The Potential for Scale and Sustainability in Weather Index Insurance

THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE
FOR AGRICULTURE AND RURAL LIVELIHOODS
A number of key challenges remain for index insurance, including:
• Designing products that balance meaningful coverage with an affordable premium;
• Minimizing basis risk;
• Securing delivery channels for product distribution;
• Expanding the limited target market (agricultural borrowers at state banks are required
to buy national insurance);
• Creating new indices that blend the quick payouts of index insurance with the more
accurate payouts and lower basis risk of area-based insurance; and
• Using technology that more accurately captures weather events and trends, such as the
Normalized Deviation Vegetation Index (NDVI), which is derived from satellite measures
of ‘greenness’ corresponding to the level of photosynthesis on the ground.
In terms of replicability and scalability, the potential to apply the contract farming model to
other crops and value chains, linked to an index insurance product, seems great. Farmers
integrated into a value chain have a greater potential for sustained income growth and
increases in their quality of life. This can also better position them to take on higher-risk
income-generating opportunities that require greater upfront investment: the insurance can
play a key role in hedging these investments against weather shocks.
ANNEX
83