title: Weather index insurance: promises and challenges of promoting social and ecological resilience to climate change
Creators: name: Yu, Lu
name: Aleksandrova, Mariya
Publisher: name: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
publisherIdentifier: https://ror.org/01t3zke88
publisherIdentifierScheme: ROR
Year: 2021
Subjects: subject: climate change
subject: agriculture
subject: rural development
subject: weather
subject: insurance

description: Rural communities are particularly vulnerable to weather shocks and ecosystem decline.
 Traditionally, farmers have adapted to climate variability and extremes through various
 risk management strategies, either individually or cooperatively. However, climate change
 amplifies the frequency and intensity of extreme weather events and exacerbates
 environmental degradation processes. <br> Market-based risk transfer instruments are now
 being developed as complements to these conventional risk management strategies to shield
 rural households from increasing climate risks. At present, risk transfer solutions play a
 central role in the global climate and development agenda. International- and
 regional-level initiatives such as the InsuResilience Global Partnership support
 vulnerable developing countries to increase their financial protection coverage through
 climate risk finance and insurance, including through innovative micro-level schemes such
 as weather index insurance. <br> Over the last decade, index-based weather insurance has
 been gaining attention in the climate resilience discourse. These schemes compensate
 insured individuals based on a pre-defined weather index instead of individual losses, as
 with traditional types of insurance. Therefore, this instrument has several advantages,
 including greater time- and cost-effectiveness and reduced moral hazard risk. <br>
 Although weather-index insurance holds great promise, there are several challenges in
 designing and promoting it in developing countries. First, on the demand side, there is a
 lack of accessibility to affordable insurance, especially for the poorest rural
 populations exposed to climate hazards. Second, on the supply side, insurance providers
 are facing an elevated risk of paying larger claims due to the increasing frequency and
 severity of weather extremes, while reinsurance services are often missing. Third, the
 ecological effects of implementing weather index microinsurance initiatives receive little
 attention in research and policy. Yet, protecting the environment and building ecological
 resilience are critical policy dimensions of climate risk management in rural regions,
 where the poor disproportionately depend on ecosystem goods and services for a living, as
 they often lack alternative livelihood strategies. <br> Looking into the key challenges
 to microinsurance initiatives and drawing upon findings of a review of literature on
 weather index insurance and field research, this Briefing Paper derives recommendations
 for development cooperation, governments and insurers for an enhanced action agenda on
 climate risk insurance. The discussion is focused on the specific case of weather index
 insurance for the rural poor at the micro level. We emphasise the importance of enhancing
 knowledge on the potential positive and negative ecological effects of weather insurance
 schemes, and the need to develop a diverse set of climate risk management strategies for
 the poor, including social protection mechanisms.
description: Briefing Paper, 14/2021