MR Microinsurance_2012_03_29.indd - International Labour ...

Microinsurance and climate change
Preliminary lessons learned
1. A combined product (credit plus insurance) protects farmers and the MFI against
loan defaults due to crop failure, which helps the product quickly attain scale.
2. Automatic weather stations enable the insurer to have access to data in real
time, which facilitates faster claims payments.
3. Effi cient restructuring of the contract design broadens the scope of potential
clients that benefi t from rainfall policies, e.g. agribusiness intermediaries.
4. Continuous adaptation to clients’ needs builds a basis for sustainability.
5. Government subsidies make the product more aff ordable, allowing the scheme
to go to scale.
Sources: Adapted from Hellmuth et al., 2009; Levin and Reinhard, 2007; Valvekar, 2007; Aggarwal, 2011.
Most of these examples remain in their pilot stage, or have been discontinued
because they struggled to achieve suffi cient scale to be viable. Clarke
(2011) argues that the low take-up for index-based agriculture insurance is not
necessarily related to lack of trust or fi nancial illiteracy, but is simply an economically
rational choice where the price is above a certain threshold compared to the
expected payout. In addition, many currently available weather-index insurance
products show low correlation with actual losses, warranting better indices with
lower basis risk. 2 However, even indemnity-based products may have little eff ect
on the risk management of the poor if the product does not properly refl ect the
target group’s perception of risk (Karlan et al., 2011).
By contrast, the experience in India seems more promising. In 2010, India’s
weather-index insurance market was the second largest weather market in the
world, following only the United States. As described in Chapter 20, innovations
in weather-index insurance developed by the private sector have been embraced by
the Indian Government, which now provides premium sub sidies to make creditlinked
cover more aff ordable to low-income farmers. Consequently, in 2011,
more than nine million Indian farmers had index insurance cover (Ruchismita,
2011).
2 Basis risk, defi ned in more detail in section 4.3.2, is the diff erence between the actual losses incurred by
the insured and the amount of benefi t that they are actually paid.
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