Index Insurance Forum

Why does the design of a high-quality agricultural index product require a good understanding of the agricultural cycle?

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Historically, the first index insurance design dates back to 1920 when Indian economist Chakravarti envisaged a rainfall insurance product in which claim payments would be due if the total rainfall during a season was less than a given threshold. However, indices today are highly tailored to reflect the phenological stages of crop growth and therefore require a deep understanding of the agricultural cycle. For instance, an index needs to capture that even if total seasonal rainfall is high, a short dry spell at a particular moment of the crop growth can trigger large crop losses. Building a high quality index allows an insurer to reduce basis risk (see What is basis risk?).
 
Below is an example of a three phase drought contract used in the design of index insurance in Senegal.
 
Three phase drought contract used in the design of index insurance
 
 
Three phase drought contract used in the design of index insurance