Index Insurance: A Viable Solution for Irrigated Farming?

Abstract

This paper documents the practical experience of deploying index insurance in a tropical country whose agriculture is dependent on dual sources of water: rainfall and irrigation. The paper introduces an innovative hybrid index insurance product based on the authors' experience of piloting the concept. The hybrid product was created to address the higher basis risk of using a single rainfall trigger that ignores the hydrological conditions on the ground. The paper brings forth findings from a live pilot in selected locations -- with varied agro-climatic conditions—in Sri Lanka under the World Bank Group's Global Index Insurance Facility. The findings indicate that the new hybrid product performs better than the single trigger (rainfall-based) index insurance product, thereby reducing the basis risk faced by farmers. The paper also shares some of the practical limitations in deploying the product.