Using Insurance in Adaptation Efforts

by |December 24, 2008

If the recent Conference of the Parties in Poznan, Poland was any indication, next year’s buzzword in the climate-change community will be climate risk insurance.

“Dealing with insurance is of fundamental importance in order to meet adaptation objectives,” said UNFCCC Secretary General Yvo de Boer. “If you can’t get insurance because climate change makes you too high risk, no one else is going to lend you money for any other economic activity, either.”

All of which makes us quite excited here at the International Research Institute for Climate and Society (IRI). For a number of years, we’ve been focusing on weather index insurance, which is one of a number of ways to insure against climate related impacts. We are even dedicating the next issue of our flagship publication, called Climate and Society, to the topic.

Index insurance is insurance linked to a weather index such as rainfall, rather than a possible consequence of weather, such as crop failure. “This subtle distinction resolves a number of fundamental problems that make traditional insurance unworkable in rural parts of developing countries,” says IRI economist Dan Osgood. “Unlike traditional crop insurance, the insurance company doesn’t need to visit a farmer’s field to determine premiums or to assess damages.”

Designed by J. Rodriguez

Designed by J. Rodriguez

Instead, the insurance is designed around weather data such as rainfall: if the rainfall amount is below an earlier agreed-upon threshold, the insurance pays out. Basing the contracts on an index also eliminates a ‘moral hazard problem’. “People don’t have an incentive to misrepresent their claims or to destroy their crops in order to get a payout,” Osgood says. “The farmer has the incentive to make the best decisions for crop survival.”

Insurance isn’t suited to cover the entire range of risks that a changing climate poses and it doesn’t supplant the need for good policy and practice. But if negotiated and managed properly it could help with adaptation efforts, says Molly Hellmuth, the editor of the Climate and Society Publication.

Hellmuth and Osgood took this message to COP14, where they participated in a packed side event co-hosted by IRI and the Munich Climate Insurance Initiative. MCII presented its proposal for climate risk insurance as an adaptation strategy, while IRI and its partners showcased their experiences in implementing  index insurance in Africa and other parts of the world. (see the webcast).

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insurancece

I usually don’t comment on blog posts, but I have to say I like what you wrote here.

Jb
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Interesting concept but wouldn’t the insurance company still need to visit the field to verify they even have the crops to begin with. Second, seems that the principle of indemnification doesnt exist. For example, policy is taken out against rainfall amounts as suggested. What happens when the rainfall is below the threshold but the crops survive. They would get the claim payout and still be able to sell the crops? Again, interesting concept though.