Oxfam America and Swiss Re, in collaboration with Oxfam America's partners the Relief Society of Tigray (REST) and the International Research Institute for Climate and Society (IRI), will launch a pilot for weather index insurance for the cereal crop teff in the village of Adi Ha, Tigray, Ethiopia, a water-stressed community that has expressed strong interest in incorporating insurance mechanisms into its risk management portfolio. The pilot will adopt a holistic risk management approach, including risk reduction measure(s), e.g. installation of infrastructure such as drip irrigation, provision of high value and improved agricultural inputs, business development services, improved land management practices, technology transfer, and/or increased market access. Proposed innovations include new techniques to overcome weather data barriers, meaningful engagement of farmers in insurance design, and community-based management of basis risk.
The academic literature suggests that poor Ethiopians regard drought as the primary risk to their livelihoods. Drought-related risks occupy a central position in the public's mind largely because 85% of the Ethiopian population remains dependent on smallholder, rain-fed agriculture.
In the absence of formal insurance markets, the poor typically cope with economic crisis through self-insurance (e.g. savings, debt, and asset liquidation), income diversification, and informal insurance arrangements. For reasons well documented in the microinsurance literature, these risk-hedging strategies all too often fail. Exacerbating the problem, particularly in Ethiopia, is farmers' own reluctance to experiment with higher risk, but higher yielding technologies like drought resistant seeds-even when affordable credit is available.
Weather index insurance could help farmers reduce their negative risk exposure and feel more comfortable taking on productive risks. Prudent risk taking may prevent a slide into poverty and promote poverty reduction and climate change adaptation. Further, as in other index insurance pilots, rainfall index insurance in Adi Ha could also serve as collateral for banks and microfinance institutions, which are typically reluctant to make loans for inherently risky agricultural activities. Swiss Re and Oxfam America therefore believe that climate risk transfer mechanisms could also facilitate broader and deeper access to financial services for the poor.
Oxfam will be responsible for the project coordination and management, capacity building of local partner organizations, implementation of risk reduction measures in Adi Ha through Ethiopian partner organizations, insurance product development and design primarily from the perspective of transferring farmers' risks (through support of research partners), and insurance product prototype testing based on sample data collected from farmer groups.
Swiss Re will sponsor all activities, review, and assess third party work with respect to commercial viability and conformity to market standards, and provide advice on risk reduction measures.
Adi Ha is the largest tabia in the Kola Temben woreda of Tigray Regional State in Ethiopia, with a total population of 8,494 people. According to Swiss Re's microinsurance demand study in Adi Ha, teff is produced by 92% of the 613 rain-fed farmer households, 7% of the 1,170 irrigated farmer households, and 40% of all households. The partners estimate that approximately 646 households (3,875 people) currently produce teff in Adi Ha. The pilot will target current and prospective teff farmers in Adi Ha for the pilot and eventually all teff farmers in Ethiopia at scale. Swiss RE and Oxfam America will take special measures to ensure marginalized groups, particularly women and rain-fed farmers benefit equitably. According to a participatory wealth ranking exercise in Adi Ha, approximately 52% are poor; and 10% are rich as defined by asset ownership, primarily number of oxen.
Swiss Re and Oxfam America are exploring several innovations for the pilot:
Creating techniques to overcome weather data barriers - Rainfall index insurance normally requires at least 30 years of reliable precipitation data. Oxfam America is working with the International Research Institute on Climate and Society (IRI) to explore new techniques to enhance local data through a combination of satellites, rainfall simulators, and statistical tools. These innovations are designed to reduce uncertainty (and reduce insurance premiums), as well as enable scale-up to other areas with limited weather data.
Engaging farmers to participate more meaningfully in index insurance design - Many weather insurance pilots have struggled to engage farmers due to the technical nature of the index and time pressures to develop a commercial product in the first year. Oxfam America will slow the design process by first conducting non-commercial risk simulations with farmers. It is belived that these upfront investments in designing the engagement model will ensure a more scalable and sustainable result.
Community-based index insurance - Index insurance has many advantages, but one major disadvantage is its weakness in the face of microclimates and spatial basis risk. Swiss Re aims to lower this risk by exploring the potential for a community-based association to buy the insurance policy and coordinate loss-adjusted payouts for members when the index is triggered. While community-based models may present serious challenges, strong social solidarity in Tigray indicates that this route is worth exploring.
Nov 2007 - Jan 2008 - Exploration & Demand Assessment
Feb 2008 - Jun 2008 - Pilot Preparation
Jul 2008 - Oct 2008 - Prototype Testing & Risk Reduction Design
Nov 2008 - Jan 2009 - Financial Package Design & Risk Reduction Implementation
Feb 2009 - Jun 2009 - Financial Package Education
Jul 2009 - Oct 2009 - Financial Package Implementation
Nov 2009 - Jan 2010 - Evaluation & Learning