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How Quality Agricultural Index Insurance Shifts the Dynamics of Resilience

Agricultural index insurance has shown significant promise as a development tool to promote resilience and to accelerate the end of the need for aid. However, 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 MRR 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 (see links below) 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. 

Risk is a constant fact of life for small-scale agricultural families around the world. Families in developing economies often take precautions to protect themselves against drought and other risks. For example, farmers may plant traditional varieties of seeds saved from the year before to keep from losing any money spent on improved seeds. Pastoralists may keep larger herds as a hedge against losing some during a drought.

While these kinds of strategies 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 families poor across generations. 

A number of development interventions that focus on helping families to build assets or skills do help them to make progress toward greater prosperity. Unfortunately, that progress is often lost in the event of a serious shock. The 2020 COVID-19 pandemic is one example of a global shock that was completely unanticipated. 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.

Risk, Resilience and Index Insurance

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

Index insurance promotes resilience by playing an important role in shifting the dynamics of poverty. 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

A key factor that can shift these dynamics is the opportunity to invest for higher productivity. For farmers this could mean improved seeds and fertilizers. For pastoralists it could mean veterinary care to keep their livestock healthy. If there is always a chance of losing everything in the next drought, these additional costs of investing are too risky.

Insurance shifts this dynamic in two important ways. First, it provides a safety net so families are immediately able to withstand a shock. Second, when a family knows they are protected they tend to invest to improve their assets and income above where they began.

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. This is the core idea of Resilience+, the idea that drives the MRR Innovation Lab’s research program.

Field-trials of Index Insurance for Development

I4 researchers and others have conducted randomized field trials that quantified the impacts index insurance has both on investments and on overall well-being. Recent work has also found evidence that when rural families are protected by insurance they invest more for productivity—Resilience+.

An I4 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

I4 also supported an International Food Policy Research Institute (IFPRI) randomized evaluation of index insurance in Bangladesh. The results 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 I4, 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.

Most recently, a project in Mozambique and Tanzania bundled CIMMYT drought-tolerant maize seeds with index insurance for a seed-replacement guarantee. Farmers who purchased the insured seeds had 12 percent higher yields in normal years. In the year after severe drought and seed replacements, these farmers nearly doubled their investments in improved seeds and realized yields double those of their neighbors who lacked access to the guaranteed seeds and who also struggled to return to their pre-drought level of productivity.

Persistent Struggles Scaling Index Insurance

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 describes the various types of indices for agricultural index insurance and how each works.

The Feed the Future Innovation Lab for Markets, Risk & Resilience at UC Davis generates and transfers knowledge and innovations that promote resilience and empower rural families, communities and markets to share in inclusive agricultural growth.