The inherent volatility of agricultural livelihoods can keep farmers poor by discouraging investment in technologies that bring higher yields. Index insurance avoids the high costs of traditional indemnity insurance by basing payouts on an index of weather conditions that can be used to estimate average losses in an area. By reducing risk, index insurance can not only prevent descents into poverty but also increase opportunities to prudently invest in higher-return agricultural activities.
This poster shows how an effective and accurate index insurance contract can protect farmers by making up for losses caused by drought or other widely shared climate-related risk. The dashed line represents the minimum level of assets a farmer will have when covered by insurance. The green line represents how, despite fluctuation in assets, insured farmers can invest in higher-yielding inputs like hybrid seeds and chemical fertilizers that uninsured farmers cannot afford to risk. This difference means that insured farmers are able to increase their assets faster and more securely than their uninsured neighbors.