“ensuring Agricultural Resilience: Crop Insurance Benefits In Europe” – Covering agricultural indices is a very promising risk management tool to promote sustainable development and resilience. Index insurance can help smallholder farmers and ranchers increase their resilience to climate shocks such as drought or floods, while encouraging investments in productivity that pave the way to prosperity in good years.
However, effectively implementing agricultural index insurance has proven complex. Agricultural index insurance interventions require collaboration among many public and private sector partners. Markets have also been affected by expensive but poor quality contracts and insufficient consumer education, leading to low levels of adoption by individual farmers.
“ensuring Agricultural Resilience: Crop Insurance Benefits In Europe”
Coverage of the agricultural index and our understanding of how it can be used as a sustainable development tool has grown significantly since the first interventions in the 1970s. A growing body of research suggests that agricultural index insurance will be a An essential risk management tool for key resilience-based initiatives, including the G7 InsuResilience initiative, which aims to extend insurance coverage to an additional 400 million households globally by 2020.
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The MRR Innovation Lab’s Index Insurance Innovation Initiative (I4) is at the forefront of research into better agricultural index insurance contracts and interventions around the world. This article provides a brief introduction to agricultural index insurance, including how it works and an overview of its great promise as a risk management tool to promote sustainable development and risk.
Agricultural index insurance is based on payments indexed to easily measurable factors such as rainfall or average yields that predict individual losses. Index insurance is attractive as a risk management tool in developing countries, where the fixed costs of verifying claims for large numbers of small farms make traditional insurance prohibitively expensive.
Conventional insurance (left) pays individual farmers for their verified losses. Index insurance (right) pays all insured farmers in an area the same amount based on an estimate of average losses. Changes in payments illustrate risk, that is, the possibility that index insurance payments will be more or less than the actual individual loss.
In addition to its high costs, agricultural index insurance solves two major problems of traditional insurance: adverse selection and moral hazard. An example of adverse selection in the agricultural sector is where farmers most likely to suffer losses are the only ones to purchase insurance. An example of moral hazard is where covered farmers reduce their efforts or forgo their income for the specific purpose of obtaining insurance premiums. Index insurance overcomes adverse selection and moral hazard because the index is based on factors that no one can influence.
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The most common types of indicators (plural of “index”) are average surface productivity, growing vegetation (NDVI), and precipitation. Each of these indicators can statistically predict crop or livestock losses for an individual farmer with varying degrees of accuracy and at different costs. While areal productivity indices have fixed costs that vary depending on the size of the area measured, NDVI and precipitation can be measured remotely, allowing for greater accuracy without increasing costs.
This highlights a disadvantage of index hedging, namely risk. the difference between the index assessment of individual farm losses and the farmer’s actual losses. With index insurance, there is always the possibility that an individual farmer who suffers damage will not receive the insurance premium. It is also always possible that a farmer who has had a year without losses will be compensated. In both cases, the index insurance contract fails.
In a way, risk is a trade-off to avoid having to verify individual losses. Index insurance always carries risks, because the area average conditions index will not necessarily cover the conditions of each individual parcel. One of the challenges for researchers is to develop more accurate indicators to better predict individual losses at lower cost, and to design better contracts that include security procedures so that farmers who do not receive compensation remain protected. .
Agricultural index insurance strengthens agriculture in developing countries by acting as a safety net in times of disaster and enabling greater investment in productivity. These two benefits combined – a safety net in bad years and higher incomes in good years – explain why agricultural index insurance can have a disproportionately greater impact than other development interventions.
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Drought-tolerant hybrid corn seeds, such as those included in the AMA Innovation Lab’s agricultural index insurance pilot in Tanzania, can better withstand drought while providing significant productive benefits from hybrid vigor.
Agricultural index insurance differs from other development interventions in the way it mitigates risks that pose barriers to investment in productivity. All small farmers and shepherds insure themselves against bad weather and other hazards. For example, some choose traditional varieties from seeds saved from previous seasons, rather than hybrids which can triple their yield but must be purchased each season.
Limiting investments is one way to limit losses in the event of a disaster. The question here is how much this self-insurance strategy costs already struggling families and how many opportunities are lost to protect a critical food source. Development economists who study the effects of insurance on the agricultural index describe increased investments in productivity as “frontal” effects. These antecedent effects come from the decisions of the farmer or shepherd who are aware of the insurance coverage.
A limited but growing literature reveals that interventions with good agricultural indicators have significant ex ante effects. A recent intervention with cotton producers in Mali and Burkina Faso measured the extent to which the presence of insurance increases investment in productivity. The impact was even more pronounced in Mali, where an estimated insurance cost of US$48 generated additional cotton plantings worth around US$300 at harvest, with a cost-benefit ratio of 6.25.
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In addition to antecedent effects, research has found that agricultural index insurance has strong ex post effects as a safety net, particularly in the case of the Kenya Livestock Index Insurance (IBLI) program for pastoralists in Kenya and from Ethiopia. A 2013 evaluation first conducted in 2010 by the International Livestock Research Institute (ILRI) with support from the AMA Future Feed Innovation Lab found that insured households were 36 percent less likely to sell livestock to cope. Insured families were also 25 percent less likely to cut back on their meals than uninsured families.
Despite recent rapid growth in government and donor investment in sector development, not all agricultural index insurance contracts have the potential to leave farmers better off than if they had no insurance of the All. The quality of index insurance products available in developing economies is unregulated, exposing vulnerable households to unnecessary risks. Poor quality products that fail farmers also affect markets, which allow for better products later.
While farmers considering agricultural index insurance have no way of knowing whether their payments will translate into real disaster protection, products with similar hidden quality levels come with third-party certifications. In almost all countries, seed companies must submit new varieties to national germination tests to obtain government quality certificates. Electrical products such as toasters and televisions are UL certified globally to meet industry safety standards.
The AMA Feeding the Future Innovation Lab has developed a Minimum Quality Standard (MQS) that defines an objective measure of the quality of agricultural index insurance contracts that can be accepted for product certification worldwide. MQS easily compares the value of an indexed insurance contract over time, without insurance or equivalent cash conversion.
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In addition to setting a minimum quality standard, the MQS can also be used to determine whether an agricultural index insurance contract is a cost-effective way to support farmer welfare compared to other possible types of support. From the perspective of a donor or government considering subsidizing agricultural index insurance, any index insurance contract should have greater potential for income stability, dollar for dollar, than an equivalent direct cash transfer. .
Uninsured risks for small farmers also affect local and regional economies that depend on the success of agriculture. Effective risk management tools can help stabilize the livelihoods of smallholder farmers and promote broader agricultural and economic growth.
Research and opportunities for more accurate agricultural index security indicators have increased significantly, particularly in recent years with advances in remote sensing and satellite technology. With more accurate indicators, risks in agricultural index insurance markets will continue to decrease. This could have a significant impact on underwriting, as research has shown that the main reason farmers do not choose to purchase insurance is its high cost.
Satellite measurements taken at 250 m resolution can miss variations in small plots of agricultural land. The accuracy of measurements taken at 5 meters can improve the ability of the agricultural insurance index to predict actual crop losses. The AMA’s Feed the Future innovation laboratory tests very precise indicators in order to improve the quality of agricultural index insurance contracts.
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Index insurance can also play an important role in aid budgets that increasingly focus on resilience and emergency relief. As the risks of climate shocks are expected to increase, national social protection budgets will struggle to keep pace.
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