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Insuring farmers against weather extremes



In Nepal most farmers don’t have access to appropriate crop insurance and are completely exposed to climate risks like change in the monsoon pattern. To solve this problem the government of Nepal recently issued a new regulation that every non-life insurance companies must provide crop insurance. However, most local insurers are struggling because i) farmers don’t have proper documentation on yearly production, ii) high risk of moral hazard (insurance fraud), iii) absence of distribution channel in rural areas and iv) no knowledge for development of index based insurance. In order to help local insurers to tackle with these problems we have come up with unique insurance products. The local insurers can distribute these insurance products to the farmers, allowing insurers to adhere the regulatory compliance. Above all, the farmers can have crop insurances that fit their need, are affordable and easily accessible.

We develop and provide weather index-based crop insurance. It is a parametric insurance which is based on meteorological data (e.g. rain and temperature) rather than on complicated damage estimations. Our insurance solutions are tailor-made to the need of farmers, for example monsoon insurance for rice farmer without irrigation, or storm insurance for banana farmer. The mechanism behind the claim payout is very simple, a farmer chooses a meteorological condition s/he wants to insure against (e.g. < 200mm rainfall in the month of June) and if this pre-defined condition is met the farmer will receive an indemnity payout.

Category of the action

Mitigation/Adaptation, Changing public attitudes about climate change

What actions do you propose?

In Nepal most farmers don’t have access to appropriate crop insurance and are completely exposed to climate risks. Local insurance companies cannot provide this service mainly due to lack of expertise in the design and distribution of crop insurance. We will help the local insurance companies in Nepal to design affordable and appropriate insurance products and develop their distribution systems, so that the smallholder crop farmers can protect themselves from various weather related risks.

We develop index insurance based on objective meteorological parameters (e.g. rainfall) depending on the need of farmers. Insurance distribution will be built on existing channels (e.g. credit cooperatives) to increase the farmer’s access.

The weather index-based crop insurance is an insurance scheme in which the indemnity payout is based on objective parameters like precipitation or temperature. Examples are monsoon insurance for rice farmers and storm insurance for banana farmers which are based on rainfall amount and wind speed, respectively. In an insurance contract, payout conditions are determined by i) a predefined a meteorological condition a farmer wants to insure against and ii) a time period. For an example, a rice farmer needs >200 mm rainfall (predefined condition) in the month of June (period) and thus if the rainfall is below 200mm the famer receives an indemnity payout. For determining if the predefined conditions are met, we gather data from nearby meteorological stations or use remote sensing technology like precipitation radar. The insurance design makes the distribution possible through already existing credit or farmer cooperatives and agro-chemical stores.

In traditional crop insurance schemes the indemnity payout is based on damage estimations in the field. For commercial farmers in developed countries these costs are relatively low when compared to the premium. However, in developing countries where the average field size is less than 1 hectare these products are simply too costly.

Furthermore, moral hazard and lack of proper yield documentation create additional challenges. Our products can help to overcome these problems as the claims payout are solely based on objective parameters and doesn’t need any field visits. To design our products we use mathematical and climate prediction models which will be fed with historical crop and meteorological data to assess the climate risk on the crop yield. To gather relevant meteorological data we will use satellite technology e.g. precipitation radar in addition to ground meteo-station. In order to facilitate money transfer (premium and indemnity payout) we will use SMS payment through mobile.

Who will take these actions?

The key actors are:

- Ministry of Environment and Ministry of Agriculture: Their main roles is to recognizing insurance as an important alternative for climate adaptation. Providing insurance subsidy to the farmers (similar to other agriculture insurance).

- Nepal Insurance board: Providing license to the products. 

- Insurance companies: Promotion and distribution of weather index insurance, collection of premium and indemnity payment.

- Farmer cooperation: Distribution of products

Where will these actions be taken?

The action will be taken initially in Nepal. Nepal is one of the most climate vulnerable countries. Extreme weather events and shift in monsoon pattern are causing serious havocs on crop production. In a country where 70% of the population is involved in agriculture, climate related losses are estimated to be 10% of GDP (Asian Development Bank). Consequences for poor smallholder farmers are worse because they don’t have any formal risk management strategy. Although crop insurance is recognized as a powerful tool to reduce climate vulnerability, insurance penetration is less than 1%. In a bad year famers have to survive through credits or savings pushing them further into poverty. The main problem is a lack of insurance product that can fit farmer’s need and be easily distributed.

We further plan to extend to other countries in South and South-East Asia. 

What are other key benefits?

Insurance cover increases the adaptive capacity of farmers by securing a stable income and by opening door for new opportunities. The farmers do not need extra saving for bad weather events but instead can invest to modernize the farm. For examples framers will be able to buy agriculture inputs like drought resistant seeds and fertilizers, to build up irrigation system and greenhouses or to invest in mechanized farming equipment. These measures will not only help to increase the productivity of the farm but also to increase farmer’s resilience to natural hazards. Additionally, financial security will help them to develop other aspects of livelihood such as children can go to school and they will have money for basic health care. The insurance provides a passage to move from subsistence farming towards marked-based agriculture practice. Hence, crop insurance will not only strengthen the resilience capacity of farmers but also ensures the food security of the whole society.

What are the proposal’s costs?

Insurance design itself is not very costly, but the main costs is related to cost for data, administration cost and broker charge. Initial costs would be required for training to the insurance agents, financial education to the farmers and create the structure (distribution channels, document system, data channels etc.).

We expect an initial cost to set-up the project to be around USD 200,000 for the first two years. The cost does not include human resources fees (salary).


Time line

- The first five years will be project initiation phase which includes insurance design, finalizing important collaborators (data providers, reinsurers, government etc), establishing distribution channels, testing and refining insurance products etc. 

- The next 5 - 15 years will be stabilization phase where new products will be launched, the service will be expanded geographically and also identify new sectors and customers groups. We will also try different other techniques to measure crop loss e.g. drones

- In long term we expect that insurance will not be anymore a stand alone service. It will be embedded with other products and services, for example for agriculture it will be included in seeds or fertilizers. We assume that in 50 years the technology will be so advanced that we would not require to estimate loss through meteorological data but can we can measure directly  using different techniques (such as light reflection from crops) or through drones.

Related proposals


  • Bagazonzya, Henry K; Devkota, Kirti; Mahul, Olivier; Stutley, Charles. 2009. Nepal - Agricultural insurance feasibility study. Washington, DC: World Bank.
  • The World Bank (2011). Weather Index Insurance For Aagriculture: Guidance for Development Practitioners
  • World Food Programme (WFP) and IFAD (2011). Weather Index-based Insurance in Agricultural Development – A technical guide