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The incidence of natural disasters has increased considerably during the last fifty years. This increase has significantly affected the agricultural production in many countries. The frequency of droughts, floods and other disasters over the last ten years is among the root causes of the current world food crisis, characterized by food shortages and rapid increases of food prices, especially cereals. Natural disaster risk management is therefore important in avoiding similar crises in the future. How can disaster risks be managed to ensure agricultural production is maintained? In this article, proactive financed insurance to farmers will be discussed, and an example of good practice will be examined.
Natural disasters have enormous impact on the economy, especially in developing countries. The agricultural sector is the most vulnerable sector to natural disasters. The impact of unfavourable climate events on agricultural production has become very clear in recent decades. Uncertain weather conditions discourage private investment in the agricultural sector. Structural lack of investment has led to a low level of productivity and total agricultural production.
Natural disasters are impossible or at least very difficult to predict. For example, over the last century, 80 per cent of earthquake-affected areas had no previous recorded history of earthquake vulnerability (UNITAR, 2008). A natural disaster is a chock that results in negative impacts on social and economic assets. When disaster strikes, the capacity of the affected population to resume productive activities in the post-disaster period depends on the risk management system in place. Because farmers face huge losses in terms of livestock, seeds and other assets, their capacity to resume income-generating activities is reduced and the situation in terms of rural employment and food security inevitably worsens. The vulnerability of the economy depends on the extent to which the government can rapidly assist the affected population. To do so, the government needs to raise money, usually a big amount in a short period of time, which might be a big issue for developing countries. This problem can be avoided by establishing an ex ante risk management system.
A key strategy in disaster risk management is government-sponsored insurance. Providing insurance against drought, flood and other disasters will reduce the vulnerability of the population, especially the agricultural sector (Margaret, 2008). Such insurance will help people to quickly resume their activities and the negative impacts of the disaster will more rapidly dissipate. In this age of global warming, insurance to farmers will positively impact on private investment in the agricultural sector, since investors know they will be repaid if they face big losses related to climate conditions. For such insurance, multiple arrangements can be made. The government or local authorities might pay the premium to a private insurer, which will intervene quickly by paying cash when a natural disaster strikes. Another possibility is to establish a social protection fund or a micro-finance system at regional or district level, which will assist farmers to rapidly resume their agro-pastoral activities in the post-disaster period.
Establishing such a fund or insurance could be based on the Mexican government example, which can be tailored to other developing countries. In May 2006, the Mexican government issued a special catastrophe bond to raise funds for rescue operations in the event of an earthquake. The issuance of the bonds was given to the Zurich-based re-insurance group Swiss Re. It offers an insurance package covering the period 2006 - 2009. Investors who buy the bonds are betting that an earthquake will not hit the country in that period. If it does not, the investors will get back the value of the bond and they will keep the premium as well as the interest. But if an earthquake hits the country, the investors will lose their money and the Mexican government will use the money for rescue operations (UNITAR, 2008). In this way, the Mexican government has a special natural disasters fund for which it supports a small cost (premium and interest of the bond). While this bond is directed to earthquakes, a risk management system in another country might envisage a drought or flood bond. The fund will minimize the impact of natural disasters on agricultural production and food security.
In this age of climate uncertainty, the agricultural sector and the poor are paying a heavy price. Innovative and proactive methods of risks management are essential to minimize the impact of natural disasters. They will encourage investment in the agricultural sector and facilitate adequate and quick response to natural cataclysms. This in return will ensure agricultural production, food security and promote rural development.
Written by Agbessi Komla Amewoa, Associate Expert, UNESCAP-CAPSA, Bogor, Indonesia.
(References available upon request) |
