Innovation in Agricultural Insurance: Linkages to Microfinance

This paper reviews index insurance as an innovation that provides unique opportunities for microfinance entities (MFEs):

• To manage correlated risk;
• To expand their ability to assist rural households.

The paper builds a set of recommendations for using index insurance in combination with rural finance.

Some of the observations that the paper makes are:

• The precondition for index insurance to work best for the individual farmer is correlated risk;
• Index insurance can shift correlated risk out of small countries into the global market;
• With the development of more sophisticated systems, indexing major events will be more straightforward.

The paper offers some arguments in favor of index insurance products:

• Linking index insurance to microfinance activities could facilitate improved risk taking behavior and expansion of services for MFEs;
• Index insurance contracts involve significantly lower transaction costs and can be offered directly to end users;
• Linking index insurance to MFEs can help in lowering risk and using appropriate institutions to manage different types of risk;
• It is possible that offering index insurance directly to the MFE can circumvent bad government, poor macroeconomic policies, and inadequate legal frameworks.

Finally, the paper recommends:

• NGOs and charities may purchase the index based insurance contracts; this would give them the needed resources for quick response;
• Close attention must be paid to the advice of global market makers.