IRI is working with partners in Malawi on climate risk to help protect farmers against periodic, crop-destroying droughts by using a novel application of agricultural insurance. Rather than insuring against crop failures, as traditional contracts do, the new contracts are tied to an index based on local weather-monitoring data. Farmers receive payouts if rainfall in their area falls below a set of agreed upon trigger points during key stages of crop growth.

Malawi is one of Africa's poorest countries. It has a predominantly rural economy, with more than 80% of its people engaged in farming. Most farms are one hectare or less in size and people typically grow either maize, the main food crop, or tobacco and groundnut, which are the principal cash crops. Since irrigation systems aren't widespread in the country, the majority of crop production is raindfed and thus susceptible to recurring droughts. The fear of drought also keeps productivity low even in good years because farmers are condition to be wary of investing too much money in improved seeds, fertilizers or equipment.

The ongoing project, which bundles insurance with a loan for the purchase of seeds and fertilizer, began in the 2005-06 season. Both the insurance contracts and loans are provided by companies in Malawi. Nearly all of the original farmers involved are keen to participate again this year, and there is a high demand from new farmers to join. An estimated several thousand contracts have been signed so far for the 2006-07 season.

The reason for the project's success so far lies in linking the payouts to weather data, says Dan Osgood, an associate research scientist at IRI who leads the institute's efforts in Malawi. "Because the insurance is index based, we eliminate the need for adjusters--typically a very expensive part of insurance."

Basing the contracts on an index also eliminates what Osgood terms a 'moral hazard problem'. "People don't have an incentive to misrepresent their claims or to destroy their crops in order to get a payout," he says. Instead the farmers are motivated to be as productive as possible without trying to game the system.

"In essence this is a development package, but instead of subsidizing the farmers and simply giving them the inputs, we have used several microfinance tools and built a way for them to be able to pay the full price, with tax, for everything, allowing them a productivity they couldn't access previously simply because of missing financial markets," he says.

Project partners include the Commodity Risk Management Group at the World Bank, the Malawi Meteorological Service, Opportunity International Bank of Malawi, Malawi Rural Finance Company, the Insurance Association of Malawi, National Smallholder Farmers' Association of Malawi, the International Crop Research Institute for the Semiarid Tropics and the Chitedze Agricultural Research Station.

Relevant Links
Climate Risk Management in Africa: Learning from Practice (PDF) (Malawi work begins on page 75)
Economics and Livelihoods projects at IRI
IRI's work on Decision Systems