Download Hazell presentation. ICARD conf. on Dry Areas

Policy approaches for coping with
climate change in the dry areas
Dr. Peter Hazell
Former director, development strategy and governance
division IFPRI
division,
The problem
• Climate change will add to already high
levels of production risk in the dry areas
• This will make agricultural development
even more difficult than in the past
• It will
ill also
l place
l
additional
dditi
lb
burdens
d
on
relief agencies and government programs
th t help
that
h l ffarmers manage d
droughts
ht
Possible policy approaches
• Invest in helping
p g more families find viable
migration and nonfarm opportunities to fit with
the declining carry capacity of dry lands
• Invest
I
in
i irrigation,
i i i
watershed
h d management, and
d
the breeding of more drought resistant crops to
reduce production risks in dry areas
areas.
• Strengthen safety net programs in dry areas
o ote de
development
e op e t o
of weather
eat e index
de
• Promote
insurance for better management of weather
risks
Why weather index insurance?
• A problem with climate risk in dry areas is
the high frequency of production losses for
farmers
• An even bigger problem is that when
severe losses occur
occur, most farmers within a
region lose at the same time.
• This
Thi hi
highly
hl covariate
i t pattern
tt
off lloss makes
k
the management of weather risks difficult.
Difficulties in managing climate
risks
i k
• Community support networks are much less able to cope
with
ith covariate
i t llosses, since
i
everybody
b d needs
d h
help
l att th
the
same time. Credit also becomes scarce when everybody
is seeking to borrow and few have money to lend
• Local
L
l markets
k t ffor crops, feed
f d and
d lilivestock
t k also
l work
k
against farmers when they all are trying to trade the
same way at the same time (e.g. when many farmers try
to sell livestock in drought years they force animal prices
down, and then when they all try to buy again in postdrought years, prices rocket)
• Relief agencies have problems because they need deep
pockets to assist large numbers of people in drought
years, and funding may be insufficient or not available in
time.
Weather index is a promising instrument for
overcoming
i th
these problems.
bl
• Insurance contracts are written against
extreme weather events like drought,
measured at local weather stations
stations.
• Payments are made whenever the agreed
index falls below some critical value (or
trigger point).
• All th
the iinsured
d receive
i a paymentt
regardless of their individual losses
The covariate loss problem is transferred to
the insurer, who can pool that risk at higher
levels
• Some insurers can do this because they
have large and diversified portfolios of
their own with many opportunities to offset
risks.
risks
• Insurers can also sell part of their risk
exposure in
i th
the global
l b l reinsurance
i
and
d
financial markets.
Use of weather index insurance
Weather index insurance is already being
used in two ways
• To insure relief agencies
• To insure individual farmers
Insuring relief agencies
• In this case the agency purchases the insurance and
receives
i
a paymentt whenever
h
th
the iinsured
d eventt occurs.
• This reduces the need to go to donors or the government
for funding after a crisis has occurred, helping to avoid
th ffunding
the
di uncertainties
t i ti and
dd
delays
l
th
thatt plague
l
many
relief efforts
• Part of the funding of the relief agency is transformed
from a series of lumpy payments in crisis years
years, to a
more easily managed annual insurance premium
• The index for this kind of insurance is usually defined as
an aggregate index over a number of weather stations
covering the region in which the relief agency works.
Could even be based on remote sensing data
Insuring farmers
• Insurance contracts are sold to individual
farmers, usually through an intermediary such
as a financial institution or an input supplier
• The
Th index
i d is
i defined
d fi d at the
h nearest weather
h
station to the farmer. This can present problems
(basis risk) if the weather station is too far away
and the farmer’s losses do not correlate highly
with events measured at the weather station
• Either the farmer receives a direct payment or
the intermediary may collect it to pay off a loan
Experience
• A recent review byy IFAD and the WFP found 37 ongoing
g g
index insurance programs in 35 countries
• 7 of these programs insured relief agencies, ranging
from insurance of NGO programs in Ethiopia to
insurance of public relief programs in Mexico and Malawi
• In 2009, the total insured value of the 30 farm level
programs was about $1 billion
• Most of the programs are reinsured internationally: all 7
of the programs for relief agencies and 29 of the farm
programs
• While all the programs for relief agencies are fully
programs
g
are not
subsidized, 19 of the farm insurance p
Constraints to scaling up
• Spontaneous development by the private
insurance industry has been limited, and
government and international agencies like the
World Bank have had to initiate activities
• This reluctance stems seems related to high
barriers to entry – upfront research and
development costs, too few weather stations,
and difficulties in securing access to
international reinsurance
Governments and donors can play
i
important
t t enabling
bli roles
l
• Build weather station infrastructure and data systems
and
d make
k th
thatt data
d t publicly
bli l available
il bl iin a titimely
l manner
• Finance agro-meteorological research leading to product
design and make the results publicly available
• Educate farmers about the value of insurance
• Facilitate initial access to reinsurance
• Support the development of sound national rural risk
management strategies that do not crowd out privately
provided index insurance.
• Support
pp impact
p
studies to systematically
y
y learn from
ongoing index insurance programmes and to
demonstrate their ex post economic and social benefits.
g legal
g and regulatory
g
y environment
• Provide an enabling