Developing Rainfall-Based Index Insurance in Morocco

Abstract

Almost 90 percent of Moroccan agriculture is not irrigated, and since most of Morocco's crops depend on adequate rainfall, yields and production vary widely. A drought insurance program based on rainfall index contracts is feasible in parts of Morocco and could significantly benefit its farmers.

Cereal production accounts for about 70 percent of all agricultural land in Morocco. Cereal producer prices, influenced by the government, are higher than world prices. Production is divided into six broad agroclimatic zones. About half of cereal production is concentrated in the favorable and intermediate zones; the rest occurs mostly in less favorable (arid and semi-arid) zones, with average annual rainfall below 450 millimeters.

Skees and colleagues assess the feasibility of rainfall-based index insurance to provide effective, low-cost drought insurance for Moroccan farmers and rural dwellers. Their analysis focuses on Morocco's three main cereal crops - hard wheat, soft wheat, and barley - using data on annual production and planting from 1978-99. Maize is included in some of the analysis.

The benefits of this program over the traditional insurance scheme are that it minimizes the risk of moral hazard and adverse selection and promotes a streamlined pay-out process. These features make the program more attractive to international re-insurers and investors in capital markets.

A rainfall-indexed insurance product is feasible in Morocco, where the statistical correlation between rainfall and cereal revenues is rather strong in 17 provinces in the more favorable agroclimatic zones. Proportional rainfall insurance contracts would pay the insured an amount based on the shortfall in actual rainfall during a set period compared with the trigger rainfall. The contracts could be purchased in any amount, allowing farmers to insure the full amount of their expected revenue if they wish.

This paper - a joint product of Private Sector Development and Finance Group, Middle East and North Africa Region; Rural Development, Development Research Group; and Financial Sector Department - is part of a larger effort in the Bank to analyze the feasibility of weather-based index insurance markets in developing countries. The authors may be contacted at [e-mail], [e-mail], [e-mail], or [e-mail].