Updated Aug 14, 2020
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.
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.