Agriculture is the dominant sector in the Ethiopian economy where 83% of the population fully depends on and more than 43% of the GDP is generated. This sector in turn is dominated by a subsistence farming where more than 95% is a rain fed farming of which more than 90% owned by a smallholder (mostly less than half hectar) poor farmers. These smallholder farmers are highly exposed to the negative impact of climate change mainly reflected in shortage of rainfall (draught) in this part of the continent.
The climate risk mitigation mechanisms existing in the country are more of informal traditional ways of risk sharing and risk smoothing mechanism. Whereas the covariant nature of the climate risk like
draught cannot be copped with this traditional mechanisms.
Therefore as an innovative means of market mechanism Nyala Insurance S.C. (NISCO) has introduced insurance products which can help in mitigating the impact of climate risk.
To this effect NISCO has developed two innovative insurance products namely Double Trigger Multiperil Crop Insurance (DTMPCI) in 2007 and Weather Index Crop Insurance (WICI) in 2009. The former uses weather data as a trigger and a benchmark based loss assessment for indemnification purpose while the WICI totally depends on data from nearby weather stations. WICI in found to be more simple in administration and transparent than any other crop insurance products, which can play a pivotal role in climate risk mitigation process.
However, index insurance is not a panacea for the overall agricultural risk management. Indeed in spite of all challenges related with data, infrastructure etc, NISCO believes that it can it can play a critical market-based role to sustainable agricultural growth in the rural areas of developing countries in general and in drought prone countries like Ethiopia in particular.