Operational & Regulatory Strategies for Weather-based Index Insurance


Smallholder farmers are constantly faced with weather risks, which define good and/or bad production years. With the majority of the labour force on the continent engaged in the agricultural sector, insurance has emerged as a critical gap in the value chain. Like all entrepreneurs, farmers make decisions in risky and uncertain environments. However, in contrast to most entrepreneurs, farmers are vulnerable to significant systemic price and weather risks, often exacerbated by the effects of climate change, with no safety net to protect their livelihoods. Smallholders are further exposed due to their limited asset base, small margins and poor decision-making. Because smallholder farmers are already vulnerable, the consequences of poor decision-making can be catastrophic. Smallholders are frequently unable to access financial services as banks are reluctant to lend money due to the potential for default resulting from crop failure. The result has been chronic underinvestment in the sector; however, insurance against such risks facilitates access to credit for smallholders. This allows them to purchase improved farm inputs such as high quality seeds and appropriate fertilizers, therefore improving crop yields, food security and the development of the rural economy. This policy brief outlines key operational and regulatory strategies that can effectively reduce the impact of severe weather on small-holder farmer productivity as well as support increased investment in farm productivity.