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A number of successful pilot schemes in many countries, including Ethiopia and Kenya, have introduced the concept of index-linked weather insurance for small-scale farmers. This works on a simple theory: by insulating them from weather-related hazards that could adversely affect their outputs, index-linked weather insurance allows farmers to take risks and plant crops, knowing that they will get a return at the end of the season, whether it is in the form of a good yield, or a payout as compensation. As a result, index-linked weather insurance has been heralded as a successful mechanism of disaster risk reduction and climate change adaptation – and part of the social protection suite. But is it really sustainable in the long term?

It is well known that you have to “speculate to accumulate”, or spend money to make money; and that securing an economic livelihood takes place in a context of many risks. Farming is no exception: inputs such as seed and fertiliser must be purchased before planting, and time must be taken throughout the growing season to tend crops. Even with these inputs of time and money, the yield of the crop is dependent on the weather - in particular on the pattern of rainfall within the season. On a continental scale, a large proportion of Africa is classified as dryland, characterised by low rainfall with high inter- and intra-annual variability. Against a backdrop of increasing variability many small-scale African farmers, who have spent years putting something in without getting something out, have abandoned planting in order to conserve their meagre resources. Whilst this is a rational decision of risk management, of course it does not help them secure their livelihoods, and on an aggregate scale contributes to ongoing poverty and underdevelopment.

Insurance has a long history as a risk management tool, but has typically been a luxury affordable only by the rich. Indeed, large-scale commercial famers have been purchasing index-linked weather insurance for a long term to insulate them from the weather risks to their crop productivity. Recent pilots have experimented with public-private partnerships in order to make this opportunity available to small- scale farmers. Private sector insurance companies extend the option of insurance, whilst public sector partners, typically multilateral and bilateral donors, cover the premiums.

Index-linked weather insurance is a financial product where the payout, or the level of payout, is dependent on pre-specified patterns of the index, as opposed to actual yields. As such, it avoids the moral hazard of a reduced yield being in the financial interests of farmers to ensure payout. Indeed, as well as reducing the risks of weather hazards to the yield, and thus ensuring a farmer of his livelihood come the end of the season, it also enables another potential benefit. A farmer may feel empowered to modify his/her choice of crop(s) or method of farming, and should this new practice be better able to cope with drier conditions, (s)he may receive both a yield and a payout (if the rainfall was less than the predetermined amount). In this way, by reducing the risk, index-linked weather insurance might actually enable adaptive decisions that promote adaptation to climate change and other weather-related risks in the longer term.

The theoretical benefits of index-linked weather insurance are thus clear: guaranteed outputs at the end of the season facilitate risk-taking at the beginning, with the ultimate result that livelihoods and secured and poverty reduced. The recent positive experience has even led IFAD and WFP to set up the Weather Risk Management Facility, to examine a variety of schemes from around the world and look at key actors, product features, and successes in order to promote its introduction in new locations. But I remain worried that this should not be taken to be a long term solution, and that it runs the risk of actually increasing vulnerability to climate change if not looked at critically.

There are various causes for my concern in the promotion of index-linked weather insurance as a risk management and climate change adaptation tool. The provision of insurance by private sector companies is based on their calculated assessments of the risks involved, in turn dependent on complex layers of decision-making, including the ability to sell risks on the international market through reinsurance. Insurance companies are not answerable to any public sector organisations or governments, and thus are entitled to (and do) withdraw their products should they no longer become financially viable.

There are many examples of the withdrawal of insurance products with regard to weather-related hazards: whilst it was once possible to obtain hurricane insurance in the southern United States, the extent of damage and value of subsequent claims from homeowners and industry has caused its withdrawal. Similarly in the UK, obtaining house contents insurance for homes built on the floodplain is no longer possible.

We know that climate change is occurring and that this will mean changes in weather patterns across the world. Whilst it may encourage innovation that further reduces risk and enables climate change adaptation, the other side of the coin is that providing index-based weather insurance now as a cushion against the weather may actually discourage farmers from engaging in their traditional self-reliance, preparedness, and risk-spreading activities. If this happens and then the insurance product is removed, they will arguably be in a more precarious situation – both worse off economically and more vulnerable to risk - than they were before the insurance was available. Similarly, pilot schemes have typically relied on donors covering the premiums, which is never a long-term solution.

Whilst I can see a potential for index-linked weather insurance as a tool for managing risks, I feel that a longer term perspective on whether or not it is appropriate and how it will work needs to be taken now. Index-linked weather insurance is not a panacea, and will not necessarily be the most appropriate risk reduction mechanism in some marginal environments, where promoting agriculture will be unsustainable under climate change and its associated weather conditions. Looking at the longer term projections of changing climate and deciding accordingly whether this is an appropriate tool, or might raise the risk of maladaptation, will determine whether or not it should be considered part of the social protection suite for any given location.