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During the last years, a main focus of our work within POLISES was on potential side effects of insurance programs. In addition to the review article on maladaptive outcomes of climate insurance in agriculture (for a short summary see the corresponding blog article), we have also contributed to the ongoing debate with several modelling studies and qualitative analyses:  

• Our former colleague Felix dealt with the question of whether livestock drought insurance might lead to ecological vulnerability. In his paper published in Ecological Economics, he investigates potential long-term effects of livestock insurance on pasture conditions. With the help of a stylized agent-based model of a Borana common property pastoral system in Kenya, it could be shown that especially if pastures are very sensitive to grazing, insurance can cause and/or intensify ecological instability due to unsustainable herd sizes induced by the availability of insurance. Appropriate insurance design that sets limits to the number of animals that is insurance might help to dampen these side effects.
• Tim, one of our short-term research visitors in summer 2019, also focused his research on the ecological impact of insurance. However, he considered crop insurance rather than livestock insurance and compared how this financial instrument and different combinations of legume cover crops as ecological insurance affect the climate resilience of mixed crop-livestock smallholder farmers. Using a social-ecological simulation model that covers interactions between soil nutrient dynamics, crop yields, and household wealth, he was able to show the complementary effects of cover cropping and insurance on medium-term income. In his paper published in Ecology and Society, he discusses the role that ecological and financial strategies could play in building resilience in smallholder agricultural systems and the potential of bundling these adaptation strategies.
• Within the SEEMI project, POLISES member Meike addressed potential unintended social side effects of the introduction of formal insurance. It was empirically observed that insured households might lower their contributions to traditional arrangements where risk is shared through private monetary support. To investigate what this implies for smallholders that cannot afford formal protection, a stylized agent-based model was developed which explicitly includes the decision behavior regarding informal transfers. In her paper published in PLOS ONE, she shows that the introduction of formal insurance can have negative side effects even if insured households are willing to contribute to informal risk arrangements. However, when many households are simultaneously affected by a shock, e.g. by droughts or floods, formal insurance is a valuable addition to informal risk-sharing. The model results underline that new insurance programs have to be developed in close alignment with established risk-coping instruments.
• Our former short-term research visitor Lemlem analyzed the potential of agricultural insurance for food security of smallholder farmers by the means of qualitative socio-environmental analysis. Despite some positive evidence that insurance positively affects farmers’ production strategies, consumption smoothing, asset protection, and asset recovery, the specific effect of insurance on farm households’ dietary diversity is largely unexplored. In her paper published in Global Food Security, she argues that there exist multiple causal mechanisms through which insurance may negatively influence farm households’ dietary diversity. She elaborates these mechanisms and provides recommendations on ways to avoid unintended negative effects on dietary diversity which should be taken into account by governments and donors if they continue to further promote insurance.

Overall, recent POLISES research underlines the huge potential of insurance programs to end poverty and increase the resilience of smallholder farmers. However, our insights show that insurance products must be developed carefully to avoid unintended side effects. Our research outcomes highlight a range of key aspects that need to be taken into account to design insurance products in a sustainable and effective way.

On June 22, Birgit will discuss our findings as a panelist in the session “Climate Insurance: (Mal)adaptation, delaying inevitable retreat or migration” at the conference “At What Point Managed Retreat? Resilience, Relocation and Climate Justice”, organized by the Columbia University (June 22-25, 2021).