Institutions supporting climate-change adaptation in the developing world, along with
international development organizations, are closely observing the performance of recent
weather-related insurance programs in vulnerable and poor regions, including especially
the Malawi index-based insurance pilot program. This program offers a bundled weather
insurance and loan package to subsistence farmers facing high risks of drought. If
successful, innovative insurance systems of this type may provide a blueprint for
reducing vulnerability to drought and other climate-related risks in highly exposed
regions. They also provide opportunities for re-orienting donor assistance from after-thefact
disaster aid to pro-active support. Finally, they add an important candidate for
support from existing and envisaged global adaptation funds.
There are several notable features of the Malawi scheme: joint liability of farmers’ clubs,
elimination of cash payments by individual farmers, index-based contracts reducing costs
and eliminating moral hazard, and a bundled loan/seed package that can greatly increase
farmer productivity. Greater harvests reduce poverty and render farm households less
vulnerable to climate risks; however, the scheme itself does not include payments to
farmers in the event of a drought. Importantly, the insurance scheme has not, to date,
accounted for the relationship of drought risk with the ENSO phenomenon or with
climate change. The Malawi program, which is self supporting, has been made possible
by extensive technical support from the World Bank.
From the participating farmers’ perspective, the first operational year of the pilot project
was successful. A large majority (86%) of sampled farmers reported that they would
participate again. Despite its merits, there were significant challenges in the original
architecture of the program, many of which were revealed from experience gained in the
first pilot year. NASFAM was critical for the system logistics, and proved adept at
communications and responding to the early seed germination crisis. However, trust in
this organization appears to be polarized among survey respondents (the majority place
great trust, but a significant minority place low trust in the institution), which flags a
potential problem of vesting responsibility largely in one organization. There were also
concerns voiced about the pre-arranged agreement to sell the groundnut harvest to
NASFAM. If market prices prove higher than the NASFAM price, as was the case in the
first year of operation, there is a risk of side selling to outside traders, limiting
NASFAM’s capacity to repay the loan. Basis risk, or the risk that precipitation
experienced by an individual farmer does not correspond to that measured at the weather
station, has also proven to be a controversial issue. The survey of farmers revealed a
worrying lack of understanding of the index-based system, and a lack of trust among
many farmers in the weather station data on which the system rests. Since institutional
trust is a pre-requisite for the sustainability of the scheme, the Malawi experience reveals
significant challenges in scaling up operations, particularly given the already
overstretched capacity of NASFAM.