Weather risk is pervasive in the agriculture sector. It influences farmer profitability and remains one of the major constraints limiting farmers from accessing credit necessary to expand production and improve productivity. Other actors in the supply chain also feel the effects of weather risk. Input suppliers are reluctant to offer credit for inputs if they are uncertain about yields and farmers’ to repay. Banks providing pre- and post-harvest production credit are affected by and worry about high rates of default in the event of adverse weather. To address weather risk, many developing countries have implemented traditional crop insurance programs. Such programs, however, cover a very small segment of farming populations and are often not sustainable. As a result, a large majority of farming populations in developing countries remains vulnerable to weather risks.
Index-based insurance is a new tool that addresses some of the limitations of traditional crop insurance programs. The World Bank has worked with a large number of partners to test the use of index-based weather insurance as a means to manage weather risks (namely, excess/deficit rainfall and flood risk) and enhance access to finance in a number of countries in Africa, Latin America and Asia. Agriculture and Rural Development is in the process of sharing with the wider development community the lessons of its research and development on index-insurance. It is working to mainstream weather risk management issues into broader World Bank projects and to facilitate support to integrated risk management approach.
In addition to commercial supply chain actors, governments are also financially exposed to weather risk. If there is a weather related disaster, governments are called upon to provide direct support to citizens and must increase spending as a result of damage incurred. Ex-post policy choices for managing shocks can be costly, inefficient, difficult to manage when a country is already in crisis, and destructive to markets and trade. In many cases, it is possible to reduce the impact of these weather-related events by shifting a country’s focus from a post-event disaster response to a proactive (ex-ante) risk management and financial model. The World Bank provides assistance to clients in ex-ante risk management by transferring risks to the market, for example through weather derivatives. Instead of managing crisis, managing risks can allow more cost effective and transparent use of scarce resources, better planning and preparedness and, in the case of risk financing, reducing countries’ dependence on often unreliable and untimely assistance in the aftermath of a shock.