1. Leveraging new technologies like satellite imagery and smartphone photos can help make agricultural insurance more affordable and reduce information problems. 2. Current insurance programs face challenges of high costs and "basis risk" where payouts don't match actual losses, limiting demand. 3. Taking smartphone photos of insured crops could engage farmers more, lower costs by crowdsourcing data, and reduce basis risk by providing on-the-ground verification to complement satellite data.

1. Leveraging new technology:
The potential of index insurance
Berber Kramer
Research Fellow, International Food Policy Research Institute (IFPRI)
The Knowledge Lab on Climate Resilient Food Systems: An Analytical Support Facility to Support the SDGs
IFPRI – AGRA workshop, Nairobi, February 7th, 2018

2. Presentation outline
1. How can insurance make food systems more resilient from climate change?
2. Challenges in the provision of insurance for improved risk management
3. Opportunities for satellite and smartphone-based near-surface remote sensing
4. Priority research areas in leveraging such technology

3. Why insurance for climate-resilient food systems?
Insurance
Ex post: Insurance payouts
Timely inflow of cash, continued investment
Ex ante: Risk reduction, confidence
Improved lending, resilient agricultural investments

4. Traditional indemnity-based insurance: Costly to supply
 High administrative costs relative to the amounts that smallholder farmers seek to insure
 Asymmetric information driving up insurance premiums or crowding out markets entirely:
o Moral hazard—reduced prevention as insurer cannot observe effort
o Adverse selection—selection of clients with higher expected payouts)
Index-based insurance: Difficult to generate demand and awareness
 Examples: Weather index-based, NDVI-based, area-yield index-based
 Often low demand due to basis risk, poor understanding, and limited engagement
 Historical data limitations and setting up data infrastructure can be expensive
Challenges in the provision of agricultural insurance

5. Basis risk is a widespread phenomenon in insurance
Source: Clarke, Mahul, Rao and Verma (2012). Weather based crop insurance in
India. World Bank Policy Research Working Paper 5985
Low payout-yield correlation:
1. No payout triggered, but
farmer suffers damage: worse
outcome than if farmer would
not have paid premium
2. Payout triggered, but farmer
does not suffer damage:
raising expected payouts
unnecessarily
Can we leverage technology for index insurance to have the envisioned impacts?

6. Remote sensing through high-resolution satellite imagery
 Promising area with many institutions working in this space, including CGIAR (radar / weather
data, soil moisture, vegetation indices (NDVI, EVI) and flood indices)
 Basis risk however can remain a challenge (e.g. heat stress during flowering phase of winter
wheat)
 Satellite imagery offers limited transparency / tangibility (for farmers and insurance providers)
Mobile phones and smartphone technology
 Reducing administrative costs and crowdsourcing of information (e.g. varieties, sowing dates)
 Potential to provide complementary advisory services at low cost
 Ground pictures of insured crops, taken by farmers themselves, to improve engagement,
reduce basis risk and allow for better monitoring
Technology to address these challenges

7. Picture-Based Insurance (PBI): Seeing through a farmer’s eyes
 Taking advantage of increasing smartphone penetration in
rural areas
 Easy-to-understand, high farmer engagement, and reduced
basis risk
 Augmenting information flow to the insurer, which can be
used for monitoring and improving satellite-based indices

9. Research priorities
1. How to generate ground data for development and validation of insurance indices?
2. Bundling with agricultural inputs, extension, credit, aggregators, social protection?
3. What are the risks of using technology? Asymmetric information, consumer protection
4. Impacts, particularly for groups with lower technology access/acceptance?

10. For more information:
Project notes and more available at: https://www.ifpri.org/project/PBInsurance
THANK YOU!