11 months ago
On a date
30 Aug 16’
ASSESSING AGRICULTURAL INDEX INSURANCE RELIABILITY
Index based insurance and risk-transfer schemes have existed for many years in the catastrophe and agriculture risk management worlds. Well known for their relative ease of construction and implementation, they offer rapid payouts post event, without many of the associated costs of claims adjusting as with loss or damage based mechanisms. Such mechanisms are particularly appealing for agriculture insurance, especially in low and middle income countries.
Progressive perils such as drought can be characterized by a weather-based index relatively easily as a convenient way of defining an event – e.g. x days with rainfall less than Y during a critical growing period. However, the issue of basis risk has always been a concern, but rarely quantified. Put simply, basis risk is the risk that an index insurance product does not pay when it should – primarily because whilst weather is related to yield, it is not a 100% correlation. Thus there may be years when farmers experience bad yields, but the index-based mechanism does not pay out, or conversely the farmer may experience good yields, and yet also receive payouts from the index.
Indexes, therefore, must be well designed in order to be reliable, and to minimise the basis risk. They must take into account the specifics of the agro-climatic zones and crop types and varieties in question. Different stakeholders will have different perspectives on the reliability of an index, e.g. farmers, donor organisations and private insurers will all have subjective viewpoints different to each other. Few studies exist on the reliability of index-based agriculture insurance mechanisms, in large part due to the challenge of insufficient historical data with which to compare payouts with actual yield performance.
A recent paper by the World Bank proposes two new indicators to measure index insurance reliability. The indicators are designed so they can be used without much prior technical knowledge. The indicators can be used to compare agricultural insurance products against a benchmark, compare one product’s value over time based on changes in indicators or compare different products with each other.
Posted 11 months ago by admin