Index based insurance differs from many insurance policies in that payment is triggered by an external indicator. In the context of the agricultural industry, this index can track heat, rainfall or any other environmental factor affecting crops. On the occurrence of a particular defined event, a payment is made to all policy holders within a specified class, area or group. In contrast to more common forms of insurance policies, the payment is not assessed on an individual basis.
- The WINnERS index based insurance scheme was launched at the World Economic Forum in Davos earlier this year with the aim to provide 50,000 farmers in Tanzania with insurance cover and thereafter expand across sub-Saharan Africa by 2020.
- April this year, the Swedish start-up insurer BIMA raised $38.4 million to expand its micro-insurance products based on a mobile phone credit business model across emerging markets, including Africa. Partnerships between telecoms and insurance providers, such as the Safaricom/Changhamka partnership in Kenya, allow for high market penetration.
Index based policies are not without their risks.
- Payments are made only occasionally but on a large scale and triggers such as heatwaves, droughts and floods are difficult to predict more than a few days in advance.
- This poses a challenge to risk assessors and policy drafters to strike the right balance between covering profitability and ensuring policies are attractive; the external trigger must be considered carefully.
- While exceptionally heavy rains or heatwaves can be analysed with relative ease by reference to averages, it is far more difficult to assess the impact of a slow-onset drought on crops.
At what point is the payment triggered? Will this arrive all too late for the local farmer? As the climate varies month on month and across the continent, triggers would in turn need to vary throughout the year and across regions. These and other factors, such as dealing with electronic signatures and adequately knowing the identity and nature of the insured, are among the challenges to index based insurance and other innovative micro-insurance policies.
Index-Based Insurance Project Database
A compiled database of index-insurance related projects is now available on FARMD.