Changing Climate, Changing Behavior: How Can Agricultural Microinsurance Incentivize Adaptation to Climate Change?

The past years have seen exciting innovations around providing microinsurance to smallholders. Smallholders face major weather-related risks, and these risks are increasing in many places due to climate change. Microinsurance helps smallholders recover from damage after disaster. But microinsurance can also be employed to provide incentives to smallholders to reduce climate-related risks.

Endeva, ClimateAnalytics and Munich Climate Insurance Initiative would like to explore the potential of microinsurance for adaptation, identify others working in this space and hear about experiences with this approach. The guiding questions for the discussion will revolve around:

  • What mechanisms are there to incentivize disaster risk reduction for smallholders through microinsurance?
  • Where have these mechanisms been tried and what are the experiences?
  • What next steps are needed to fully leverage the potential of agricultural microinsurance for disaster risk reduction?

The discussion is based upon a recent paper "Changing Climate, Changing Behavior" by Endeva and ClimateAnalytics and aims to identify opportunities for collaboration around the topic.

Please share your thoughts below!

Editor's Note:

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223-Endeva_ChangingClimateChangingBehavior_2013.pdf (170 KB)

Insurance can provide strong incentives to change behavior. Think about your health insurance! Would you take up paragliding as a sport if your insurance would become much more expensive as a result? Would you feel more inclined to sign up for yoga class if your insurance would cover the cost?

These incentive mechanisms can be used in agricultural insurance to help smallholders adapt to climate change. We identified four mechanisms:

  1. Rewarding risk reducing behavior
  2. Paying for risk reduction measures
  3. Informing about approaching weather events
  4. Paying out prior to the weather event.

We also identified examples that already employ these mechanisms. Yet, these are few.

We look forward to exploring the potential of this approach with you later today!

Continual exposure to weather-related risk reduces economic opportunity, exhausts financial resources and erodes the overall coping capacity of low-income individuals, leading to lost livelihoods and poverty in the long-term. Thus, protecting the livelihoods of low-income, vulnerable groups exposed to extreme weather-related shocks, as is the case with farmers with small landholdings, is critical to putting them on the path to greater resilience and improving their capacity to cope with a rapidly changing climate.

Welcome to the online discussion! Today we're going to be exploring a topic that could transform the lives of smallholder farmers around the world - agricultural microinsurance. We're joined by a great panel, and I'm really looking forward to the conversation.

So let's start with the first question - around mechanisms to incentivize disaster risk reduction for smallholders through microinsurance. In their report, Endeva and Climate Analytics identify four mechanims (see Christina's first comment below).

Can you share your thoughts on these and any other mechanisms and specific examples that you know of?

Thanks Zahid! We really look forward to existing experiences here! Basically, the mechanisms we've found realte to providing incentives through information and finance. One really interesting example is from PERU: the ENSO Business Interruption Index Insurance provides payout to policyholders as soon as the El Nino event can be expected. In that way, smallholders and other users can invest in getting ready for a storm or flood.

In general, however, we found very few examples where incentives to adaptation are built into microinsurance policies. We believe there is much more potential! We'd like to explore how to build these mechanisms in more systematically. And also what the challenges are.

Thanks for sharing that example, Christina. Have there been any impact studies done on the benefits?

In addition to that, we can also say that the benefits of microinsurance have been rather widely studied when it comes to the economic aspects, but when it comes to climate change related issues and adaptation, there is still a lack of research done in the area. This was one of the purpose of our research.

We are not aware of an evaluation or payout. The big challenge with these mechanisms is that, of course, they can only be tested when disaster strikes.These events need to be used to better understand the mechanisms. I just saw that GIZ will fund research on the impact of microinsurance after the Taifun in the Philippines. this is great! However, adaptation was not an explicit goal of this policy, as far as we know.

We know from mainstream insurance that insurance can provide strong incentives. This is a great framework to get people to change their behavior. Information and training is not enough. We all also need economic incentives and immediate benefits to change the way we act.

Sobiah, can you share your experience from St Lucia to illustrate the difficulties that can arise in applying these mechanisms?

Talking about the potential Christina is referring to, it is indeed considerable. Thanks to our research, we found that microinsurance can do more than only providing a payout in the aftermath of a disaster. It also can contribute to a change in the risk behavior of the farmers getting into an insurance contract (through capacity building for example) and can also lead to infrastructure modifications or constructions and so on, which lead to a decrease in the sensitivity of the farmers.

In addition to a lack of research in this area as Florent mentions, there is also a need to strengthen the link between climate change adaptation - risk reduction - insurance. The SBI Work Programme on Loss and Damage and now the Warsaw International Mechanism provide a platform for action to strengthen this link

This is the aim of the work that we are doing in the eastern Caribbean - developing microinsurance solutions that protect persons against the loss and damage brought on by extreme weather events, bringing these solutions to market, and using lessons learnt during implementation to inform the international climate policy making process

Hi there,

I haven't joined one of these before. Will the panel be making presentations that we can listen to, or do we just field questions to them via this link?

Thanks, Lydia

Just to add another exciting example:

People Mutuals offers smallholders in India several crop mutual insurance schemes, all based on rainfall indices. Only members of a farming federation can access the services of People Mutuals. To stimulate demand and build capacity, members of farming federations are trained on climate change, drought and water management issues. For this matter, the DHAN Foundation established Village Information Centres, which provide agricultural extension services for farmers and agricultural labourers. Smallholders can use the VIC to learn more about agricultural practices, consult experts and obtain information about the agricultural market. The close link between insurance, adaptation information and training, and collaboration within the federation is quite effective. Social networks complement the formal incentives, people help each other adapt, but also monitor each others' behavior.

Hi Joanne, thanks for joining us! This is a text based discussion, so please do go ahead and post your comments and questions.

Did you look at indirect incentives, for example on crop patterns or plant variety decisions?

The microeconomic/incentive-logic would be to translate the long-term, risk-related costs into short-term insurance costs that become relevant for decision-making and help people to adapt their decisions – e.g. switch to a draught-resistant crop when insurance related to water-needy plants are rising in price, or choosing pricier draught-resistant seeds to benefit from lower better insurance premiums?

I guess one factor holding back such causal chains / impacts is the lack of diversity and specificity in agricultural insurance products...

To specify this point, the R4 insurance in Ethiopia includes a mechanism where policy holders can pay for the insurance through labour if they are poor. And this labour is dedicated to builing adaptation infrastructure, such as improving irrigation or soil management. In this way, agri insurance can reach even very poor farmers, while at the same time advancing adaptation measures.

We've heard some really interesting examples already, and so have touched on our second question. Let's explore that a bit more.

Where have these mechanisms been tried and what are the experiences?

It would be great to hear some more examples.

This link is really important! The political focus of the climate change debate is more and more moving towards adaptation, and governments plan to dedicate large amounts of money to support disaster risk reduction. Microinsurance could be a very effective AND efficient instrument in this regard. And one that aligns incentives of actors, and can ultimately be self-sustainable.