How to Measure Whether Index Insurance Provides Reliable Protection
Agricultural index insurance offers the promise of an affordable and sustainable insurance product for farmers that can help reduce their vulnerability to aggregate agricultural shocks such as large-scale drought or flooding. However, index insuran...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/07/26578448/measure-whether-index-insurance-provides-reliable-protection http://hdl.handle.net/10986/24825 |
| Summary: | Agricultural index insurance offers the
promise of an affordable and sustainable insurance product
for farmers that can help reduce their vulnerability to
aggregate agricultural shocks such as large-scale drought or
flooding. However, index insurance provides claim payments
based on a trigger that is only imperfectly correlated with
losses. This implies that it carries basis risk: it may
provide claim payments in years when there are no losses,
and no claim payments in years when there are losses. The
impact of index insurance on poverty outcomes is highly
sensitive to the degree to which the product offers reliable
protection. Offering unreliable index insurance may lead to
high reputation risk for donors, governments, and the
private sector. This study proposes to measure the
reliability of index insurance in terms of two policy
objectives that stakeholders may have when offering index
insurance: the extent to which the insurance captures losses
caused by the peril covered by the contract (insured peril
basis risk) and the extent to which the insurance covers
losses from agricultural production (production smoothing
basis risk). For both types of basis risk two indicators are
proposed: the probability of catastrophic basis risk and
the catastrophic performance ratio. Donors, governments, and
insurers can use the proposed monitoring indicators without
much prior technical knowledge. Although the indicators
specifically focus on agricultural index insurance for
low-income farmers, they can be applied to any context where
payments are provided based on indices that are correlated
with losses. |
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