Wednesday, November 2, 2011

Eat the Rich

Prior to starting a grad school I had a bona fide job. The one charged as head of the company was a a savvy politician but also of the grandfatherly type. A good man that I learned much from in a short period of time. Replying to my general personality of skepticism, he told me, "You are too young to be so cynical." Maybe, but it has boded well for my graduate studies.

The Financial Times has picked up the Oxfam-Swiss Re collaboration (mentioned in the past, here). The article reports (written by an academic at UNC-CH) that the collaborators are creating a "work-for-insurance" plan.
Insurance companies and non-profits would link up to use this market-based solution to help poor African farmers mitigate the effects of drought. It would also have the potential to create new insurance and risk-management markets.
The program seeks to be modeled after a government "food-for-work" program.
In 2008 Oxfam and Swiss Re adapted Harita, a livelihood development plan that packages crop insurance with access to credit, savings schemes and advice on crop yields. It has since evolved into a “rural resilience” package, now called R4. Oxfam and Swiss Re gave local insurers and partners the confidence to adapt the food-for-work schemes to make crop insurance available in a similar way for the first time.

The key to offering crop insurance to very poor people is to keep costs down, and index insurance – which pays out all policyholders when factors related to crop failure occur – is less expensive than verifying farm-by-farm claims. Oxfam, Swiss Re and partners designed such a scheme based on rainfall data. Oxfam uses satellite information, while farmers also have cylinders on sticks to measure rainfall themselves. If rain fails to reach certain levels, the policy pays out.
It also integrates insurance with risk reduction because the work farmers do for the insurance relates to outcomes, such as digging ditches or cleaning seeds.
Swiss Re’s pledge of continuing support suggests to stakeholders a sincere attempt to build a new market with long-term, market-based solutions.
Although it is early days, the scheme indicates a new way to make profits while also making a difference.
1) Sounds a little like indentured servitude.

2) Work for food, offers food (I guess). What makes matters different from work-for-food, is that there is no food. Does payout guarantee food will be available for purchase? I don't imaging that it would because many of these areas depend upon subsistence ag and suffer from a lack of infrastructure. One can't eat their insurance payout.

3) Let's say Dr. Joe Climate Scientist predicts a drought year (coupled with climate change of course). If the rates for insurance increase, does the work required for insurance increase? How will such a situation interact with predictions of loan defaults as suggested here.

In 2009, the IRI published a report on their experimentation with index insurance around the world. The report is revealing of some experienced difficulties, what it takes to establish an insurance regime in areas without prior experience with insurance, and the process of creating and characterizing insurable risks.

I am curious to see how this plays out over the years. My cynicism leaves me quite skeptical. In general, there seems to be much about the decidedly insurable risks that are hidden behind an array of models and a primary motive for establishing international trading markets. For example, the IRI report mentions that,
Another advantage is that the insurance product facilitates price discovery for Ethiopian drought risk in international financial markets. Putting a price on drought risk allows for better understanding of investment tradeoffs for mitigation/ management of drought risk.
Also, thus far, implementing insurance in these rural developing areas is being done on a foundation of implied good faith in the industry, aid groups, and scientists. There seems to be no means of accountability. In the end, it may be that poor farmers are becoming vulnerable to much more then just drought.

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