How insurance can fight poverty

Peace, democracy, clean water, medicine: Africa desperately needs all of it. But just as crucial, yet conspicuously absent in the public debate, is the need for crop insurance. A disappointing harvest is often devastating for farmers and entire nations. This is why crop insurance will become more important as a strategy for poverty reduction, notes renowned economist Jeffrey Sachs, Bono’s mentor on African issues and author of the influential book The End of Poverty.

Traditional crop-insurance policies like those taken out by Western farmers won’t work in Africa, Sachs explains. It is too costly for insurers to recruit customers and check all the claims filed by individual small farmers who say they’ve been hit by pests or poor weather conditions. In the August issue of Scientific American, Sachs describes two options that could be used to skirt this problem:

Farmers should be able to purchase a weather-linked bond, a kind of loan they could pay off when the harvest is successful, but would be eased or waived in the event of a seasonal drought or other climatic conditions that official weather stations could objectively verify.
Banks should be able to issue loans to co-operatives of hundreds or thousands of farmers for the purchase of fertilizer and agricultural chemicals. Such items, which Sachs says are essential for increasing revenues, are usually difficult for farmers short on cash to finance. Banks themselves can be insured against climate-related disasters, and then can ease loan-repayment conditions when such problems arise.

Earlier this year, Sachs’ own Earth Institute worked with reinsurer Swiss Re to set up a “rainfall index.” The experience proved positive and could serve as a model to help decrease the risks faced by African farmers.