,” Stein asserted. “We are looking in particular for other insurance companies to commit to the program and support it further, and for partners in the data and analytical field, because this is a quite critical field for us.”
Index-based insurance doesn’t use traditional brokers, but rather other partners like NGOs and farmers cooperatives.
“In some countries, index insurance is forbidden, because regulators said it is too risky and too innovative. Regulators don’t understand how the risk is going to be spread, how the insurance company at the end of the day triggers all the payments in due time, for the people,” explained Chiqiuier.
Over the last three years, the World Bank has worked closely with West African authorities to push for regulatory obstacle to the project to be removed, and put in place a new framework.
Chiquier mentioned how in some countries, governments have a big role to play, for instance on rainfall stations and satellite data, and in some cases participating in the risk along with the private sector.
“We met with a lot of governments, which were excited about the opportunity, and [eager to collaborate] to scale up and do faster, by convincing their local private insurance companies to jump in. Governments [ready to] share the risk, to provide data, or helping validating the data. There are a lot of possible forms of public-private-partnerships, and we are detecting interest from more and more governments.”
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