Developing Index-Based Insurance for Agriculture in Developing Countries

The spectrum of risks that affect the income of agricultural producers and agribusinesses is quite broad. The two predominant risks are: price risk, reflecting variations in market prices for agricultural commodities and production inputs; and production risk, which encompasses variations in the volume or quality of the commodity produced. This note focuses on one of the most pervasive production risks, weather, which impacts all aspects of the agricultural supply chain, particularly in economies based on rain-fed agriculture. Even with the introduction of new crop varieties, production technology such as irrigation, and new management practices that offer the potential to increase yields and improve resistance to weather perils, the majority of agriculture in developing countries remains highly susceptible to extreme, uncontrollable weather events that can severely impact both quality and yield of a crop. Such events include excessive or insufficient rainfall and extreme temperatures.