Global Index Insurance Facility gets funding to expand index insurance

The Global Index Insurance Facility (GIIF), a weather and disaster insurance facility managed by International Finance Corporation alongside the World Bank, has received funding to help it expand the use of index insurance in agriculture.

The Dutch Ministry of Foreign Affairs has contributed $25m to the GIIF to help fund the facility over the next five years as it pursues a goal of using its parameterized index insurance products to develop sustainable agricultural insurance markets around the developing world.

“With the world’s population expected to reach 9 billion by mid-century, improved farmer productivity will prove critical for food security. This calls for increased investments in agriculture, and sustainable agricultural insurance markets offer a solution to the problem of low farmer productivity and investment,” commented Aaltje de Roos, Senior Policy Advisor for the Dutch Ministry of Foreign Affairs.

With low levels of yield due to insufficient investment and the impacts of weather and natural catastrophes a feature of agricultural production in many developing economies, such as Sub-Saharan Africa, South Asia and parts of East Asia Pacific, the importance for smalllholder farmers of understanding and managing weather risks to minimise economic losses is clear.

The goal of the GIIF is to expand the uptake of index insurance products as a risk management tool in agriculture, food security and disaster risk reduction, using it as a tool to support the growth of local markets for index insurance.

“We greatly value the ongoing collaboration with the Dutch government in support of index-insurance programs targeting smallholder farmers,” said Peer Stein, Director of IFC Access to Finance Advisory Services. “With the number of people affected by climate-related disasters on the rise globally and the poorest households left without the means to deal with their economic effects, index insurance holds the promise to be a great vehicle for protecting the most vulnerable from the unknown”.

A number of issues have held back the growth of agricultural insurance in developing economies, including a lack of appropriate products, high cost of premiums, and payment delays that discourage potential clients.

“We at IFC are eager to address what you may consider a market failure and do the needful to make insurance and other mitigation tools for natural and climate change-related disasters available and affordable to farmers,” added Gilles Galludec, Manager of GIIF.

To date the GIIF has supported nearly a dozen partners, development organisations and the like, in developing countries to set up index insurance markets for farmers and micro- and small-to-medium enterprises, with more than 500,000 clients covered to date and $109 million in sums insured.

The use of index insurance and parametric or index triggers continues to be the best way to expand insurance coverage into emerging economies. The important factor to consider is in making these schemes self-sustaining, so that at some point in the future the subsidies can be dropped in favour of an operational private market in index insurance with global reinsurers and capital markets providing the risk capital required to back it.