Expanding Insurance Coverage: Hybrid Index Solution for Small Farmers

Agriculture is significantly influenced by weather-related factors thus it particularly impacts farmers in developing nations who often lack effective risk management tools. Even though agricultural index insurance has offered solutions to cover the unexpected risks from weather conditions, traditional insurance challenges persist, such as missed payouts in satellite index systems and the high costs associated with yield assessments in Area Yield insurance indices. In response to these challenges, the Capstone team developed a strategy that aims to mitigate potential basis risk in satellite-based indices and reduce costs associated with area yield-based indices. 

The strategy leverages innovative triggers combining satellite data with local insights for more accurate yield assessments. By doing so, the team aimed to bridge the coverage gap for smallholder farmers, thereby reducing the risk of missed payouts and empowering farmers to secure their livelihoods effectively. The research underscored the importance of striking a balance between accuracy and cost-effectiveness to facilitate the widespread expansion of index insurance. Furthermore, the team's findings highlighted the complementary strengths of satellite data and local extension experts in assessing areas that require higher-average area yield index payouts. While satellite data may offer broader coverage, local extension experts excel in evaluating severity for the areas that need the most amount of payment, emphasizing the need for a collaborative approach that harnesses the strengths of both methods. 

This project was supported by Max T. Mauerman, Senior Staff Associate at Columbia University's International Research Institute for Climate and Society (IRI) and Dante Salazar Ballesteros, Staff Associate Financial Instruments Sector Team with IRI.