A System of Drought Insurance for Poverty Alleviation in Rural Areas

Topic :

This report is a feasibility study of a practical method of drought insurance that is self-sustaining and ready for use by poor farmers, NGOs or other development organisations. It begins by noting the inherent risks in agriculture, where drought in particular has a documented adverse impact on agricultural development. A long history of decision-support tools have been developed to try and help farmers or policy makers manage risk. However, it also notes that the poor have little access to risk-minimisation methods used by others. This may mean minimising investment in the main risk they confront, growing a crop, such as not applying fertiliser to it. Although risk is lessened, the potential to generate a profit is also lessened. Risk avoidance is thus inefficient and using it locks poor small-holders into poverty, argues the report.

Insurance is widely used by farmers in developed countries to protect them against weather risk. As the reprot states, in the case of drought, insurance takes the best available scientific estimate of drought probability at a site within a single number – the insurance premium. However, weather insurance has rarely been offered to poor small-holder farmers in developing countries.

A case study on weather insurance for drybean farmers in Nicaragua is firstly presented. The report then builds on this by setting out the considerations for developing rainfall insurance for these drybean farmers – this includes both technical and non-technical considerations. The following section discusses a methodology for designing a payout index based on rainfall. Usefully, a sample contract is also provided. The final sections of the report look at practical issues such as site specific probabilities of a trigger event, practical issues of distributing insurance, and the outcomes of consultation with farmers.

Related Resources