Weather Index-Based Insurance Essay

Weather is considered to have a very significant effect on crop production. According to the United Nations Department of Economics and Social Affairs (2007), all aspects of agricultural supply chain, specifically rain-fed agricultural, are affected by weather. Further, it is known that both quality and yield of a crop is controlled by weather (UN-DESA, 2007). Thus, a weather variability or weather fluctuation imposes a threat to agricultural producers, most especially to smallholder and subsistence farmers. One leading recommendation to protect farmers from income loss and reduced yield due to climate change is the adaptation of insurance programs. The traditional crop insurance is one of the insurance programs in which payout is determined according to the crop loss or damage of a specific farmer after a calamity (IGES, SEARCA, 2015). However, developing countries, like the Philippines, is not capable of fully implementing the traditional crop insurance, mainly because carrying out the procedures in measuring the actual loss of all policyholders is very expensive and tedious. Further, traditional crop insurances are very subjective since they are easily affected by moral hazard, or the powerful incentive of farmers to allow crops to fail, and adverse selection, or the phenomenon where clients’ demand for insurance and their risk of

Weather index-based insurance is known to address climate risk more objectively since instead of assessing actual loss or damage, WIBI uses a weather variable such as rainfall and temperature which is highly correlated to crop loss, to assess the threshold levels of the index (IFAD, 2015). Further, WIBI is resistant to moral hazard and adverse selection since the index depends on the specific weather variable, and not on the actual loss of the policyholder (Greatrex H, et. al.