Changing Climate – Changing Behaviour: How agricultural microinsurance can help smallholders reduce their risk of climate-related disaster
Saint Lucia, the island in the Caribbean, is regularly hit by hurricanes. The incidence and severity of these disasters has been increasing, probably due to climate change. The Livelihood Protection Policy in Saint Lucia provides smallholders and other low-income individuals with climate-related insurance. The Munich Climate Insurance Initiative (MCII) established Climate Risk Adaptation and Insurance in the Caribbean, a project supported by the German Ministry for the Environment. The project’s objective is to reduce and transfer risk in Saint Lucia to support climate change adaptation (Munich Climate Insurance Initiative, 2012). The program provides vulnerable individuals, who have no stable income streams and would not be supported by any kind of safety net in case of an extreme weather event, an index-based insurance scheme, where payouts are triggered by predetermined rainfall and wind speed indices. One component of the DRR measures incorporated into this insurance product is an SMS-alert service. Policyholders are warned via SMS if an extreme rainfall or wind event is about to cross a pre-determined. This gives them a chance to get ready for the storm or flood and avoid the most severe damages.
The past couple of years have seen many new crop insurance schemes for smallholders emerge. In addition to helping smallholders cope with risk and disaster, they offer significant potential to embed incentives to adapt to climate change and reduce the risk of disaster. However, this potential is rarely used.
Climate change is a reality for many smallholders in developing countries. They are among those most affected by the changes in weather patterns and extreme weather events. As individuals or as a community, smallholders can take a range of measures to reduce their vulnerability to climate-related risks. Smallholders can develop or improve infrastructure, for example by building irrigation systems, storage facilities, protective installations such as dams and basins, or plant trees to limit soil erosion and evapotranspiration. They can also can diversify crops, choose varieties or species that are more resistant to floods, droughts, pests and diseases, and adjust their farming techniques.
By enabling and encouraging smallholders to mitigate risks, insurance schemes also improve their own financial viability. And often. only small tweaks are required to integrate the behaviour change aspect, like in the case of the SMS warning. In our research, we identified four mechanisms to induce disaster risk reduction via microinsurance:
- Inform about approaching weather events, as in St Lucia
- Reward risk reducing behaviour, e.g. by providing insurance only for certain kinds of seed, or by lowering premiums when using certain agricultural practices.
- Pay for risk reduction measures, e.g. by providing information material
- Pay out in anticipation of the occurrence of the event, to allow people to invest in risk reduction
We also found an example for each of these mechanisms through in our review of 22 documented schemes. However, we don't know much about how these mechanisms can be applied and implemented effectively, and no data is available on the effects of the existing schemes we have identified with regards to DRR.
On Christmas Eve 2013, Saint Lucia experienced heavy rainfalls, causing landslides and flooding, damaging roads and homes across the island. The rains came so suddenly that they could not be predicted in time to use the SMS info service. The event drastically shows the challenges related to implementing disaster risk reduction incentives. It also provides an opportunity to study the difference this service can make in future events. Policyholders received their payout in early January, helping them to recover quickly from the damage.
Disaster risk reduction measures could be added to any existing and future micro agri insurance scheme. But first, we need to understand better how these mechanisms work.
“Changing Climate – Changing Behaviour: How agricultural microinsurance can help smallholders reduce their risk of climate-related disaster“ was published in August 2013 by Endeva as part of the series "Our Next Endeavour". Authors are Florent Baarsch of ClimateAnalytics and Christina Tewes-Gradl and Johanna Huppert of Endeva. The paper is available for free download from the Endeva Publications Page.