Why climate insurance is a bad idea

One of the fastest growing adaptation strategies pursued by developing countries is weather- and climate-related crop insurance. These are local or regional schemes being set up by NGOs, community groups and government organisations to protect farmers from crop losses due to early monsoon, drought, flooding and the like. Thee idea is that the farmer makes an affordable payment to the insurer and then gets payment should his crop fail owing to such an event. Ideally, it prevents farmers falling into terrible debt, destitution, suicide and bonded labour. Already, harvests are far lower than expected across the crop types from cotton to wheat and in most states of India, because of weather-induced pestilence and flooding. So payouts are likely already for those signed up to the new schemes

The idea was for private insurers to get in on this new market. But non could offer rates low enough for farmers to afford. So government banks are managing the schemes. Even they don’t offer rates low enough for the poorest farmers at most risk to afford. So in essence what has happened is that the government is funding a two-tier compensation scheme that encourages wealthier farmers to take larger risks with unsustainable plantings (at public expense) while pushing the poorest into greater poverty.

And as climate change exacerbates the risk, so that instead of 1 in 10 harvests failing, 1 in 3 fail, the situation will become even more ludicrous: essentially the money is going around from farmer to government to farmer is a sort of niche taxation system that unevenly distributes wealth, so that the richer farmers are merely banking their cash in a no-interest account.

The same thing is happening elsewhere: in the States, homeowners are insuring their houses against flood or hurricane damage, in places like New Orleans or Key West, with government insurers (because the private ones wouldn’t touch something so risky at affordable rates). Again, only wealthier people can afford the high rates, and with climate change, the number of payouts is set to soar.

The situation is simply not sustainable. Governments would do better to instead fund programmes that help farmers to relocate or retrain in other industries, and homeowners to move somewhere habitable. In the short-term (and short-termism needs to be phased out) farmers and householders do need to be helped, but the help should be cleverly given. So that when a farmer’s crops fail and the area is judged to be unsustainable for planting in the long-term, he should be offered compensation with advice on alternatives.

One idea I have heard aired recently, which sounds good, is that every single person on the planet should be signed up to a single climate insurance scheme. This means that when an even makes somebody destitute in Haiti, we all help him recover. This seems more doable and places the responsibility for finding alternative and sustainable occupations or residences for the poorest people squarely on the shoulders of the entire global community – which includes the rich. So if wwant our insurance premiums to go down in London, we need to help fund an alternative job for a farmer in Gujarat.

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