Index insurance is a relatively new but innovative approach to insurance provision that pays out benefits on the basis of a predetermined index (e.g. rainfall level) for loss of assets and investments, primarily working capital, resulting from weather and catastrophic events. Because index insurance doesn't necessarily require the traditional services of insurance claims assessors, it allows for the claims settlement processes to be quicker and more objective.
Before the start of the insurance period, a statistical index is developed. The index measures deviations from the normal level of parameters such as rainfall, temperature, earthquake magnitude, wind speed, crop yield and livestock mortality rates.
Insurance is important for development because uninsured losses lock vulnerable populations in a vicious cycle of destitution. Unfortunately, agricultural insurance and disaster insurance are either unavailable or prohibitively expensive in many developing countries. Combined with other risk management solutions such as extension services, adequate farm management and quality farming inputs, index insurance can be an appropriate solution to overcome these obstacles.