Farmers harvest rice last October in Chiang Mai Province, Thailand

Farmers harvest rice last October in Chiang Mai Province, Thailand. Photo: Ol’Pete / Flickr.

The monsoon couldn’t arrive soon enough in Thailand this year. By March, major reservoirs were down to as little as 10% of their capacity. Rice paddy fields were left unplanted, or else they were parched in the dry heat. The monsoon rains in June provided some relief, but not enough to undo the damage.

Farmers had already faced a severe drought last year, and this one was worse. If the pattern persists – and climate models suggest that drought risk in Thailand will continue to increase – many rice growers will have to switch to more drought-resistant crops, and even then they may struggle with water scarcity.

If Thailand wants to continue to be one of the world’s top rice producers, it will need to help farmers withstand the shock of more-frequent crop failures. This is where agricultural insurance comes in.

Thailand has provided indemnity insurance to farmers through a national programme for decades. More recently, with support from development partners, it has introduced weather index-based insurance for specific crops, which provides payouts once certain conditions occur, without requiring farmers to document their losses.

But as climate change and development amplify the risks faced by farmers in Thailand and across Southeast Asia, officials recognize that they need to expand and improve insurance schemes, greatly increase participation, and better integrate insurance in national adaptation strategies.

At a recent workshop in Ho Chi Minh City organized through the Association of Southeast Asian Nations Climate Resilience Network (ASEAN-CRN), policy-makers and development and research partners delved into the countries’ challenges and potential ways to use agricultural insurance to boost resilience across the ASEAN region.

Along with Thailand, the Philippines and Vietnam have well-established, government-subsidized crop insurance schemes. Indonesia has an agri-insurance scheme and is working to improve it; Cambodia has yet to establish a national programme, but in 2014 it launched a small pilot, with funding from a Dutch NGO; Myanmar aims to launch a pilot within months.

In other words, ASEAN Member States all recognize the value of insurance to build resilience. A priority now is to further develop index-based insurance schemes. This model makes it easier to support farmers during climate-related events, particularly in developing countries, because payouts are triggered by an event defined and recorded at the regional level, rather than at individual farm level (e.g. a drought recorded at a local weather station, or a low official crop yield estimate for a district).

Index-based insurance is also said to reduce moral hazard and adverse selection, because farmers have no incentive to reduce their effort to minimize risk, and all farmers received the same payout regardless of their individual risks. Because there is no need to verify individual claims, index-based insurances are expected to deliver faster financial support after a disaster.

One of the key disadvantages of index-based insurance, however, is that products are not case-sensitive, so farmers who have suffered disproportionally from a drought may feel wronged when they receive the same payment as a neighbour who suffered less. In addition to the challenge of implementing schemes in largely developing countries, cultural norms such as a lack of trust in governments, religion and belief systems further impedes the uptake of insurance among farmers.

Water reservoir

Low water levels in a reservoir in Kaeng Krachan National Park, Thailand, amid the drought last April. Photo: Budak / Flickr.

Slow-onset climate events pose new challenges to agriculture insurance

Climate change is a growing challenge for insurers – not just in the developing world – because insurers traditionally use records of past losses and damages to project future ones. Climate change is widely expected to further increase the occurrenceand severity of climate-related shocks, or disasters. Anticipating how the insurance sector needs to adapt to climate change is particularly difficult in developing countries with weak or emerging insurance markets lacking baseline data and historical records of insured losses and damages.

Another challenge for agriculture insurance in ASEAN is slow-onset events such as sea-level rise, inundation and saltwater intrusion. While insurance is well-suited to shocks such as floods, droughts and tropical cyclones, it may be much harder to make it implement when considering slow-onset events that are likely to exacerbate losses to farmers in ASEAN in the coming decades. Insurance works best when it has a clear trigger moment –i.e. when a disaster strikes. For slow-onset events it’s very hard to draw the line between “normal” and “catastrophe” – things steadily get worse over time, and farmers get poorer.

Thus, there is a risk that insurance markets will slowly fail if the financial backing (for instance, from aid, or from reinsurance coverage) is not adjusted to increasing damages fast enough to maintain the level of government subsidies and payouts needed to keep these programmes viable. We know from experience that crop insurance coverage in many ASEAN Member States remains spotty, and often does not persist over time.

Insurance should be just one component of comprehensive resilience strategies

Crop insurance alone cannot protect the region’s farmers from climate change impacts; a broader range of risk management and adaptation strategies is needed. But, if done well, insurance can be a crucial piece of the mosaic that we need to keep working on. ASEAN Member States – and governments and insurers around the world – are still learning how to “do insurance right” in the face of climate change.

Looking ahead, it will be crucial to learn together and from other regions (e.g. sub-Saharan Africa) about how best to structure insurance programmes so that they are financially viable, what risks are or aren’t insurable, and how to build trust among farmers so that they will truly benefit from this important risk management tool.

This blog post also appears on the Swedish International Agricultural Network Initiative (SIANI) website.