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Sri Lanka - Index-based climate insurance seen feasible for farmers

Index-based climate insurance is a feasible option for Sri Lankan farmers if they had greater education and awareness that could overcome existing lack of trust, a new study has found.

Kanchana Wickramasinghe, a research economist at the Institute of Policy Studies, said farmers faced big climate change risks given the increased frequency and intensity of natural disasters.

“Farmers have limited options but they face significant risks,” she told a forum where she presented the findings of her study for IPS. “Climate change brings additional risks to their livelihoods.”

The dry zone is one of the most vulnerable areas for climate change impact and the focus of the IPS study was on paddy farmers.

Only four percent of farmers surveyed for the study had voluntary insurance, Wickramasinghe said.

Most farmers who had insurance did so as it came with agricultural loans from banks, and not because they take insurance as a risk management strategy, she said.

This was because of lack of trust, and lack of education and awareness on the potential for climate insurance to reduce risks.

Index-based insurance relies on ‘objective parameters’ like rainfall which is closely correlated with crop yield and has a higher level of trust than that of indemnity insurance which is based on direct measurement of damage suffered by farmers.

The study found farmers felt index-based insurance had low costs and timely payouts.

Farmers reported bad experiences fellow farmers had with indemnity insurance and lack of trust as they were not sure of getting benefits when disaster strikes.

They also feel insurance was not suitable for small scale farmers and was better for large scale agri-business.

Wickramasinghe said the study showed insurance can help with sudden loss of income experienced by farmers due to climate related events like drought or floods when their loan repayments become a problem.

The study found borrowing was the most common risk management strategy of farmers.

Borrowing was mainly from informal sources, with pawn insurance the most common, and also from village level money lenders and relatives and very little from formal banks.

Policymakers need to pay attention to rainfall index insurance to avoid issues with indemnity based insurance,

“Farmer education is a must because most don’t understand insurance,” Wickramasinghe said.

Source –