Does the design matter? Comparing satellite-based indices for insuring pastoralists against drought

For those wishing to develop and provide satellite-based index insurance products, there is no consensus in the scientific community on which of the many available indices most accurately track agro-ecological shocks as experienced by farmers and pastoralists. Furthermore, commonly used metrics for assessing index accuracy are less relevant for examining the quality of protection provided, because they do not consider household-level welfare outcomes. This study aims at filling this knowledge gap by bridging two index insurance literatures: the remote sensing science literature that focuses on the predictive power of the indices, and the economic literature that focuses on welfare outcomes. The article uses the case of the Index Based Livestock Insurance (IBLI) product in Kenya to compare the quality of existing and potential insurance products developed from different processing chains applied to time series of the satellite-based Normalized Difference Vegetation Index (NDVI). Although the indices are highly correlated to each other (ρ>0.95), a utility analysis provides insight into how small differences in accuracy, premium rates, and timing of resultant indemnity payments can lead to large differences in product value. Our results highlight that index accuracy, cost and timeliness of payments need to be considered jointly to assess insurance quality for clients.

JENSEN Nathaniel;  STOEFFLER Quentin;  FAVA Francesco;  VRIELING A.;  ATZBERGER Clement;  MERONI Michele;  MUDE Andrew;  CARTER Michael; 

2019-05-24

ELSEVIER SCIENCE BV

JRC112379

0921-8009 (online),   

https://www.sciencedirect.com/science/article/pii/S0921800918309303,    https://publications.jrc.ec.europa.eu/repository/handle/JRC112379,   

10.1016/j.ecolecon.2019.04.014 (online),