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INDEX-BASED PRODUCTS TRADITIONAL PRODUCTS 34 =4 PRODUCT Named peril crop insurance Multiple Peril Crop Insurance (MPCI) Area yield index insurance Weather Index Insurance (WII) SUMMARY • Specific perils Damage-based policy •Measure % damage in field *Agreed sums insured •Operated in private sector •Generally unsubsidized •Experience in private sector •All perils, few exclusions • Yield-based policy •Measure harvested yield •Compare to a % of average yield •High cost, often requires subsidy •Problematic for small farms *Concentrated in a few countries (USA, Canada, South Africa, Argentina) Many failed attempts *Farmers grouped into assigned areas (e.g., district, county) * MPCI but on area average yield All farmers in area treated equally •Effective where similar exposures affect whole districts *Largest program is NAIS (India) •Payouts based on weather station measurement •Index trigger, exit, increments set to expected loss of yield Can be complex to design *Limited experience to date PERILS *Main: hail, fire •Other: frost, freeze, wind •Suited to localized, independently occurring, sudden perils •May include quality loss • A wide list of perils •Difficult to exclude perils, as causes of loss cannot be identified *Includes management influences May include quality loss • Occasionally includes some price risk A wide list of perils •Difficult to exclude perils, as causes of loss cannot be identified •Includes management influences May include quality loss Occasionally includes some price risk •Main: rainfall deficit and excess; high, low, or prolonged temperatures •Other: high wind, sun Combinations of above ⚫Basis risk minimized for gradual events BENEFITS + Simple policy *Limited farmer details needed at point of sale •Transparent loss: assessment •Product experience -Manageable adverse selection and moral hazard (especially for hail) •More easily made into a "universal" product type +Limited technical adaptation required for different crops *Guarantees farmer production and income Type of insurance farmers typically want and understand •Indemnifies each farmer according to yield *No adverse selection, moral hazard, individual farmer loss adjustment *Low administrative costs Can address catastrophe perils affecting group Enrollment of farmers is easy. *Captures all causes of yield loss *No adverse selection, moral hazard, individual farmer loss adjustment Can address catastrophe perils affecting group •Transparent, objective Meteorological Service Data (MET) • Easier to reinsure CHALLENGES +Individual farmer loss assessment *Loss assessment cost in small farmer systems *Not suited to complex perills, espe- cially drought and pest •Individual farmer loss assessment, major loss adjustment task, impartial loss adjustment difficult Adverse selection (worst farmers benefit) *Moral hazard (exploitation of policy) +Major work to set up yield history for each farmer, poor data High premium and administrative cost + Not suited where farms are small *Local perils (e.g., hail) will not result in payout +Yield history at local district level often not available or reliable +Basis risk at local level depending on district area and peril Basis risk is key challenge *Setting up the index parameters is technically complex +Need good meteorological and agronomic data, crop modeling + Difficult to correlate damage for sudden-impact weather Source: matériel de formation de la Banque mondiale dans le domaine de la gestion du risque agricole

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