Insurance instruments that provide economic security against droughts, floods, tropical cyclones and other weather extremes have emerged as an opportunity for developing countries in their concurrent efforts to reduce their vulnerability to weather variability and adapt to climate change. Yet, issues remain concerning the viability of insurance systems serving the most vulnerable and their potential role in an adaptation regime. Many pilot projects are underway, that can inform debate on these issues. This discussion builds on a recent drought micro-insurance project for subsistence farmers in Malawi, which by enabling farmers to access higher yield seeds, raises their productivity and decreases their vulnerability to climate change. Beyond this ‘developmental’ gain from insurance we show that micro-insurance in Malawi can directly promote adaptation by actually reducing crop losses from drought. This is possible by incorporating seasonal rainfall forecasts, which are strongly related to El Niño-Southern Oscillation (ENSO), into insurance pricing. This paper describes the Malawi pilot program, its challenges after the first operational year and the potential benefits of ENSO-based pricing. The paper concludes by discussing the outlook for micro-insurance in the emerging climate. Copyright © 2010 John Wiley & Sons, Ltd.

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