Peril Mismatch in Index Insurance Design
Observational StudyReview
Index insurance products designed around a single peril like rainfall deficit fail when the dominant localized crop hazards faced by smallholders are un-indexed perils like frost or flooding.
Picture this
Imagine buying a flood insurance policy for a seaside home when the main threat destroying local houses is severe wildfire. The policy provides zero payouts when a wildfire hits because the insurance gauge only monitors ocean water levels.
What the evidence says
36 out of 120 Kebeles (30%) were excluded from the study because rainfall deficit was not the primary hazard, as frost and flooding predominated and lacked suitable index data.
- Who was studied
- 120 Kebeles initially selected across 4 zones (North Shewa, West Gojam, South Wello, North Wello) in Amhara, Ethiopia.
- How
- Agro-climatic hazard auditing and site selection mapping during pilot program implementation.
What to do
Conduct pre-implementation agro-climatic hazard assessments across target communities to verify that the insured weather metric matches the dominant local driver of crop loss.
From the source
"...while the hypothesis was that the main risk faced by households in the nonrandomly selected kebeles was rainfall deficit, it turned out that in only two thirds of the villages where the study was implemented, the main risk faced was rainfall deficit."
Productivity, credit, risk, and the demand for weather index insurance in smallholder agriculture in Ethiopia