How Quality Agricultural Index Insurance Shifts the Dynamics of Resilience

August 7, 2018


Pastoralist receiving an index insurance policy
Photo:Feed the Future Innovation Lab for Assets and Market Access

Agricultural index insurance has shown significant promise as a development tool to promote resilience and to accelerate the end of the need for aid. Feed the Future Innovation Lab for Assets and Market Access (AMA) researchers have found benefits that include increased health and well-being among pastoralists in Kenya and significantly increased cash crop investments for cotton farmers in Mali and Burkina Faso.  

While these kinds of benefits can promote food security and resilience, effectively implementing agricultural index insurance in developing economies around the world has been a challenge. Markets have struggled with expensive but poor quality contracts and low levels of adoption by farmers. There are also no existing regulations for index insurance quality.

The Innovation Lab’s Index Insurance Innovation Initiative (I4) is at the leading edge of research to improve agricultural index insurance contracts and interventions worldwide. This post is part of a five-part series in partnership with Marketlinks that provides an introduction to agricultural index insurance, including its promise and pitfalls, recent innovations, and its place in broader efforts toward economic development and resilience. To read the first post, click here

Small-scale farmers in developing economies do have ways to protect themselves against weather and other risks without insurance. One common way is to plant traditional varieties of seeds saved from the year before to keep from losing any money spent on improved seeds.

While this kind of strategy can help households safeguard their primary source of food, an important question is just how much it costs them in long-term resilience. These kinds of decisions are a window into the dynamics that keep struggling households poor across generations. 

Quality agricultural index insurance can play a valuable role in shifting the dynamics of poverty and resilience. These dynamics describe how households move up and down through different states of well-being. They largely depend on three main factors: 

  1. assets, such as cash, land, tools, or livestock
  2. human capability, like health, knowledge, and education or physical capability
  3. unexpected shocks from the weather, injury or illness, conflict or macroeconomic failure

Development interventions that focus only on assets or human capability can help people make progress toward greater prosperity, but often that progress is lost in the event of a serious shock. Emergency aid and contingent transfers help households stay fed in these dire circumstances but on their own do not proactively shift the dynamics of resilience.

Quality agricultural index insurance is a unique development intervention that can proactively promote and support long-term resilience. This is true for individual households but also for their communities, local economies, and even nations

The difference between quality index insurance and other interventions is that the presence of insurance shifts how households tend to invest in productivity. While farmers facing a high risk of a shock tend to underinvest, research has established that when farmers know they are protected by insurance they invest more in productivity. 

Both benefits together — a safety net in bad years and higher income in good ones — are how agricultural index insurance can generate significantly greater long-term resilience than other development interventions. AMA Innovation Lab researchers and others have actually quantified these impacts, both on investments and on overall well-being.

A recent AMA Innovation Lab randomized intervention among cotton farmers in Mali and Burkina Faso measured just how much the presence of insurance increased investments in productivity. In Mali, the impact was most striking, with an estimated US $48 cost of insurance generating additional cotton cultivation worth roughly $300 at harvest for a cost/benefit ratio of 6.25

The AMA Innovation Lab’s Index Insurance Innovation Initiative also supported an International Food Policy Research Institute (IFPRI) randomized evaluation of index insurance in Bangladesh. The IFPRI study showed that insured farmers invested 23 percent more on fertilizers than they would have without insurance and increased their investments in irrigation — a step to extend resilience to drought — by roughly 25 percent.

One of the clearest results for index insurance as a safety net comes from the Index-based Livestock Insurance program in Kenya. First piloted in 2010 by the International Livestock Research Institute (ILRI) with support from the AMA Innovation Lab, a 2013 randomized evaluation found insured households were 36 percent less likely than the non-insured to sell livestock as a way to cope. Insured households were also 25 percent less likely to reduce meals than non-insured households.

These positive impacts do show index insurance’s potential, but implementation remains a challenge to broadly scaling successful interventions. One of these is that few private sector companies have been able to broadly and sustainably deliver a quality contract. Markets also still struggle with low rates of adoption. 

These are only two of many questions and challenges if agricultural index insurance will achieve its broadest impact. The next post in this series will describe the various types of indices for agricultural index insurance and how each works.

The Feed the Future Innovation Lab for Assets and Market Access at UC Davis conducts and supports research on policies and programs designed to help poor and smallholder farmers worldwide to manage risk, adopt productive technologies, and take an active part in economic growth.