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Index Based Agricultural Insurance in Developing Countries: Feasibility, Scalability and Sustainability

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Publication date
Number of Pages
Type of Publication:
Focus Region:
Focus Topic:
Climate / Weather / Environment
Type of Risk:
Weather & Climate related
Type of Risk Managment Option:
Risk transfer
Vincent H. Smith, Myles Watt
Bill and Melinda Gates Foundation

This report begins with a brief discussion of risk and, in general terms, the willingness of farm households to incur costs to avoid adverse income and food availability outcomes.  In the following section, we describe the landscape for index insurance: what products have been implemented or proposed, how they have been structured, and the challenges they pose for private insurers and public agencies in terms of their practical implementation.  We then examine the existing evidence on farmers’ willingness to pay for agricultural insurance.  Two areas of analysis are relevant in this context.  Only a few studies have directly examined how much farmers are willing to pay for agricultural insurance.  Two of those studies examine insurance contracts in which indemnities are directly linked to each farm’s yield or revenue losses.  Two other studies examine willingness to pay for rainfall index products in developing counties.  A second and larger set of studies examines the demand for crop insurance and provides indirect insights about when farmers are more or less likely to purchase agricultural insurance.   Most of these studies have also examined the demand for multiple peril insurance rather than index insurance.   Next, we explore the issue of basis risk for index insurance and the extent to which it is likely to reduce a farmer’s willingness to pay for index based coverage as opposed to multiple peril coverage.   Scalability — which is closely linked to farmers’ willingness to pay for insurance and the cost of providing that insurance — is then investigated.  Sustainability and administrative costs of providing weather and other index insurance products are also discussed, together with potential synergies and cost savings associated with linking index insurance to other financial services, agricultural input supplies, or other elements of the agricultural production and marketing chain.