ADDIS ABABA, 24 November 2010 (IRIN) - New automated weather stations could boost Ethiopia's fledgling agricultural insurance schemes, expanding the use of payouts triggered by abnormally low rainfall and reducing costly visual verification of yield losses.

Some 85 percent of Ethiopians farm for a living, mostly on very small plots. They have few options to mitigate the increasing crop failure brought about by climate change. With credit hard to come by, farmers may have to sell essential assets or dip into meagre savings to survive a poor harvest and pay for the next planting season.

Such a poverty trap, exacerbated when severe drought affects entire regions, undermining traditional risk management strategies, tends to rule out investment in improved seeds or other costly yield-enhancing inputs. Sometimes it prevents a farmer buying any new seeds at all.

Two insurance schemes have been set up recently in Ethiopia in an effort to break this vicious cycle – and to make a profit. For now, they only have a few thousand policy-holders between them – fewer than 1 percent of all farmers in Ethiopia, and well short of the critical mass required to ensure long-term viability.

The new weather stations could improve their chances. The National Meteorological Agency has just set up 20 (10 in the Somali Region, five in Eastern Oromia and five in Afar) - and another 30 are due to be installed by the end of 2010. The devices send real-time data to Addis Ababa via mobile phone and feed into the country's national drought index.

"The stations will allow us to identify climate risks at an early stage and better protect vulnerable, food-insecure people in rural areas through innovative projects such as the weather risk insurance," said Felix Gomez, Ethiopia acting country director for the World Food Programme, which installed the stations.

Oxfam America works with an Ethiopian company, Nyala Insurance, to provide drought insurance to five villages in the northern Tigray region, with another 50 in the pipeline.

Operating under the Horn of Africa Risk Transfer for Adaptation project, farmers taking part in this scheme, launched in 2009, pay premiums of 25 or 30 percent of the payout, which is based on expected yield. Oxfam America meets the cost of the premium for those unable to pay; in lieu they have to work on projects that improve livelihoods and reduce the impact of natural disasters, such as dam construction.

"It's better to help a farmer before disaster strikes than coming afterwards with a donation," said Sophia Belay, micro-insurance programme director with Oxfam America.

Payouts are made when a predetermined amount of rain needed to grow the insured crop fails to fall by a certain date. Information from satellites is used to determine rainfall levels, which tends to be more expensive than weather-station data. "There is big potential for growth... [but] it's too soon to say" if the scheme will take off dramatically, said Belay.

"From the farmers, the demand is very high, because they can't predict the weather. But on the supply side, we really have to work hard to sell the idea to insurance providers, who have traditionally seen farmers as too high a risk, so this is a completely new field for them.

"So we tell them, the more they come, the chances of making a profit are higher, that if they offer the same insurance in different parts of the country, they will make money," she explained.

Farmers' share

Under a separate scheme, the Oromia Insurance Company began offering multi-peril policies, through cooperative unions, to farmers in Oromia state in December 2009. It has 1,200 customers who have insured either their inputs or the revenue from their staple crops.

"Our philosophy is that by helping our society it is possible to make a profit," Megersa Miressa, the company's micro-insurance desk officer, told IRIN. Eighteen percent of Oromia's shares are owned by farmers.

But in its first year, rather than a profit, the company expects to lose about half a million birr (around US$30,000) because of the combined effects of storms, floods and yellow rust.

"This is a risky area," said Megersa.

Oromia plans to reduce its costs by introducing index-based schemes in place of its current system, which involves visual verification that insured crops have been planted and losses incurred.

To succeed in its ambition to cover Oromia state - where 1.5 million farmers belong to unions - within five years, and other parts of Ethiopia thereafter, the company also has to overcome obstacles such as a lack of awareness. "Most farmers don't know about insurance," said Megersa.

Kassaye Kekeba, chairman of Ambo Farmers' Cooperative Union, which works with Oromia, told IRIN: "Some farmers have doubts that they might not be paid. Once the insurance company pays those who have lost [crops], then I hope most farmers will start to benefit from this modern scheme."

Notes of caution

But in the growing literature about index-based insurance schemes, there are some voices of caution. Noting the schemes have been "heralded as a successful mechanism of disaster risk reduction and climate change adaptation – and part of the social protection suite", Katharine Vincent of the Regional Hunger and Vulnerability Programme questions their long-term sustainability.

"Insurance companies are not answerable to any public sector organizations or governments, and thus are entitled to (and do) withdraw their products should they no longer become financially viable," she warned in an article published online.

Taking out insurance might "discourage farmers from engaging in their traditional self-reliance, preparedness, and risk-spreading activities. If this happens and then the insurance product is removed, they will arguably be in a more precarious situation – both worse off economically and more vulnerable to risk - than they were before the insurance was available," she added.