Developing index-based insurance for agriculture in developing countries

Publication´s abstract

The paper presents the main lessons from pilot programmes in several countries, and examines the prospects for extending and scaling up index-based weather insurance products in developing economies to promote sustainable development.

The paper discusses the following topics:

• Existing weather risk-management instruments
• Risk assessment
• Structuring a risk-management solution
• Implementation of risk-management solutions
• Pre-requisites for scalability and sustainability
• Market development
• Insurance pricing overview
• Seven steps to developing a weather insurance pilot

Textboxes provide information about existing schemes:

• Index-based rainfall insurance in India (ICICI Lombard / BASIX)
• Index-based rainfall insurance in Malawi

The conclusions can be summarised as follows:

• Index-based weather insurance instruments can provide a viable alternative to traditional insurance instruments for agriculture.
• They potentially offer advantages to households, businesses, and governments in developing countries (creation of income-smoothing opportunities for farmers, better access to credit).
• Issues relating to farmer education such as basis risk needed to be increased. When farmers do not understand the underlying foundation of contract-indexing, this can lead to dissatisfaction with the scheme.
• There is a need to raise awareness of the limited role that weather insurance has in managing the larger spectrum of risks farmers face and to control those risks as much as possible
• Organisational capacity of the participating stakeholders is crucial
• The main limitations of index-based weather insurance contracts are that they only cover a portion of the exogenous risks facing farmers. Price fluctuations and other risks such as unmanageable pests or availability of inputs cannot be managed with such products.
• Basis risk is a key limitation
• Reaching many farmers with products to manage weather risks requires infrastructure in the form of more and better weather stations and higher-quality weather data; investment to ensure that capacity-building and training can be delivered to local stakeholders; and ensuring that a sound regulatory environment exists to foster market development.