Climate index insurance
Agricultural cover paying an indemnity based on a measurable climate index, such as rainfall, rather than on assessed loss.
Climate index insurance is a cover, mainly agricultural, whose indemnification is triggered by a measurable climate index, rainfall deficit or excess, temperature, satellite vegetation index, rather than by assessing the loss actually suffered on each farm. This parametric mechanism allows quick, low-management-cost indemnification of a multitude of dispersed smallholder farmers, for whom individual loss adjustment would be economically impossible. Widely used in emerging markets to protect crops against drought, it relies on increasingly precise meteorological and satellite data. Its limitation is basis risk: the index may not faithfully reflect a given farmer's loss, who may suffer damage without a trigger, or the reverse. The quality of index design and its correlation with actual yields determine the protective effectiveness and the uptake by the target populations.
Textbook case: a rainfall index below a critical threshold triggers the automatic payment of an indemnity to insured farmers, without individual crop assessment.
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