Updated Aug 14, 2020

The Audit Rule Is an Index Insurance Failsafe for Farmers

https://basis.ucdavis.edu/publication/spotlight-audit-rule-protect-farmers-case-insurance-index-fails

Tara Chiu

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An audit rule provides a failsafe for farmers if an index insurance product fails to trigger payouts when it should, combining the potential for accuracy of direct measurements of average yields with lower costs of an index built from satellite data.

To minimize the risk that an index insurance contract will fail to pay out in the case of unpredicted but widespread losses, AMA Innovation Lab researchers have implemented a new technique called the "audit rule" so farmers can be sure their index insurance product has functioned as it should. An audit rule provides a failsafe for farmers if an index insurance product fails to trigger payouts w...
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To minimize the risk that an index insurance contract will fail to pay out in the case of unpredicted but widespread losses, AMA Innovation Lab researchers have implemented a new technique called the "audit rule" so farmers can be sure their index insurance product has functioned as it should. An audit rule provides a failsafe for farmers if an index insurance product fails to trigger payouts when it should. It combines the potential for the accuracy of direct measurements of average yields with the lower costs of an index built from remote measures of vegetation cover or weather data.
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Stage 4: Transition to Scale

Focus Areas:

Agriculture

AgricultureSEE LESS

Implemented In:

Tanzania, Mali, Mozambique and 2 MoreSEE ALL

Tanzania, Mali, Mozambique, Bangladesh and Burkina FasoSEE LESS

5
Countries Implemented In
Verified Funding
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Problem

Index insurance links payouts to outside factors, such as levels of rainfall, vegetation growth or an area's average crop yields rather verified individual claims. An index of these factors predicts average losses in an area, not individual losses. For this reason, index insurance will always carry basis risk, meaning a chance that the predicted losses do not match up with real losses on the ground.

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Solution

An audit rule provides a failsafe for farmers if an index insurance product fails to trigger payouts when it should. It combines the potential for the accuracy of direct measurements of average yields with the lower costs of an index built from remote measures of vegetation cover or weather data. The audit rule provides added security farmers require to invest their limited funds in a more productive future.

Target Beneficiaries

Farmers who face the risk of drought.

Competitive Advantage

When the quality of the index for an index insurance product can not be made more accurate, the audit rule adds value by making the design of the insurance contract better and of grater value for farmers.

Milestone

Date Unknown
Date Unknown
New Country Implemented In
Burkina Faso
Date Unknown
New Country Implemented In
Bangladesh
Date Unknown
New Country Implemented In
Mozambique
Date Unknown
New Country Implemented In
Mali
Date Unknown
New Country Implemented In
Tanzania
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