Insurance to withstand drought

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Building Resilience and Adaptation to Climate Extremes and Disasters

Insurance payouts typically enable farmers to buy food covering the lean season and also repay existing loans without having to sell productive assets such as oxen and agricultural tools.

Some farmers also use the payout to invest in alternative livelihoods such as petty trade.

According to the first impact evaluation carried out in Ethiopia in 2012, when more than 12,000 drought-affected households received an insurance payout of over $320,000, in some villages insured farmers saved more than the uninsured, bought more oxen and made further investments in seeds, fertiliser and productive assets.

They were also more likely to hire labour and plough oxen. Women, often heading the poorest households, achieved the largest gains in productivity, through investments in labour and improved planting materials.

In 2015, a complementary risk fund was launched, providing formal protection to supplement insurance coverage in cases where insurance could not be cost-effective.

El-Niño and R4 in Ethiopia

As a result of El Niño-related droughts in 2015 and 2016, weather insurance payouts were triggered in Ethiopia, Senegal and Malawi. This led to almost 30,000 farmers and their families – 180,000 people – receiving over $445,000.

As the country with the biggest number of R4 participants, Ethiopia witnessed the lion’s share of the payouts. While the programme has been present since 2011 in both the Amhara and Tigray regions, providing insurance to 27,668 farmers, all payouts during the El Niño event were concentrated in Tigray, with these distributed to 25,773 households.

El Niño brought a major drought across most of Tigray, with substantial yield losses caused by a late start of the rainfall season and significant dry spells along it.

In this context, the R4 early window index was triggered in 10 of the 12 Woredas (districts), with unprecedented index levels in many villages.

In addition to this, the complementary risk fund was effective in its inaugural year, covering some of the drough-trelated risks for which the insurance could not be cost-effectively offered.

It also allowed for a new satellite vegetation component of the insurance to be phased in slowly, prevented farmers from being exposed to untested products and provided formal protection against basis risk: the potential mismatch between the index results and the situation on the ground.

After consultations with farmers and data driven adjudication, using fund protocols, the fund complemented the original insurance payouts of $129,899 with another $234,195, which was distributed to all insured farmers in Tigray (an average payout sum of $14 per household).

The R4 programme is unique in its kind for having envisioned such a mechanism.

Impact and lessons learned

Both R4’s 2012 impact evaluation in Ethiopia and the one conducted in Senegal in 2015 confirm that R4’s comprehensive risk management approach contributes to farmers’ food security in times of climate shocks.

R4 achieves this by improving farmers’ ability to invest in, and increase, agricultural production in ‘normal’ times, while providing more diversified and ‘safer’ ways of storing the increased wealth generated from agriculture.

After the 2015 drought in Tigray, the interviewed farmers mentioned coping strategies such as selling their livestock or spending down their savings, rather than fully resorting to emergency food aid or eating less.

In addition, project participants stressed the importance of insurance as a protection tool, mentioning that they used the insurance payouts to repay loans and purchase food and consumable goods, as well as to buy school supplies for their children.

In a drought year like 2015, this could have been possible, without insurance, only through the selling of limited assets and sacrificing future productivity.

Pertinently, the government encouraged the expansion of R4 to cover additional villages, awarding R4, and its implementing partner REST, with one of the ‘Best Development Project’ prizes in Ethiopia for 2015.

However, a series of lessons have been learned following the 2015 El Niño event, teaching the R4 team how to better face similar crises in the future.

Further improving the indexes

The challenges posed by the 2015 droughts forced the R4 team, in close collaboration with the International Research Institute for Climate and Society (IRI) of Columbia University, to complete the phase-in of a hybrid index.

This included the Enhanced Vegetation Index (EVI) to complement rainfall estimates. Dry runs have already shown that such a technical improvement would have improved the response of the index in 2015, increasing the payout amount.

Changes in the maximum amount of payouts due between the two periods (windows) covered by the index were also introduced. The original 30%–70% split between the two windows changed to a 50%–70% split, capped at a maximum 100% payout between the two windows.

During 2015, the complimentary risk fund was utilised to offer the supervised protection of these innovations without exposing farmers to untested, experimental products.

The phase-in of these successful components will be completed during the 2016/2017 season.

Making insurance more affordable

Lowering the price of insurance further would result in farmers insuring more for the same price and consequently being more protected against droughts.

Since 2015, R4 has successfully managed to considerably lower the insurance costs, which has resulted in farmers increasing their usual sum insured by one third.

Increased integration with all R4 components

More efforts are needed to integrate savings and credit components with index insurance as a buffer for non-catastrophic events.

Given the success of the complimentary risk fund in 2015/2016, the R4 team is now focusing
on more widespread application of the fund, along with further development of the processes for its long-term financial sustainability.

In addition, the R4 initiative is strengthening education to help farmers to better understand the frequency and magnitude of payouts that they should expect from their insurance policies.

Introducing mobile payment systems

Providing timely payouts is crucial in alleviating the effects of droughts on farmers’ livelihoods. In order to achieve this, the R4 team is working on setting up a payment system that could disburse payouts immediately after the end of season, instead of waiting for the physical distribution of the cash payouts for a number of weeks.

Insurance is only part of the solution

Although insurance can play a fundamental part in alleviating drought impacts on large communities when major events like El Niño happen, it can only be part of the solution. In this scenario, the Government, local NGOs and humanitarian actors implementing social safety nets or relief response should work closely with R4-like projects to coordinate the outreach to affected communities.

In addition, the introduction of seasonal forecasts and better preparedness could be seen as synergic to insurance mechanisms. While insurance could provide payouts at the end of the season, seasonal forecasts and preparedness could inform ad-hoc food security actions to be implemented before and during the season.

This would minimise the impacts of the weather risk. In this way, the livelihoods of vulnerable food insecure farmers could be supported throughout all the phases of a drought.

This case study highlights the importance of a) weather index-based insurance mechanism working as part of an integrated risk management framework and b) long-term development initiatives, like social safety nets, to help households bounce back from climate shocks and stresses.

New innovations, such as adaptive social protection in which climate information is used to trigger additional payments based on when needs are greatest, are gaining momentum for building the resilience of vulnerable communities (Ulrichs, 2016).

While looking at the household level is important in the attempt to understand the issues that need to be addressed and how actions can be taken at the local level, another key aspect of the Ethiopia drought is how the humanitarian system as a whole responded once the crises began to unfold.

The following case study is based on a Value for Money assessment of contingency funding that was provided early during the Ethiopia drought crisis.

The study forms one component of the Multi- Year Humanitarian Financing (MYHF) evaluation commissioned by DFID centrally, and uses data gathered during field visits and from an extensive review of partner programming in Ethiopia to construct an analysis of the relative costs of early and late response to the drought (Carbot Venton, 2016).

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