Crop insurance is a key element to increase the resilience of farmers, particularly small-scale farmers in countries highly exposed to the impact of climate change. Unlike traditional crop insurance that attempts to measure individual farm yields or revenues, index insurance makes use of variables exogenous to the individual policy-holder which have a strong correlation to losses. A major challenge in designing an index insurance product is minimizing basis risk, i.e., the potential mismatch between index triggered payouts and actual losses.
The objective of this project is to develop, on the basis of the WII and AYII, a hybrid solution, namely the Weather Area Index Insurance (WAII), an index that on one hand will significantly improve the WII, and on the other hand will streamline the AYII. The reasons behind this new index are:
- WII is exclusively based on rainfall data, hence not considering when, where and how much crop area have been effectively planted and the seasonal phenological crop development. To overcome to this critical problem usually nominal cropping calendars are used, in the best case complemented by sporadic time-consuming field visits. This inefficient solution creates a high level of uncertainty in payouts and high moral hazard.
- AYII, as applied in RIICE, is doubtless an advanced and complete insurance index solution. However, yield estimation requires a plant growth simulation model specific to each crop (which also relies on soil conditions and agronomic practices). In essence, in those countries where RIICE is operated by the government, it acts as an incentive for the insurance industry to adopt AYII. Conversely, in new geographies, insurance companies tend to shy away from such solution because a calibration period of few years is needed. That is, an AYII solution should rather be understood as a long-term objective and not the starting point for developing insurance products for small-scale farmers when stepping into a new geography.