Memo: Using Satellite Imagery as the Basis for Index Insurance Contracts in West Africa

In a memo of last June, we discussed the logic of matching technological innovations with  financial innovations that insulate farmers from the risks that shadow dryland West African  agriculture. One such innovation is index insurance that can potentially:  

  1. Crowd‐in credit by removing the systemic risk that discourages agricultural lending,  especially by micro‐finance institutions (Carter 2008);  
  2. Enhance farmer’s willingness to adopt higher yielding technologies that require greater  up‐front investment  
  3. Smooth out farmer’s income across good years and bad years so that …  

Realization of this potential requires an index that can be:  

  1. Covers sufficient risk [footnote on basis risk as uncovered]  
  2. Can be delivered at low cost to the small farm sector  

While there are a number of candidate indexes (area yield indexes; rainfall and other weather  indexes), our research over the last few months reveals that insurance indexes based on  remotely sensed measures of vegetative growth can meet these two critical requirements. The  remainder of this memo summarizes our work to date.