Insurance is a risk sharing mechanism recognized as an essential requirement for socio-economic development and financial inclusion in developing countries. Traditional insurance is expensive though, and there is little infrastructure in place for loss assessment and claims handling. Index insurance is an innovative insurance proposition that pays indemnities based only on the level of an index: it is a low-cost and hassle-free alternative to traditional loss insurance.
Index insurance covers the circumstances that lead to losses, rather than the loss itself. Drought index, for instance, pays out based on the level of a predetermined drought index. The farmer is insured against adverse climatic conditions that cause yield losses. EARS has developed products which cover drought related crop yield losses in over 18 different countries, covering maize, beans, wheat, coffee, sesame, sorghum, pasture, and various other crops. EARS van provide satellite based indices for various types of insurance such as drought, rainfaill, frost, or even sunshine.
Index insurance offers various advantages over indemnity-based insurance products. Administration and monitoring costs can be kept low, payouts can take place shortly after the growing season, and it is also not necessary to train loss adjusters and send them into the field to verify claims.
Insurance based on an independent index is also less sensitive to fraud or moral hazard because the indemnity calculation takes place on only the index, which is objective and cannot be influenced by activities on the ground.
Index insurance works using a drought index which tracks drought severity during the growing season in an insured area. If the index level during the growing season is above average (compared to the past 30 years), then no payout occurs. If the index drops below average, then it indicates the onset of a drought.
Depending on the design parameters, climate, and drought sensitivity of the crop, the index detects when the drought level is such that yield losses are imminent. In that case a payout for that location is triggered by the index.
EARS has strong operational experience with various index products and index insurance schemes. Data for these indices is generated using our proprietary Energy and Water Balance Monitoring System. This system uses data from Meteosat satellites and provides evapotranspiration, radiation, and precipitation data on a daily basis. Data products are available in near-real time and from as early as 1982, allowing for a thourough historical risk analysis.
Since the FESA project started in 2011, EARS has shown itself to be an experienced and independent satellite-based index product and index insurance consultant.