Abstract
The aim of most index-based insurance programs is to act as a social security mechanism and to provide defense against social and financial exclusion for people whose existing coping strategies are failing. For such schemes, insurance payouts do not depend on the individual losses but on an index which serves as a proxy for the losses. As proposed in this paper, also remote sensing data can be used for index-based insurance which gives additional advantages in comparison to traditional on-ground based indexed instruments. Furthermore, distinguishing between a promotion as well as protection level within such schemes is beneficial from a supply as well as demand side perspective and we suggest an approach how both can be simultaneously introduced within a remote sensing index based insurance framework. The applicability and usefulness of the approach is tested for smallhold farmers in North Shewa, Ethiopia. It is found that the use of remote sensing data is indeed a possible alternative to traditional weather based micro-insurance schemes which offers new ways to tackle current problems of such schemes from a supply side as well as demand side perspective.
Highlights
The aim of most micro-insurance programs is to act as a social security mechanism and to provide defense against social and financial exclusion for people whose existing coping strategies are failing (Mosley, 2009)
We presented an approach in which remote sensing data was used to design index-based insurance arrangements for small household farmers in a developing country taking explicitly protection as well as promotion dimensions into account
Given that a satisfactory relationship between indices based on remote sensing data and crop yield responses is established, it is possible to identify trigger points for claim payments, as is typically done with weather station based index-insurance products
Summary
The aim of most micro-insurance programs is to act as a social security mechanism and to provide defense against social and financial exclusion for people whose existing coping strategies are failing (Mosley, 2009). Micro-insurance should reduce the incidence of ‘‘poverty traps’’ by providing low-income households, farmers, and businesses with access to post-disaster liquidity and securing or rehabilitating their livelihoods and habitations (World Bank, 2009). Farmers especially face a variety of weather, market and production risks that make their incomes volatile from year to year, for example when crops are destroyed by drought or pest outbreaks. These risks are burdensome to the poor, including many smallholder farmers (Carter et al, 2006). In providing a more effective solution in the absence of adequate relief, index-based insurance for agriculture has emerged as a novel mechanism across the globe (Alderman and Haque, 2008). Index-based insurance involves writing contracts against specific perils that are defined and recorded at
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