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Analysis

Helping farmers weather risks?

Assessing the World Bank's work on index insurance

23 September 2009 | Briefing

The full briefing is available here.

Executive summary

In recent years the World Bank has engaged in several pilot programmes to assess the feasibility of private markets for index-based weather insurance in developing countries. Index insurance is aimed at moving from emergency ad-hoc aid in times of weather disasters to identifying and managing risk. Potential benefits include access to insurance, timely pay-out and an objective measurement for avoiding long disputes. However, its problematic aspects find no or only limited consideration in the work of the World Bank so far. The main problems and recommendations identified are:

Insurance tackles symptoms not causes and might disincentivise or distract from necessary changes in the way economic activity is organised, contributing to the build-up of the risks the insurance aims to mitigate. The Bank should directly link its work on insurance to a debate on the nature of risks and sustainability of the economy.

Insurance directly provided to individual households comes with a lot of difficulties regarding knowledge and resource asymmetries. The Bank therefore needs to ensure that its support for private solutions does not crowd out successful public and communal initiatives, as widely emphasised in its own research.

Private insurance is a step further in linking people’s livelihoods and well-being to international financial markets that are inherently volatile, endogenously create risks, and are highly connected and therefore prone to contagion. In its research and advice, the World Bank needs to take the associated costs stemming from volatility and potential market-breakdown more into account. The privatisation of insurance might also create problems for coverage and the redirection of public money into private profit. Direct and indirect subsidies of private sector activity should be kept to a minimum, regulation needs to be extensive to avoid bail-outs, and progress should be measured based on coverage and affordability, not private profit-making or market existence. In any case, the World Bank should respect countries’ policy autonomy and avoid pushing deregulation and privatisation.

Most importantly, the reports of the World Bank on index-related insurance focus on feasibility rather than developmental impact. An assessment of the developmental impact should precede market creation. The Bank needs to ensure that the facility that will deal with index insurance in the future will not be biased towards market solutions, and that its aims and later evaluation are defined in terms of specific goals that directly measure the progress in poor people’s and smallholders’ actual ability to mitigate risks and avoid crisis selling of assets, not the size or profitability of the market.