In Tanzania, there is a dramatic difference in the maize crops of smallholder farmers who have been able to purchase certified seed and fertilizer because they have taken out weather index crop insurance and those planted without improved farm inputs.

Weather index crop insurance

Climate change has made smallholder farmers' lives more risky. 70% of the global poor are rural, and agriculture is a primary source of rural livelihoods. Providing safety nets to protect these farmers from extreme weather is more important than ever. Weather indexed micro insurance is a powerful solution to this problem, but it is not in widespread use in the developing world.

As early as 2005, we began working with the World Bank to develop weather index crop insurance for smallholder farmers growing groundnuts and maize in Malawi. Typically, weather index crop insurance provides compensation to poor farmers when drought strikes during a growing season. The mechanism is simple, easy to administer, and has an automatic payout process that alleviates the need for affected farmers to file a claim or go through an expensive loss verification procedure.

Credit enables additional farm inputs, particularly certified drought-resistant seed and fertilizer, that can increase yields by as much as 200% and break the cycle of rural poverty. With insurance, lenders are increasingly willing to provide the loans that lead to rural development and the diversification of rural farmers' income sources, as farmers often reinvest their increased earnings in different crops and non-crop income sources.

Weather indexed crop insurance has been designed to provide compensation to poor farmers when rainfall during a crop growing cycle is insufficient for them to grow and optimize their yields. For this model, drought is not measured by what happens in the field but by measuring the amount of rainfall received during each of a crop's three or four growing phases. Because it isn't possible to take measurements on each individual farm, rainfall levels are taken at local meteorological stations. Participating farmers within a 20 kilometre radius of a station are assumed to have received the same amount of rainfall and to be affected in a similar manner. In the case of severe drought, all farmers will receive compensation. The mechanism is simple, easy to administer, and payouts are automatic, so there is no need for affected farmers to file a claim or an expensive loss verification procedure.

While there is growing interest in microinsurance in poor rural areas by insurance companies, the key to successful implementation has been a concerted effort on the ground to bring together smallholder clients and insurers, and research and develop products that are affordable, appropriate, and sustainable. This has also required training for front office staff, financial education for clients, and the high performance MIS system for back office operations that is operated by MicroEnsure.

We are continuing to push the boundaries of micro crop insurance innovation. During 2008, we have improved on our original "Three Phase" drought insurance model (Germination, Growth, Maturity) by developing the MAMP (Moving Average, Multi-Phase) method that provides a much better match to real losses. We are now investigating models based on advanced satellite measurement techniques such as evapotranspiration as part of the drive to bring crop insurance to bigger scale and new geographies.