What are the different types of “crop” index insurance?

  • Area-yield index insurance: Area-yield index insurance was first developed in Sweden in the early 1950s and has been implemented in India since 1979 and in the United States since 1993. With this type of insurance, the indemnity is based on the realized (harvested) average yield of an area such as a county or district. The insured yield is established as a percentage of the average yield for the area (typically 50–90 percent of the area average yield). An indemnity is paid if the realized average yield for the area is less than the insured yield, regardless of the actual yield on a policyholder’s farm. This type of index insurance requires historical area yield data on which the normal average yield and insured yield can be established. (See GIIF partner Kilimo Salama/Syngenta in Africa.)

  • Crop Weather index insurance: With this type of insurance, the indemnity is based on realizations of a specific weather parameter measured over a pre-specified period of time at a particular weather station or for a given satellite grid. The insurance can be structured to protect against index deviations that are  expected to cause crop losses. An indemnity is paid whenever the realized value of the index exceeds or falls short of a pre-specified threshold. The indemnity is calculated based on a pre-agreed sum insured per unit of the index (for example, dollars/millimeter of rainfall). It has been commercially underwritten since 2002. (See example : Drought index-based insurance for groundnut farmers in Senegal; GIIF partners Kilimo Salama, MicroEnsure, PlaNet Guarantee.)

  • Normalized difference vegetation index (NDVI)/satellite index insurance: With this type of insurance, indices are constructed using time-series remote sensing imagery. For example, there are applications of false color infrared waveband to pasture index insurance, where the payout is based on a normalized difference vegetation index, which relates moisture deficit to pasture degradation. It has been applied to pasture in a few countries. (See examples:  NDVI index-based insurance for Livestock (Cattle) Producers in Uruguay.)