Weather insurance – subsidizing large famers?

Knowledge brokering07 May 2010Thea Hilhorst

There are a lot of new and exciting developments ongoing in insurance schemes that protect farmers against weather risks. In Malawi, a weather insurance has been introduced on a large scale and in Ethiopia some small-scale experiments have been done.

The Ethiopian experience brings out some interesting questions. Is it possible to insure against weather risks when loss of harvest due to drought is recurring so often that it almost becomes a sure thing? One of the Ethiopian experiments, that was presented on a conference on food insecurity in Bahir Dar that I attended, worked on the basis of a 11% premium. That would work if drought happened once every ten years. But drought has been much more frequent in the past decades. This means that hidden behind the façade of a commercially set-up insurance scheme is a subsidy scheme. Indeed, many of the current experiments with insurance are financed by international agencies and are not (yet) cost-effective. There are several problems with this. It needs to be established whether it is feasible to organize a cost-effective system before piloting on a large scale with all the costs involved, not to speak of the expectations raised. There is an other danger. Insurance is wealth based. The more land you have, the more premium you pay and the more cmpensation payment you receive in case the risk materializes. This means that if we subsidize insurance schemes, development aid ends up supporting large farmers more than small-holders. That could hardly be the objective. It is good to experiment with insurance schemes. But it is vital to be transparent about their cost-effectiveness and hidden aspects of subsidizing.