Global warming resulting from climate change has increased the intensity and frequency of droughts, violent storms and floods, all of which are having a devastating impact on the livelihoods of the poor in predominantly agrarian-based economies. Temperature records going back to the late 19th century show that the average temperature of the Earth’s surface has increased by about 0.8C (1.4F) in the last 100 years. About 0.6C (1.0F) of this warming occurred in the last three decades.  According to the World Bank, following the 2011 drought, poverty levels in Djibouti returned to levels above those in 2002, indicating a loss of almost 10 years of development gains. Due to lack of risk mitigation tool and inadequate financial resources, the level of risk the poor households and smallholder farmers are exposed is far higher than their risk absorption capacity. It is high time to increase our effort to mitigate the increased risks in agriculture sector caused by climate change.
Climate change affects agriculture in a number of ways, including through changes in average temperatures, rainfall etc.; changes in pests and diseases; changes in atmospheric carbon dioxide and ground-level ozone concentrations etc. Due to the erratic weather patterns observed in recent decades, smallholder farmers are facing increased difficulties. Especially in developing and underdeveloped countries, lack of adequate infrastructure such as proper irrigation facilities has intensified the impact of climate change. Weather risk has brought about income vulnerability to many of the 2.5 billion people around the globe who derive income from smallholder agriculture.  Fate of smallholder farmers, in particular, who rely on subsistence farming, depends on the amount and timing of rainfall that determines the size of harvest.
Nepal is among the developing countries that are most vulnerable to global warming and climate change effects. In Oct 2015, Nepal joined the Venerable Twenty (V20) group created by members of the Climate Vulnerable Forum. Also, natural disasters and other climate change induced extreme weather conditions are leading causes for the loss of thousands of lives every year. Combined with other factors, the impact of climate change is also responsible for pushing people into the poverty cycle. In particular, people living in remote areas are prone to multiple threats and vulnerabilities and largely from climate. The 2008/09 winter draught in Nepal had significant impact on crop production, leading to reduce of production of 14.5 and 17.3 percent of wheat and barley production in Nepal. Similarly, the 2010 flood killed 98 persons and affected 39,000 families with estimated economic loss of NPR 29.44 billion. The recent earthquakes (April 25, 2015) that killed more than 8,000 persons and destroyed properties worth more than NPR 700 billion (private and public) resulting in a reconstruction need of NPR 670 billion, thereby demonstrating the importance of insurance. Recently in August 2017, Nepal experienced incessant rainfall, resulting in widespread flood across the 35 districts. The flood claimed at least 134 lives and affected more than 1.6 million people living in the Terai region of Nepal.
Despite the risks faced by farmers, many of the insurance service providers are wary of offering insurance products to small-holder farmers due to their lack of profitability. High transaction cost associated with distribution and claims settlement make it less attractive for insurers to serve the smallholder famers through traditional Multi-Peril Crop Insurance (MPCI). In addition, moral hazard, tendency that an insured person will not pay adequate attention to protecting the insured object and adverse selection, etc. contribute to an increase in the cost of the insurance premium.
To further exacerbate the problem, farmers tend to rely on low-risk/low-yield production techniques as a risk mitigation strategy. Research has shown that farmers are less likely to take risks for inputs, adopt new technologies, or invest in new equipment for fear of losing their investments. This results in lower yields and lower productivity. Access to proper risk management tools will allow farmers to take more risks and earn a good return.
Making the Case for Weather Insurance
Weather Index Insurance can present significant economic efficiency by allowing farmers to put more resources on agriculture. It can make a sizable contribution for climate change adaption, resilience to natural disasters and improved food security for smallholder famers. In addition, it will also open the door to avail a range of financial services. On the broader level, weather index insurance can also enable governments and businesses to address risks associated with natural disasters.
What is Weather Index Insurance and How Can it Help?
Unlike conventional insurance, index insurance compensates policy holders resorting to pre-determined indexes or proxy for loss. Under this insurance, actual loss of each policy holder does not need to be assessed, which reduces administrative cost. A threshold is stated on the basis of already defined standard indicators (for example, amount of rainfall recorded in weather stations) and payment is made without requiring specific claims to be made by any policy holders to make the payments. Payment rate for all policy holders is same regardless of actual amount of loss faced by the policy holder. It overcomes the shortcomings of traditional insurance that involves high monitoring cost since no field verification is required and wipes out moral hazard issues. Amount of wind, temperature, rainfall, drought (measured through solar powered or meteorological weather stations), level of harvest, vegetation index (measured by satellite to make assessment forage availability for cattle) are some of the examples of various kinds of index insurance. Index insurance (weather or yield based) is one of the common types of index insurance.
In recent years, different stakeholders have made their effort to introduce and scale weather based index insurance. In several other places, implementation and pilot at different stages is underway. Especially in African counties, several successful pilots are demonstrating the possibility of covering a wider group of farmers from adverse weather risk.
In Kenya, Rwanda and Tanzania, Syngenta Foundation for Sustainable Agriculture (SFSA) launched Kilimo Salama (which means safe farming) in 2010 to offer weather index insurance. They offer a wider array of products in different commodities based on several data sources including automatic weather stations and remote sensing. If historical weather data required to make robust weather index insurance products is not available in a particular area, these countries are investing in cutting-edge satellite data and testing analysis techniques to generate the most accurate proxy for missing data. After seeing the business opportunity, the project transformed into a for-profit social enterprise called Agriculture and Climate Risk Enterprise (ACRE) in 2014. ACRE’s team of specialists model crop risks, develop crop indices, manage climate data, develop insurance products, educate farmers, and create distribution channels for the sale of such insurance. They have also tied up with mobile technology and intermediaries including MFIs and other aggregators to take it to a new scale. In 2015 alone, 394,426 farmers in Kenya, Rwanda, and Tanzania were insured up to a total value of $11.7 million. 
Despite the benefits of weather index insurance, there are still some limitations which is hindering to upscaling of the product. In some instances, there is a disconnect between on-farm losses and payouts. There are instances where farmers may not receive a payout even though the farmers observe the loss in field and vice versa. Farmers may see variation in the losses they face while the proportion of payout is similar to the farmers covered by a weather station. This is known as basis risk in weather index insurance.
Sakchyam’s Partnership with Shikhar Insurance to Introduce Weather Index Based Insurance
In an effort to contribute to Weather Index Insurance in Nepal, UKaid Sakchyam – Access to Finance Programme (Sakchyam) collaborated with Shikhar Insurance Company Ltd. to introduce weather index insurance to apple farmers of five apple farming districts, including Jumla, Kalikot, Mugu, Dolpa and Mustang for the first time in Nepal. Sakchyam assisted Shikhar Insurance in developing the appropriate product to minimize the effect of adverse weather in apple farming. Hailstorm was also added as an additional rider to address farmers’ risk associated with this particular peril. If rainfall in April and May– which is crucial for the better apple yield–is less than 60mm, farmers automatically get insurance payout. Lower the rainfall during the two months, higher would be the payout.
In order to encourage them to use the weather index insurance product, Shikhar has been conducting awareness activities to inform farmers about the concept of weather insurance. To-date, Shikhar has issued more than 1500 weather index insurance policies to apple farmers insuring more than 41,397 apple trees worth 89 million NPR. It has shown a good promise to help mitigate the weather risks faced by apple farmers. Working together with UKaid Sakchyam’s support, Shikhar is in the process of expanding weather index insurance products to sugarcane and paddy crops as well.
Challenges of Scaling up Weather Index Insurance in Nepal
Despite the benefits of weather index insurance, it has yet to reach to the desired scalability. Absence of historical rainfall data, inadequate weather stations, lack of accuracy in weather data, etc. are cited as some of the major bottlenecks to upscale weather index insurance. The difficult geographical terrain also hinders the upscaling of weather index insurance. Use of satellite imagery is seen as an alternative solution for wider application of weather index insurance, yet the use of satellite imagery is in a nascent stage of development.
Expansion of weather stations to cover more geographical areas from the Government would help expand weather index insurance. In addition, involvement of aggregators such as MFIs, input suppliers, etc. who have direct link with farmers to sell the weather index insurance, will also increase the expansion of the product. Increase in insurance awareness and link of agriculture loan and insurance will also help increase the penetration of weather index insurance. Among the newer initiatives now being tried to launch micro-insurance products, is a UKaid Sakchyam brokered partnership between the insurance and microfinance industry to offer microinsurance under a pooled concept.
Conclusion and the Way Forward
In the context of increasing weather related loss, smallholder farmers and the low-income households need to be taken care of. If serious action is not taken to protect the smallholder farmers, it may severely impact them. Weather Index Insurance can become an important instrument to protect the smallholder farmers from the vulnerability of climate change. Concerned stakeholders need to closely work to develop weather index insurance. Policy inducements from the Government of Nepal in the form of opening additional weather stations, involvement of more aggregators to distribute insurance, deployment of agriculture technician at local level, and mandatory link of agriculture loan and insurance will go a long way to better the lives of the poor and the vulnerable.
Text by Baljit Vohra & Omkar Pandey, Sakchyam Access to Finance Programme