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Analysis of the future potential of index insurance in the West African Sahel using CMIP5 GCM results

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Abstract

Weather based index insurance is considered to be a potentially promising means of financial adaption to the challenges of climate change and variability; particularly for the agricultural sector in the developing world. However, comparatively little attention has been devoted to the analysis of the long-term viability of this adaptation mechanism in light of the interaction between changes in climate and the frequency of extreme events. Such changes in the frequency of extreme events are expected to have significant implications for the viability and pricing of index insurance over time. This question is analyzed in the context of hypothetical drought and flood index insurance contracts proposed for the West African Sahel using data from five Global Climate Models (GCMs) that were part of the Intergovernmental Panel on Climate Change’s (IPCC) 5th Coupled Model Inter-comparison Project (CMIP5). GCM derived trends in the mean and variance of the regional precipitation are integrated into a Monte Carlo simulation of the frequency of extreme seasonal drought and rainfall. Expected payout risk and the probability of 10 or more payouts in a 30-year window are modeled. The model results presented show significant pricing sensitivity to climate model parameters; particularly changes in the mean precipitation and strong multi-decadal variability. Further, within the Sahel region, there is a significant spatial heterogeneity between sub-regions. These findings imply that the utility and affordability of such index insurance contracts over time will be complex and heterogeneous over time and space.

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Acknowledgments

The author gratefully acknowledges the involved guidance of Dr. M. Neil Ward, valuable discussions with Drs. David Robinson and Asa Rennermalm, insightful commentary by the reviewers and the provision of hydrologic data by the Niger Basin Authority.

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Authors and Affiliations

  1. Princeton Environmental Institute, Princeton University, Princeton, NJ, USA

    Asher Siebert

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  1. Asher Siebert
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Correspondence to Asher Siebert.

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Siebert, A. Analysis of the future potential of index insurance in the West African Sahel using CMIP5 GCM results. Climatic Change 134, 15–28 (2016). https://doi.org/10.1007/s10584-015-1508-x

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