Wagering on the weather might become a global business. Just ask the Climate Corp., an underwriter of insurance plans for farmers. The San Franciscobased firm raised some $110 million from Google Ventures, Khosla Ventures, New Enterprise Associates and more than a dozen other investors after it launched in 2007. But the real sign that the Climate Corp. is onto something came last November, when Monsanto, the U.S. agriculture biotech giant, acquired it for nearly $1 billion.
Farmers everywhere need help to cope with the effects of climate change. Back in 2009 the U.S. Global Change Research Program, a government umbrella group that coordinates federal research on climate change, noted that extreme weather events linked to the phenomenon had already begun to hamper agricultural yields in many regions worldwide. Starting in the 2030s, rising temperatures will shrink yields by 2 percent each decade through the end of the century, according to a March report by the United Nations Intergovernmental Panel on Climate Change.
So far, the Climate Corp. has focused on farmers in the U.S., where its profits are healthy but government-subsidized crop insurance keeps its growth in check, says director of product development Cameron Norgate. Theres huge opportunity in other parts of the world, Norgate notes. Many emerging markets have little or no crop insurance offerings because governments havent helped to develop these markets, he says. Theres potential to rapidly deploy.
Index-based crop insurance could be a good fit in developing countries, Norgate explains. Payouts are triggered by a regional deviation from a weather index, such as one that measures rainfall. As Norgate points out, index-based insurance is easily scalable because its reliance on weather data means that providers dont have to send claims adjusters into the field.
The Climate Corp. plans to expand to South America, where crops and farming practices are most similar to those in the U.S., within the next year and eventually to India and Africa. Other insurers are showing plenty of interest in teaming up with the firm, Norgate says.
Nonprofits and development agencies like the World Bank Groups International Finance Corp. and the Syngenta Foundation, which is backed by Swiss agribusiness Syngenta, have been establishing index-based insurance markets in Africa, Asia and South America for nearly a decade.
From 2009 through the end of last year, says the IFCs Global Index Insurance Facility, it and its grantees insured 644,329 farmers, for a total portfolio of $119 million, and paid out $9.75 million to clients. For-profit enterprises are the next step: In June the Syngenta Foundation spun off its index insurance program for small-scale African farmers into ACRE, a Nairobi, Kenyabased insurer and adviser.
For big insurance companies, the promise of using index insurance to enter emerging markets outweighs the possible risks. In September, Alexandre Scherer, CEO of AXA Insurance Co., a division of French insurance and asset management giant AXA Group, talked up the opportunities during a Climate Week panel discussion at New Yorks Barnard College. At the start of Climate Week, AXA and the World Bank announced a deal to invest jointly in building the index insurance market in emerging regions.
Swiss Re, the worlds second-largest reinsurer, is equally bullish on index offerings. Our aim is to create new markets, Paula Pagniez, the $215 billion firms senior microinsurance specialist, said at the same event.
Daniel Osgood, lead scientist for the financial instruments sector team at Columbia Universitys International Research Institute for Climate and Society, has worked on index insurance impact assessments led by Oxfam America. He admits that this nascent market has potential pitfalls. For instance, insurance might prove too costly for farmers or encourage them to relocate to floodplains in an effort to collect benefits.
Still, Osgood believes index insurance could offer vital protection. An early Oxfam impact assessment in Ethiopias Tigray region showed that when farmers earning about $20 a month paid between $20 and $40 in insurance from 2009 to 2012, their wealth grew by an average total of $150 during that period. Osgood and his colleagues believe this improvement stems from insured farmers access to credit. As a result, they can afford better seeds and other inputs and avoid the so-called poverty trap the need to sell off assets like oxen because of a bad yield, thereby putting themselves in a deficit for the next year. We think the benefit comes from a combination of people moving forward and people not falling back, Osgood says.
Its important to keep scaling the index insurance market by pulling in major financial firms and investors, he adds: If youre doing anything meaningful, you are taking chances.