Index Insurance: A Viable Solution for Irrigated Farming?

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“Product development is a continuous learning process. When it comes to index insurance for agriculture, product development in the Sri Lankan market has been a challenge, as agriculture here is dependent on dual sources of water: rainfall and irrigation. ‘Index Insurance: A Viable Solution for Irrigated Farming?’ is an attempt to capture our experience in developing a hybrid index insurance product to address the farmer’s needs in this context, with lessons for replication” (Authors).

Funded by the World Bank Group’s Global Index Insurance Facility (GIIF), the index insurance pilot is part of an ongoing project to improve the agri insurance schemes in Sri Lanka. This paper documents the practical experience in doing so, in a country like Sri Lanka, where agriculture is dependent on dual sources of water: rainfall and irrigation.

Most agriculture insurance programs in the developing world are indemnity insurance programs, better suited for large-scale farmers. In countries such as Sri Lanka, where smallholders are predominant, such products are difficult to administer. Index-based insurance, however, could provide a solution to this problem. However, dependence on a single trigger product (usually rainfall) may not serve some markets like Sri Lanka, where there is high dependence on irrigation for farming. Hence the need to develop robust insurance products considering hydrological droughts.

The pilot was carried out in two districts, Vavuniya and Anuradhapura. Vavuniya is a district in the dry zone, more dependent on rainfall – only two of its eight Agrarian Service Centers (ASCs) have access to irrigation from the only available major tank in the area. In contrast, Anuradhapura is one of the most irrigated agricultural areas in the country, having access to 11 major tanks and receiving water from the country’s main irrigation system as well. In both districts, some farmers have access to water from the irrigation system, making it possible for them to cultivate even during a drought.

The authors find that - the hybrid index product is better correlated to crop damage than the pure rainfall index for farmers with access to major irrigation. It is especially better at detecting the incidence and severity of actual losses. It is important to acknowledge that there may be other types of indices which can be used in combination with tank storage levels, such as a yield index and a vegetative index context, and their relevance in terms of costs and benefits can be compared. The experience to date in Sri Lanka suggests that index insurance can be successfully used in irrigation contexts with relevant improvements in product design, and the product is an innovative value proposition for smallholder farmers in Sri Lanka to build resilience against climate risks.

Full length paper can be accessed at: No 9055, Policy Research Working Paper Series from The World Bank