 By David Bresch, Head Sustainability, Swiss Re
Crops are the lifeline ofrural communities around the world. Without enough rain, many of them face disaster. Crop failures mean that farming communities lose a vital source of income and essential supplies of food. This can have devastating effects on livelihoods and health, particularly in the poorer regions of the developing world where large parts of the population depend on the land for their survival. In our interconnected world, crop failure in one region can have the knock-on effect of global food price increases, creating social unrest and increased hardship for the most vulnerable members of our global community.
Even in richer countries, drought can have catastrophic effects. In Australia, research has shown a 15% increase in rural suicides attributable to the hardships farmers face in times of drought. The historic drought in the United States this summer led the U.S. Agriculture Department to classify 218 countiesin a dozen states as disaster areas and rate over 50% of America’s corn crops and 57% of its pastures as “poor to very poor”.
Since U.S. corn and soybean crops are used globally for food, feed, and ethanol production, the shortfall will havedetrimental repercussions for poorer, import-reliant nations. To make matters even worse,the USDA estimates that food prices in the next year could surgeby as much as 4.5% globally.
Crop insurance coverage
As our climate continues to change, drought eventsare likely to become more frequent and more severe. Without adapting to these changing weather conditions, more communities will be at risk. In conjunction with adequate adaptation measures, crop insurance provides the means to cope with financial damageresulting from prolonged drought.
By protecting farmers against catastrophic drought losses, insurance gives them the confidence to invest in agricultural technologies. A number of innovative insurance products, such as parametric covers and index-based weather solutions, are available which have advantages over traditional indemnity-based covers. Their administrative costs are relatively low and payout times are faster because they use an index rather than claims adjusters to determine payouts. These products have shown to be beneficial in developing countries where resources are scarce.
Cost-effective drought adaptation measures
Insurance can help to protect against unacceptable losses from drought and other extreme weather events. However, it is equally important to keep insurance prices at an affordable level by investing in preventive measures. Insurers, as experts in risk management, have avaluable role to play in helping local decision makers determine which measures are most appropriate for their regions.
The Economics of Climate Adaptation (ECA) methodology, jointly developed by the ECA working group, allows us to determine the cost effectiveness of measures to prevent losses from climate risks, including droughts.The method takes into account measures to adapt to the effects of droughts on food security, health, livelihoodsand energy.
The key to the ECA method is a cost-benefit analysis of specific adaptation measuresrelative to the losses which can be averted. If a $2 million investment into drip irrigation systems can avert $100 million of crop losses in times of drought, it would be assessed as highly effective. Such measures are then catalogued and provide decisionmakers with a strong argument for implementing climate adaptation measures.
China and food security
The ECA study has two important examples of how drought mitigation can be applied. Firstly, a study of the challenges posed to food security by drought in northern China and a look into the health and energy challenges in Tanzania.
In the case of China, the study focuses on the impact of drought in the important agricultural regions in the North and of the country. It considers factors such as seasonality, climate change impact and the Chinese government's goal of becoming 100% self-sufficient for major food crops by 2020.
The most cost-effective ways to deal with droughtin this region are also the simplest. For example, drip irrigation systems require only $0.20 of investment to avert $1 of loss. Seed engineering, using standard hybrid techniques, requires $0.30 for every $1 of loss averted. At the other end of the scale, reservoir construction is less effective with an investment of $3.70 required to avert $1 of loss.
Health and energy in Tanzania
The second ECA case covers central Tanzania. The majority of the 4.4 million inhabitants of the central region of the country are subsistence farmers whoface serious health issues in times of drought, such as malnutrition or dysentery. Added to this is the effect of drought on the national energy supply. 50% of Tanzania's energy is projected to come from hydropower, with 95% of this coming from the drought-prone central region.
On the medical front, the ECA report assessesmethods aimed at increasing water quantity as highlycost-effective: rain water harvesting, or building basic covered wells with pipes costunder $5 per case of diarrhoea, dysentery or cholera prevented. Oral hydration therapy costs as low as $10 per case prevented. The chemical filtration of water and vaccination programs, by comparison, were both around $250 per case.
Regarding energy shortages, the ECA found that efficiency measures, such as low consumption light bulbs and preventing dam leakages were either cost-neutral or actually returned money to the community in the long-term. Among the various types of power generation alternatives, gas and photovoltaic sources were the most cost-effective, with $0.06 and $0.08 per kilowatt hour.
Reducing losses by investing in preventive action reduces the human impact, the impact on society and the economic costs of drought. Striking the right balance between loss prevention and risk transfer measures is a key challenge for local decisionmakers. This is why an effective approach to droughts requires a comprehensive risk management approach, a long-term view of climate risk and an alignment with a country’s broader strategy of economic growth.
This article first appeared in the August issue of Actuarial Post Digital Magazine. Click the cover below to view the issue:
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