Agricultural Index Insurance Pairs Economics, Natural Sciences For Climate Resilience in East Africa

By Alex Russell

For poor and subsistence farmers in developing countries, a severe drought, flood or other catastrophe can cost them everything. In response to these kinds of climate-related risks, farmers often choose to minimize their exposure to loss. They might avoid higher-cost improved seeds that promise bigger harvests or riskier but profitable cash crops. Both of these strategies can keep them poor.

Maize farmers in Tanzania. Agricultural index insurance could help small farmers like these invest in higher-value crops and increase their income.

Agricultural index insurance is a relatively new tool for farmers to manage climate-related risks and has shown promise in the field. Instead of verifying individual claims, the insurance company bases payouts on an index that can be remotely sensed, like rainfall or biomass growth. That is a significant cost saving when working with small-scale farmers, because it is much easier to verify claims on a single farm of 500 acres than 100 farms of five acres.

But the technology that makes this possible is still in its infancy. It takes special expertise and effort to develop high-quality contracts that pay out accurately. Unfortunately, many of the contracts available now are more likely to leave farmers worse off than if they had no insurance at all.

“Some of these contracts are of such low quality that they systematically fail to pay out as they should,” said Michael Carter, a professor of agricultural and resource economics at UC Davis and an expert on agricultural index insurance for rural development. “We can do better than this.”

Carter is leading a new USAID initiative to establish the world’s first agricultural index insurance quality certification in Kenya based on his applied research in contract design and his work developing a Minimum Quality Standard (MQS). He is partnering with Robert Hijmans, a UC Davis professor of environmental science and policy who is an expert on remote sensing. The UC Davis collaboration is an ideal pairing of the two specialized types of expertise needed to make agricultural index insurance really work for subsistence and small-scale farmers facing significant climate-related risks.

An ideal pairing of expertise to benefit poor farmers

Remote sensing is the starting point for an agricultural index insurance contract. Many of the most effective agricultural index insurance contracts are based on measurements of conditions on the Earth’s surface taken from satellite. Strong links between those measurements and developing crops mean index insurance can accurately trigger payments when a farmer experiences a loss.

“Agriculture is a very difficult sector to study so with index insurance there’s a lot of scope for linking economic sciences and natural sciences through this spatial framework,” said Hijmans, who leads the Ecology, Geography, and Agriculture lab at UC Davis as well as the Geospatial and Farming Systems Research Consortium for the Feed the Future Innovation Lab for Sustainable Intensification at Kansas State University. “Spatial science is exploding as a way to do more multidisciplinary work because of how geography connects physical processes with economic processes.”

But even the most accurate of indices can still fail depending on the overall index insurance contract. In recent years Carter has developed new ideas in contract and index design and has taken them to the field for testing. One of these innovations is an audit rule that lets farmers petition their insurance company to hire an agronomist in the event they suffer losses that are unpaid. Another is a two-trigger contract that pays out at two levels of estimated losses. Carter tested both of these in randomized interventions in Mali and Burkina Faso.

“Agricultural index insurance is a complex financial instrument that has required a lot of investment from research institutions and donors to make possible,” says Carter. “We hope that these investments  make index insurance profitable for the small private insurance companies that offer it to small-scale farmers despite the limited potential market and the ongoing incremental costs.”

Research impact in real time

The USAID initiative, “Innovations to Improve the Quality and Uptake of Agricultural Index Insurance in East Africa,” or “QUIIC,” will help ensure that products for small-scale farmers across East Africa meet a minimum level of quality. Right now there are no regulations for index insurance contract quality, and until Carter developed MQS no objective measure for minimum quality.

QUIIC certification will function a lot like national certifications for seed but for now without a government mandate to attain it. QUIIC certification will indicate for farmers and governments subsidizing a product that a contract will at a minimum leave a farmer better off for having bought it.

Over the next four years Carter and Hijmans will collaborate with NASA and scientists at the Regional Center for Mapping of Resources for Development (RCMRD), a Nairobi-based intergovernmental organization that provides geo data for 20 governments across Sub-Saharan Africa. RCMRD will lead the QUIIC certification and technical lab by 2022.

The USAID initiative also includes an opportunity to test the impact of QUIIC certification in Uganda. In a randomized field study, the research team will bundle a QUIIC-certified agricultural index insurance contract with a village savings program pioneered by the international NGO the Grameen Foundation.

“This initiative to establish a certification for index insurance quality could have a ripple effect that creates incentives for insurance companies to create higher quality contracts,” says Carter. “This development could significantly improve small-scale farmers’ opportunities for long-term resilience despite increasing risks of climate-related catastrophes.”

More information

Learn more about the initiative at the Feed the Future Innovation Lab for Assets and Market Access website.

Previously: Hybrid Maize Boosts Yields for Kenyan Farmers (Egghead blog)

 Alex Russell manages communications at the Feed the Future Innovation Lab for Assets and Market Access at UC Davis.

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