Index Insurance for Developing Country Agriculture: A Reassessment

Abstract

With uninsured risk representing a major hurdle to investment, productivity growth, and poverty reduction in developing country smallholder agriculture, index-based agricultural insurance has offered the promise of overcoming the hurdles of traditional indemnity-based insurance for this context. In spite of extensive experimentation, take-up has been disappointingly low without large and sustained subsidies. We show that existing constraints on take-up can partially be overcome using revised contract designs, advanced technology for better measurement, improved marketing, and better policy support. However, because index insurance is likely to remain expensive in that context, we suggest that improved index insurance be combined with stress tolerant seed varieties and new risk-oriented savings and credit products that build on the complementarities between what can be offered by index insurance and these other instruments to cope with shocks and manage risk.