Climatic variation is an age-old risk of farming. Its consequences are severe and can wipe out livelihoods. This risk may increase as global warming increases the frequency and intensity of climatic extremes.
A conventional way of mitigating risk is the use of insurance. However, conventional approaches to insurance bear high costs and may even create perverse incentives. For example, government relief aid tends to favor wealthier individuals who took greater risks (and therefore suffered greater losses) by cropping or grazing livestock herds in drought-prone areas, for example. This form of insurance is high-cost and encourages even riskier behavior in the future.
An alternative being developed at IFPRI is private-sector insurance tied to objective, easily-monitored weather indicators such as rainfall levels (Skees et al. 1999). Farmers buy policies based on the size of their farm operation (or their judgment), so that larger risk-takers pay appropriately more to insure larger operations. If rainfall, for example falls below the pre-set minimum for a season, the insurance claim becomes valid. Insurance companies are able to accurately predict the risk and therefore calculate an appropriate premium, since there is a wealth of historical rainfall data available for most areas of the world. This approach would shift the insurance burden from the public to the private sector, and make it more efficient and equitable.
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