Agricultural index insurance has shown significant promise for promoting sustainable development and resilience. However, expensive yet poor-quality contracts and inadequate consumer education around index insurance are partly responsible for the resulting in low levels of adoption by individual farmers. Poor-quality index insurance carries the possibility of doing harm if the index fails to register a shock; not only do the farmers experience losses, but their net income has been further reduced by the cost of the premium.
Other risk management tools can be offered in complement to index insurance, including products that also use the index:
Contingent Savings Account. A commitment savings account is a type of savings account that only releases saved funds with full interest when the index detects a bad season. Withdrawals can be made if the index does not trigger, but without full interest. Like insurance, contingent savings accounts help farmers transfer money across time—but instead of a nonrefundable premium, the savings deposit remains their money. The contingent component—withdrawing in absence of an indexed shock means loss of accumulated interest—gives an incentive to counteract present bias, a typical barrier to savings. However, the accounts do not leverage any money beyond the farmers’, so they may have limited protective effects, particularly in the early years of saving.
Contingent Lines of Credit. Borrowers with strong repayment histories on conventional loans are pre-approved for emergency loans that are made available if a shock occurs. Research has shown that contingent lines of credit can have substantial impact on ex-ante investment and may also help families smooth consumption after a shock. Banks have also benefited, seeing reduced withdrawals from savings accounts after a disaster and increased overall lending (Lane 2024).
The contingent savings and credit products are complementary to index insurance. If farmers’ experience using the no-risk savings and credit products demonstrates reliability in the index and the financial institution, farmers’ demand may grow for an index insurance product that helps pool risk over space and time.
Publications
Concept Note: Blending Indexed Financial Tools for Rural Households Across Their Journey to Prosperity
Agricultural index insurance, commitment savings accounts and contingent lines of credit can comprise a portfolio of indexed financial instruments to meet farmers’ circumstances and needs.
Brief: Strengthening Microfinance Revenues and Growth by Addressing Smallholder Risk
In Bangladesh, borrowers pre-approved for a contingent line of credit had higher levels of consumption after flood-related losses,
Paper: Adapting to Climate Risk with Guaranteed Credit: Evidence from Bangladesh
Farmers who have access to an emergency loan make less costly adaptation choices and are less severely affected when a flood occurs.
Paper: Can digitally-enabled financial instruments secure an inclusive agricultural transformation?
Resilience and an inclusive agricultural transformation might be best promoted by a flexible system that offers indexed risk management tools that can meet the needs of households that enjoy different assets and beliefs.