Micro insurance for local adaptation

Insurance instruments that provide economic security against droughts, floods, tropical cyclones and other weather extremes have emerged as an opportunity for developing countries to reduce their vulnerability to weather variability and adapt to climate change. Yet, issues remain concerning the viability of insurance systems serving the most vulnerable and their potential role in an adaptation regime.

This paper examines a recent drought micro-insurance project for subsistence farmers in Malawi, which, by enabling farmers to access higher yield seeds, raises their productivity and decreases their vulnerability to climate change. Beyond this ‘developmental’ gain from insurance, the authors show that micro-insurance in Malawi can directly promote adaptation by actually reducing crop losses from drought. This is possible by incorporating seasonal rainfall forecasts, which are strongly related to El Niño-Southern Oscillation (ENSO), into insurance pricing.

The paper describes the Malawi pilot programme, its challenges after the first operational year and the potential benefits of ENSO-based pricing. The paper concludes by discussing the outlook for micro-insurance in the emerging climate.