Crop Insurance as a Risk Management Strategy in Bangladesh

Box 3.1: Examples of Parametric or Index Insurance
Index products use any independent random variable measurement that is readily
observable, protected from tampering, and is highly correlated with agricultural or
livestock losses. Four examples are:
� Weather based index uses a specific amount of rainfall or a certain number of days
with temperature in a particular range as a trigger. If the trigger is struck a payment is
made. IT is in use in Morocco, Mexico and India.
� Area yield index uses the average crop yield in a country or particular jurisdiction as a
trigger. If an individual farmer has a yield less than the reference average, an
indemnity payment is made as a function of the degree of deviation from the norm. It
is in use in the USA, India, Brazil and Quebec, Canada.
� Satellite vegetative index uses satellite images to calculate the health of a pasture
based on ‘previous’ normal years and payment is made to the rancher based on degree
of deviation. It is in use in Alberta, Canada and Spain.
� Mortality rates of livestock: A yearly census of livestock is used as a reference point to
estimate ‘annual average death rates’ from yearly census comparing end of year to mid
year points. The trigger will be a certain pre-fixed percentage of average mortality.
When death rate surpasses the ‘trigger’ payment will be made. It isunder design in
Mongolia.
(Source: Skees et al. 2005)
Disadvantage of Area-Based Indexed Insurance
� It is crucial that reliable and verifiable data are available on weather patterns. There are
two aspects to this. First, there is a need for reliable historical data covering a period of at
least 30 to 40 years (daily observations). The availability and cost for obtaining such data
may be an important issue in several developing countries. Second, tamper-proof weather
stations must be established to ensure reliable readings on insured events. New hardware
systems, such as optical precipitation sensors, can eliminate any direct human
involvement in the recording process. Readings can also be verified by comparing with
adjacent stations or with remote sensing data taken from satellite images. At present, an
important constraint with satellite measurements of rainfall is that there is little history
compared to conventional measurements.
Table 3.6: Advantages and challenges of index insurance
Advantages Challenges
Less moral hazard
The indemnity does not depend on
the individual producer’s realized
yield
Basic risk
Without sufficient correlation between the index and actual
losses, index insurance is not an effective risk management
tool. This is mitigated by self-insurance of smaller basis risk
by the farmer; supplemental products underwritten by
private insurers; blending index insurance and rural finance;
and offering coverage only for extreme events
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