New Approaches to Crop Yield Insurance in Developing Countries

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This paper begins by noting that the same factors that make agricultural production a risky business for farmers (such as a variety of weather, pest, disease, input supply and market related risks), are also of concern to agricultural lending institutions. The paper also suggests that traditional risk management mechanisms, although widely recognised, have their limitations. They can be costly in terms the income opportunities that farmers forego (e.g. crop diversification is typically less profitable than specialisation). They can discourage investments and technological changes that, while risky, enhance long-term productivity growth. Furthermore, the paper points out that they have limited capacity to spread covariate risks like droughts that affect most farmers in a region at the same time.

It is noted that society can gain from more efficient sharing of crop and natural disaster risks. The paper explores government intervention in agricultural risk markets and discusses new approaches to risk sharing with limited government involvement. In particular, the authors build the case for introducing negotiable state-contingent contracts settled on area crop yield estimates or locally appropriate weather indices. These instruments, they argue, could replace traditional insurance at a lower cost to government while meeting the risk management needs of a wider clientele.

Following the introduction the paper begins by setting out the experience with public crop insurance – discussing the programs, results and in particular the reasons for failure. It then moves onto new approaches to insurance: using index and area-based contracts to insure natural disaster. This section ends with a look at finding efficient and affordable mechanisms to share covariate risk. The paper then concludes with the view that a market-based, risk sharing alternative for agriculture has many advantages, however, does also note the issues that remain to be addressed.

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