Key points are not available for this paper at this time.
This report presents project products to the Commodity Risk Management Group of the World Bank for the development and evaluation of index insurance contracts for smallholder farmers in Malawi, Tanzania, and Kenya. The development of some products we are providing was supported at no cost by the NSF-funded Center for Research on Environmental Decisions. Index insurance is a relatively new weather risk management tool. While traditional insurance insures against crop failure, index insurance insures for a specific event or risk, such as rainfall deficits. The index insurance can be more cost effective since there is no need for in-field assessment of damage because payouts are triggered by weather data directly. Index insurance addresses two problems associated with traditional crop insurance: moral hazard (incentives for a farmer to let a crop die in order to get an insurance payout) and adverse selection (in which insurance is priced based on the risks of the entire population but only the most vulnerable farmers purchase insurance). However, index insurance only provides partial protection and is therefore only one part of a complete risk management package. It is critical that the client have a comprehensive understanding of exactly what risks are covered (and what risks are not covered) by the index product so that clients can effectively use the insurance as a part of their risk management system. Products must be transparent and completely understandable to the client or they will not be able to play their proper role.
Osgood et al. (Mon,) studied this question.