Index-based insurance for climate risk mitigation: A case study from Syria

Syria today is in the midst of a humanitarian crisis as millions flee the country's violent civil war and migrate to nations in Europe, the Middle East, and elsewhere as refugees. A recent report found that more than 470,000 Syrians have lost their lives in four-and-a-half years of armed conflict, which started with anti-government protests and turned into a catastrophic civil war. But the large-scale migration began before the start of the 2011 uprising, triggered by the most severe drought Syria had ever seen, which forced many farmers to leave their farms and migrate to the cities. Studies have indicated a strong correlation between demographic change and conflict. With many parts of the world increasingly experiencing dramatic weather conditions, mitigating climate risk to prevent conflict is no longer a far-fetched idea.
           
In a recent article published in Climate and Development, a team of researchers led by Ihtyor Bobojonov at the Leibniz Institute of Agricultural Development in Transition Economieshypothesizes that improving the adaptive capacity of rural producers to climate and weather risks is critical for political stabilization in a country like Syria. They find that "index-based insurance" can be an inexpensive climate risk mitigation tool that can help farmers increase their confidence and investment in their farms. Unlike traditional loss-based insurance, index-based insurance pays out benefits on the basis of a predetermined factor or index, for example, rainfall level, area-average yield, or vegetation conditions measured by satellites. When an index exceeds (or falls below) a certain threshold, farmers receive a fast, efficient payout. Most index-based insurance is tied to weather indices, which are directly related to farm yield.
 
There are three steps in identifying a fair premium for an index-based insurance product: (1) collecting long-term farm yield and weather data (2) identifying the index value/threshold and payoffs for each year (3) calculating an average payoff and discounting with the risk free interest rate. Using these steps, the researchers analyze the risk minimization potential of three index-based insurance schemes: (1) a statistical index (2) an agro-meteorologically based index and (3) a remote-sensing based index. They use winter wheat in Syria as a case study to examine these schemes.
 
The researchers collected data for wheat-producing areas from the National Agricultural Policy Center (NAPC) in Syria for the years 1985 to 2007. Farm yield data, daily climate data, and single weather station data was obtained from the International Center for Agricultural Research in the Dry Areas (ICARDA), which is located 30 kilometers south of the city of Aleppo in northern Syria. Single weather station data was used for the statistical index scheme, while rainfall deficit was used for the agro-meteorologically based index. And Normalized Difference Vegetation Index (NVDI), a measure of density of vegetation, was used for the remote-sensing based index. Their analysis showed that having index-based insurance increased the minimum revenue of the farmer compared to an absence of the insurance in all three schemes.
 
Bobojonov and his colleagues point out that index-based insurance might not be a one-time solution for all risks but is an inexpensive way to hedge weather-related risks, particularly in developing countries. They also acknowledge the challenge of establishing an index-based insurance market in Syria given the hostile political situation and the absence of agricultural insurance companies in Syria — and of identifying agents who could sell index insurance contracts. Studies have shown that the trust of farmers in insurance providers is the most important determinant of insurance demand in developing countries. However, they are hopeful that the Syrian Agricultural Cooperative Bank, which provided credits during the droughts of 1999/2000 and 2001/2002, could play a leadership role in establishing such markets. Similarly, drawing from the success of MicroEnsure — a social enterprise that partners with mobile phone providers to mitigate risk and to reach a wide audience in emerging markets — the researchers also highlight the potential of mobile phone providers in making index-based insurance widely accessible in the Syrian market.  
 
The ongoing conflict in Syria is a warning for all countries that climate change can take a serious socio-economic toll that crosses political borders; with the rate of extreme weather events increasing, states should take climate change risk mitigation tools very seriously. And while the outlook remains grim in Syria for the immediate future, Bobojonov and his colleagues show that there is hope to build confidence among farmers if practical climate risk mitigation tools, such as index-based insurance, is made widely accessible.