A System of Drought Insurance for Poverty Alleviation in Rural Areas

This document presents a feasibility study of a practical method of drought insurance that is self-sustaining and ready for use by farmers, non-government organizations (NGOs) and other development organizations.The paper argues that in the case of drought, insurance works best by encapsulating the best available scientific estimate of drought probability at a site within a single number - the insurance premium - which allows insurers to offer insurance to insurable parties in a transparent risk-sharing agreement.The paper presents a feasibility study of providing weather insurance for dry bean farmers in Nicaragua that had the following features:

• Dry bean farmers were canvassed in workshops to rank risks that yield the greatest losses;
• The results depended on the farmers' climate;
• Farmers coped with risk by limiting investment and labor input when the weather was bad, and increasing the areas of production if good weather was assured.

The paper explains:

• The methodology of designing a payout index based on rainfall;
• A sample contract and the calculation of this hypothetical scheme;
• The site specific probabilities of a trigger event;
• The practical issues of distributing insurance.

It concludes that:

• Crop insurance, combined with microfinance, has the potential to help poor farmers break out of poverty;
• The insurance scheme that the paper describes provides the scientific tools that allow the expansion of microfinance and insurance to people who have not yet had access to them.