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Integrating insurance into climate risk management: Conceptual Framework, Tools and Guiding Questions: Examples from the Agricultural Sector

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According to the World Meteorological Organization, 2014, 2015, 2016 and 2017 were the four hottest years on record since 1880 (NOAA, 2018; WMO, 2018). Such rising temperatures are expected to affect agricultural systems significantly and also strain food production (WEF, 2018). It is critical for the 2.5 billion people worldwide depending on agriculture and its subsectors – i.e. crop, livestock, fisheries and forestry − as their main source of livelihoods (FAO, 2017).

In 2017, in Nepal, Bangladesh and northeast India, over 6.3 million hectares of arable land were destroyed by heavy flooding and landslides (Singh, 2017). The resulting loss of harvest for subsistence farmers often means a loss of livelihoods with dramatic consequences (Singh, 2017; Gettleman, 2017). Recently, the Food and Agriculture Organization of the United Nations (FAO) published new figures showing $93 billion worth of accumulated losses for the agricultural sector and its subsectors between 2005 and 2014. In Kenya, drought occurrence between 2008 and 2011 accounted for 86 per cent of total livestock damage with losses for the period amounting to $8.9 billion. In Pakistan, in the single year of 2010 floods caused two-thirds of crop losses, reaching $4.5 billion in damage (FAO, 2017a). In addition, the cascading effect of negative impacts goes beyond economic losses. Indirect effects, such as unemployment for farm labourers, increased imports of food and agricultural commodities, and low food availability in local markets resulting in food-price inflation, are commonplace in developing countries. This occurred, for instance, in Burundi, Djibouti, Somalia, Ethiopia and Kenya between 2016 and 2017 due to the dry weather conditions. Approximately 24.3 million people were affected and local market systems were strongly impacted, particularly in Ethiopia, with food prices rising to up to 70 per cent higher than the previous year (FAO, 2017b).

As a response to increasing disaster impacts, the importance of risk transfer and financial instruments such as climate risk insurance were highlighted in key international policy agendas in 2015. The Agenda 2030 for sustainable development, the Sendai Framework, the Addis Ababa Action Agenda and the Paris Agreement all called for different actors to come together and rethink future adaptation finance, in order to determine what is at risk, how to reduce these risks, which financial instruments can address these risks and how best to prepare for extreme weather events. Failure to make adequate financial provisions against extreme weather events bear heavy costs for individual producers, agricultural enterprises and governments, as well as have longer-term economic consequences. This creates an opportunity to consider risk transfer instruments, during the early planning stages of disaster risk management and climate change adaptations, in order to build a resilient pathway.

At the same time, climate change impacts make some risks less likely to be insured. The effects of climate change are projected to be more severe in the future than in the past. This could lead to higher uncertainty in agricultural insurance. Consequently, insurers could have difficulties in pricing risks and may become unwilling to write insurance to cover particular risk areas. In addition, it could also lead to higher insurance premiums and deter farmers from purchasing the insurance (ClimateWise, 2014).

Insurers’ ability to price risks and thus set insurance premiums provides a signal that can raise risk awareness and incentivize risk-reducing behaviour (Le Quesne and others, 2017). The R4 initiative in Africa, for instance, provided insurance coverage for cash-poor farmers with the opportunity to engage in community risk reduction activities such as soil management or improved irrigation (Schaefer and others, 2016). Designing an effective and forecast-based insurance scheme is paramount for the agricultural sector in developing countries. Indeed, it might allow farmers and agricultural enterprises to engage in higher-risk, higher-return activities that spur economic growth (WB, 2005; Le Quesne and others, 2017). Additional benefits of insurance relevant for the agricultural sector in developing countries are further discussed in this report.

Despite many potential benefits, to date suitable insurance coverage against losses and damages caused by extreme weather events and climate-related disasters is still widely unavailable. Even innovative approaches seeking to reduce underwriting and administrative costs, as well as payout delays related to traditional insurance schemes, face low penetration rates. As a consequence, only two per cent of weather-related losses incurred between 1980 and 2015 in developing countries were covered by insurance (Schaefer and others, 2016). Currently, 60 per cent of the world’s population lives in these regions and faces increasing climate threats, continuing to suffer disproportionately (IMF, 2017). Hence, for the agricultural sector to foster food production and climate-resilient investment across its value chain effective agricultural risk management is needed to develop markets, policies and appropriate institutions.