Integrating Seasonal Forecasts and Insurance for Adaptation among Subsistence Farmers : The Case of Malawi

This paper explores the integration of two different methods of addressing climatic vulnerability in an ongoing pilot insurance scheme for smallholder farmers in Malawi.

Climate variability poses a severe threat to subsistence farmers in southern Africa. Two different approaches are used to address these threats:

• Seasonal precipitation forecasts for risk reduction - for example, choosing seed varieties that perform well for expected rainfall conditions;
• Innovative financial instruments for risk sharing - for example, index-based weather insurance bundled with microcredit for agricultural inputs.

So far these two approaches have remained separate. This paper proposes a model that adjusts the amount of high-yield agricultural inputs given to farmers to favorable or unfavorable rainfall conditions expected for the season. Simulation results indicate that this approach:

• Substantially increases production in years when droughts are unlikely;
• Reduces losses in years when insufficient rainfall damages crops;
• Results in cumulative gross revenues that are twice as large for the proposed scheme;
• Results in wealth accumulation that reduces farmers’ long-term vulnerability to drought;
• Demonstrates high potential for adaptation to climate variability and change in southern Africa.