Risk is extremely costly in low-income agricultural economies, prompting people to shy away from potentially higher-return activities or pursue defensive strategies that undermine accumulation of productive assets.
The problem is compounded by the fact that risk constrains the development of rural financial markets, making it that much harder for small farmers to adopt new technologies or enter new markets.
While many feel that index insurance could be an effective tool to alter poverty dynamics, there is still much to learn about its effectiveness in practice.
Through the Index Insurance Innovation Initiative (I4) research activity, USAID is pursuing a learning agenda around specific issues related to the effective use of index insurance as a development tool in developing country contexts.
These include issues around appropriate design, effective outreach and education, and the appropriate risk layering and distribution channels—including interlinking insurance with financial products.
The I4 currently has seven pilot activities including the following:
- Area-based yield insurance for small-scale Peruvian cotton farmers, entering its third year of sales
- Index-based livestock insurance for northern Kenyan pastoralists: a satellite-based insurance contract entering its second year of sales
- Group insurance for cotton producers in Mali: an area-based yield index to insure joint liability credit for cotton farmers
- Index-based livestock insurance, Adaptation and Innovations for Ethiopia: a satellite-based index for insuring livestock for pastoralists that will explicitly model and price climate-change-induced changes in risk (funded by the Gulf Cooperation Council)
- Integrating generic weather index products with group-based savings and loans, piloting products in two countries: flood insurance in Bangladesh and drought and frost insurance in Ethiopia
- Index-based weather insurance for coffee cooperatives in Guatemala: weather-based index insurance for small coffee producers
- Interlinking weather index insurance with credit to alleviate market failures and improve agricultural productivity in rural Ethiopia: a rainfall-based index mapped to agro-ecological zones for crops
Each of these activities is implemented through a partnership between the researchers and private sector partners—local insurance companies, local financial institutions or NGOs, and international reinsurers. Rigorous impact evaluation and capacity building are built into each activity. We are also grateful to the International Finance Corporation’s Global Index Insurance Initiative (GIIF) for their participation in the northern Kenya pilot.
Taking insurance to scale will ultimately be the responsibility of the private sector partners, but could be supported in conjunction with agricultural development activities. We have already seen interest and early efforts of some of our local insurance partners (i.e. in Peru and Kenya) to adapt and roll out similar products to those in the pilots. However, in most countries capacity building among local institutions remains a critical requisite.
(Source – http://www.feedthefuture.gov/model/index-insurance-innovation-initiative-i4)