Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Micro-finance weather insurance not living up to expectations


A recent storm in eastern India has again highlighted the fact that micro-finance weather insurance solutions need to be carefully designed in order to meet the needs of the policyholders. We’ve seen issues in the past with these schemes as payouts have not met with expectations of policyholders as their strict conditions of coverage are not met by the weather conditions.

Cyclone Aila tore into eastern India in the last week of May and caused massive agricultural damage, estimates of total damage to agriculture and horticulture are around Rs 500 crore. Despite the large expected losses actual claims are thought to be as low as Rs 7 lakh. Why the low value of claims? Strange considering India has at least three well publicised company led micro-insurance initiatives available to farmers.

The reason it seems is a familiar story. The damage to crops was mostly caused by wind and tides where as the micro-insurance schemes are largely set up to provide protection from monsoon rains. The trigger levels (measured in millimetres rainfall per given area) failed to reach the amounts recognised for payments to be triggered.

The failure of micro-insurance to protect farmers from their losses in this instance could be detrimental to the future of this type of insurance initiative. These are hard working local small holder farmers who have invested in weather cover as they felt it would protect their livelihood. Storms like this can destroy a whole years crop and micro-finance must strive to provide proper protection to these farmers. This could be a rare occurrence but it does leave us thinking that insurers need to provide cover for multiple perils and set realistic trigger levels if micro-insurance is really going to help the people who need it.

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