Innovations in Index Insurance: Weathering the Storm

With support from DFID and other donors beginning in 2010, IFPRI assessed how to improve the potential of index insurance to enhance the resilience of smallholder farmers. Risk is part of everyday life for many of the world’s poorest households, and uninsured risks can pose considerable costs to current and future welfare. Thus, the lack of mechanisms for ensuring resilience, including functioning insurance markets, exacerbates poverty traps for many households in the developing world. Weather-indexed insurance products are one effective solution to this problem. They have the potential to help mitigate the impact of uncertain rainfall on the incomes of the rural poor. IFPRI has been helping design and evaluate index insurance products to assist farmers in mitigating the impact and managing the risks associated with severe weather and resulting crop loss. This effort continues to have positive results, and shows that investing in low-cost, simple, and flexible insurance is highly beneficial to farmers’ welfare.

The project developed simple and flexible products that are easy for smallholder farmers to understand and use. In addition, researchers examined how complementary interventions can improve the demand for and welfare impacts of these products. In Bangladesh and Ethiopia, for example, index insurance was combined with group savings and lending and with non-index insurance products. In India, insurance training was pooled with investments in weather station infrastructure. And after demand rose in Uruguay for flexible index insurance products, the insurance product IFPRI introduced in the country is now commercially available for horticultural farmers in various regions, while the government has committed additional resources to provide discounts on premiums for basic coverage.