New York and Rome, 5 June 2009— World Environment Day reminds us that climate has always presented a challenge to farmers, herders and others whose livelihoods depend on the weather.  Moving away from such dependence is usually an early step in economic development, but many millions have not yet succeeded in taking that step. A type of insurance, called index insurance, however, offers significant opportunities as a climate-risk management tool in developing countries, according to an upcoming report called Index Insurance and Climate Risk: Prospects for development and disaster management. The new publication will be made available after its official launch on June 24, at this year’s Global Humanitarian Forum in Geneva.

For poor people, a variable and unpredictable climate presents a risk that can critically restrict options and limit development. For example, banks are unlikely to lend to farmers if they think a drought will result in widespread defaults, even if the farmers could easily pay back the loans in most years. The farmers’ lack of access to credit critically restricts their access to improved seeds, fertilizers and other inputs.

Index insurance represents an attractive alternative for managing weather risk because it uses a weather index such as rainfall, rather than a possible consequence of weather, such as crop failure, to determine payouts.

This resolves a number of problems that make traditional insurance unworkable in rural parts of developing countries. With index insurance contracts, an insurance company doesn't need to visit farmers' fields to determine premiums or to assess damages.

Instead, if the rainfall recorded by gauges is below an earlier agreed-upon threshold, the insurance pays out. Such a system significantly lowers transaction costs and allows insurance companies to sell to small farmers. Having insurance allows those farmers to apply for and receive bank loans and other types of credit previously unavailable to them.

“If implemented carefully, index insurance has great potential to reduce climate-related risks,” says the report’s chief editor, Molly Hellmuth, from the International Research Institute for Climate and Society (IRI), part of Columbia University. The IRI is publishing the report in partnership with the International Fund for Agricultural Development (IFAD), Oxfam America, Swiss Re, the National Oceanic and Atmospheric Administration, the United Nations Development Programme and the World Food Programme.

“The contributors to the publication are working together in their networks throughout the world to develop and test index insurance as an approach which, when combined with other financial, governance, structural and policy options, can enable us to better meet our collective goal of poverty reduction and economic growth,” says Hellmuth.

Up to this point, a number of projects have shown that index insurance can be feasible for people living on just two dollars a day. Since 2005, some farming communities in Malawi, for example, have been able to buy small insurance contracts to cover the purchase price of seeds in case of drought. Nearly two million Indian farmers have had access to index insurance programs since 2003. But in order to achieve their full potential, applications of index insurance will need to scale up to reach many more people. The new publication will look at the technical and operational challenges that accompany this proposed scale-up.

“Index insurance can bridge the gap between emergency relief and rural development,” noted Michael Hamp, Senior Technical Advisor for Rural Finance at IFAD. “Poor smallholder farmers in developing countries are extremely vulnerable to droughts, floods and other weather shocks which are becoming more frequent and extreme because of climate change. But, weather insurance could help these farmers cope better with weather shocks and improve their financial security.”

The report will highlight a number of case studies of the various applications of index insurance across the world thus far. Among them are:

• A public-private partnership program in Brazil to support farmers
• A multinational scheme in the Caribbean for earthquake and hurricane risk
• A national program in Ethiopia to complement a drought early warning system
• A program to enable access to credit for smallholder farming communities in Malawi
• Public and private programs in India that offer contracts across many states, for many crops, covering a range of risks, from excessive rainfall to extreme temperatures

This report will be the second issue of the Climate and Society publication. Each issue of Climate and Society centers on a specific, timely, climate-related topic. It captures state-of-the-art practice in a policy-relevant language. The first issue dealt with climate risk management strategies in Africa. For more information about the Climate and Society publication, please visit: http://iri.columbia.edu/csp/issue2

Press release No.: IFAD/29/09

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International Research Institute for Climate and Society
The International Research Institute for Climate and Society (IRI), part of the Earth Institute at Columbia University, aims to enhance society’s ability to understand, anticipate and manage the impact of seasonal climate fluctuations, so as to improve the quality of life and the environment. From environmental monitoring and forecasting to climate-related risk management tools and practices in water resources, public health, agriculture, and food security, IRI and its partners focus on opportunities to build capacity for bringing climate information into regional planning and decision-making. For more information, visit the website

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International Fund for Agricultural Development
The International Fund for Agricultural Development (IFAD) works with poor rural people to enable them to grow and sell more food, increase their incomes, and determine the direction of their own lives. Since 1978, IFAD has invested over US$11 billion in grants and low-interest loans to developing countries, empowering some 340 million people to break out of poverty. IFAD is an international financial institution and a specialized UN agency based in Rome – the UN’s food and agricultural hub. It is a unique partnership of 165 members from the Organization of the Petroleum Exporting Countries (OPEC), other developing countries and the Organisation for Economic Co-operation and Development (OECD).