Wimbledon roof snubs index insurance

Wimbledon has been so boring this year that spectators turned their binoculars to the skies in hope that rain would trigger operation of the new Centre Court sliding roof.

Defence against unfavourable weather was also the subject of a report coincidentally launched by the Global Humanitarian Forum during the first week of the tennis tournament. The title “Index insurance and climate risk” may not set the pulse racing but it deals with a fascinating branch of microfinance.

As Kofi Annan said in his introductory speech, “African farmers are the only farmers in the world who take all the risks….no insurance, no access to credit and in many cases no access to governmental support.” Index insurance offers very low cost protection to poor farmers, paying out claims in the event that a natural indicator, such as rainfall, fails to match a regional “index” of expectation.

This cover against crop failure enables the farmers to overcome one of the barriers to loan finance for seed and fertiliser. Investment bankers would recognise this as a hedging technique (not in the agricultural sense of the word!).

Index insurance has been pioneered in several countries. The results are assessed in this new report which has been put together by a big name consortium of UN, NGO and corporate interests. Their purpose is to thrust the subject into the global negotiations on adaptation to climate change.

That sounds admirable but there’s an inherent contradiction in a marriage of index insurance and climate change. The insurance principle depends on reliable historical data. If climate change is going to upset weather patterns, then the data becomes invalid. Underwriters are the same as bookmakers; they need form to make a price.

At a pinch the Wimbledon experience illustrates the problem. For years the tournament organisers arranged insurance against the loss of income caused by rain. Gradually the underwriters became twitchy about the uncertainties and put up the premiums. Eventually in 2002 the All England Club decided that insurance was too expensive, preferring to cover the risk themselves.

Now they have taken the sledgehammer approach of building a roof on the Centre Court, refusing to disclose the cost which has been estimated at £80 million.

Unlike the richest tennis tournament in world, African farmers cannot buy off climate change if the insurers won’t play ball. The UN-backed report acknowledges that this is the crunch question. Unfortunately, the corporate partner is Swiss Re, a discredited institution which nearly bankrupted itself through indulgence in credit default swaps.

We need more substantive commitment from the reinsurance industry before the index insurance idea can run.

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this article was first published by OneWorld UK

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