Index insurance for developing countries: a primer

Over the past thirty years, countless index insurance pilot programs and studies have been implemented by researchers, agricultural ministries, and non-governmental agencies in a wide variety of settings throughout the developing world, using a wide variety of indices and index insurance designs. However, despite these efforts, a commercially sustainable and scalable index insurance scheme for poor smallholder farmers remains elusive. In this chapter, we provide a basic theoretical overview of how index insurance works ... and does not work. To this end, we present three models that expose the fundamental features of index insurance contracts, the tradeoffs that exist between them and alternative forms of risk management and their uses in supporting smallholder farmer access to agricultural credit. We also provide a short review of insights obtained from behavioral economics research on the demand for index insurance.