Trends, Decadal Processes, and RainfallInsurance for Farmers in Ethiopia

Presented by Daniel Osgood, deo@iri.columbia.eduThe International Research Institute for Climate and SocietyColumbia University

with Tufa Dinku, Arthur Greene, Eric Holthaus, KristopherKarnauskas, Brad Lyons, Michael Norton, Asher Siebert

What is Index Insurance?

Problems with traditional insurance havekept it from being available to most ofthe world

• Recent index innovation– Insure weather index not crop– Cheap, easy to implement, good incentives– Only partial protection– Only a couple of years old– Can a couple dozen pilots transition to a viable

industry that meaningfully addresses poverty atlarge scales?

• Insurance Physics: Ma$$ conservation law– Premium money covers payouts + cost of risk– Probability estimates of payouts necessary– Can include uncertainty in probabilities in price

IRI Insurance experience (and partners)• Some places:

– Ethiopia, Ghana, Honduras, Indonesia, Kenya,Malawi, Mali, Nicaragua, Nigeria, Rwanda,Senegal, Tanzania, Uganda

• Some partners:– CUCRED, DECSI, Ethiopia Met Service,

FIDES, ICRSAT, IIASA, Malawi InsuranceAssociation, Malawi Met Service, MRFC,Millennium Villages Project, NASFAM, NYALA,OIBM-MicroEnsure, Oxfam America, REST,SwissRe, World Bank-CRMG, The RockefellerFoundation

• Some summaries– Nearly 50 contracts designed– Purchased by thousands of farmers

Climate trends and insurance pricing• Prices must reflect best knowledge of

trends

• Care about altered probability of droughtnext year (not 2100)

• Can update prices each year withimproved probabilities

• Insured climate variability typicallydominates trend (~2%)

• Decadal processes often dominate trend

• Partners and policy-makers have limitedknowledge of decadal processes

• Insurance products in Morocco and theSahel have been challenged by decadalprocesses

Adapting insurance for adaptation

• Insurance as climate change adaptationmechanism– Increase resiliency– Build wealth– Price signals for transition

• Farmers in Malawi said that index insurance was toadapt to climate change

• Policy difference between long term trend anddecadal processes

• Need insurance adaptation based on best info

Nicaragua Insurance and precipitationtrends

• IPCC ¼% drying per year• Drying begins approximately 2025• No significant trends in historical rainfall,

index payments• If anything, payouts go down over time• Farmers may have

– Decades to build wealth– Decades to slowly adapt or transition as

prices slowly increase (and droughts slowlyincrease)

Historical Rainfall Historical burn payouts

Example in Ethiopia

• Insurance as part of a Development andAdaptation project

• Horn of Africa Risk Transfer for Adaptation(HARITA)

• Parthers: Oxfam America (PSD, HARO, HRD),SwissRe, IRI, REST, DECSI, NYALA, EthiopiaMet Service, Rockefeller, crop parametersfrom LEAP, Mekele University, builds ongroundwork by and software with WB CRMG,WFP, critique and input from Michael Carter

Insurance company concerned by trend in Adi Ha• 15 years of data

(NOAA ARC Remote sensing product triggers payouts)

• Non-significant trend in rainfall totals• Trend increased price by ~25%• Farmers in Ethiopia paid for this

• Is the trend due to– Climate Change?– Decadal Process?– Spurious noise?

Rainfall during contract window for Adi Ha ARC pixel

y = -1.7662x + 151.52

0

50

100

150

200

250

19951996

19971998

19992000

20012002

20032004

20052006

20072008

Year

Rai

nfa

ll (m

m)

Rainfall Total

Trigger

Linear (Rainfall Total)

Assuming trend increases Adi Ha Payouts

14.8%7.8%Mean--2008--2007--2006--200569.2%53.5%2004--20034.7%-2002--200144.4%13.0%2000--1999--199886.3%43.1%1997--19962.1%-1995DetrendedObserved

IPCC does not predict drying trend

But recent history suggests drying trend in Spring

• Climate Change?• Decadal Process?• Spurious?

• No insurance currently offered for Spring• What about fall when insurance offered?

Mar Apr May

Fall (index insurance season), little evidence of drying

• Regional rainfall analysis shows no fall drying

• “Trend” in indexed rainfall unstable– Goes from negative to positive

• With subtle changes in contract period• Removing a single payment year

• Fall insurance ‘trend’ may be spurious– Lower price?– Need to build evidence– Need improved pricing methods

• Ps.– Spring rainfall important for many other crops in

Ethiopia• Trend/decadal process is important

– Don’t forget temperature• Consensus on increasing temperature• Increases ET• Increases crop water processing

Large Region

Small Region

Thank you