New Approaches to Crop Yield Insurance in Developing Countries

This paper explores government intervention in agricultural risk markets and discusses new approaches to risk sharing with limited government involvement. It builds the case for introducing negotiable state-contingent contracts settled on area crop yield estimates or locally appropriate weather indices. These instruments could replace traditional crop insurance at a lower cost to government while meeting the risk management needs of a wider clientele. The paper:

• Focuses on production risks, and reviews the experience with public crop insurance programs;
  • Recognises their inherent limitations and inability to help many of the rural poor;
• Proposes simple area-based index insurance options to satisfy the risk management needs of a much wider clientele or rural dwellers;
• Asks whether an extension of the approach could also address price and market risks.

The authors conclude that:

• Market-based, risk-sharing insurance alternative for agriculture has many potential advantages;
• The link between risk and credit markets is important and if risks are not mitigated, then credit will be more expensive and less readily available;
• Market-based insurance should reduce the burden on government budgets and by making insurance available, the government may not have to provide free disaster aid;
• Can also help redress important food security problems;
• Other efficiency gains from farmers' credit are investments in new technologies and flexibility from the benefits of specialisation.