On the Advantages and Feasibility of Weather Index-Based Crop Insurance Schemes in Bolivia

Abstract

Weather index-based insurance schemes are gaining attention as instruments for agricultural risk management. A key difference between these insurance schemes and more traditional ones is that the former can cope more effectively with adverse selection and moral hazard issues, yielding less expensive insurance contracts. In this article, we argue that index-based crop insurance schemes can be particularly promising in Bolivia and discuss the essential technical requirements and methodological steps for igniting supply of these policies. Using daily rainfall data between 1967 and 2017, pilot insurance schemes for wheat and potato crops are developed for Anzaldo, one of Bolivia’s poorest agricultural-dependent rural municipalities. These policies are compared with the country’s current public fully subsidized crop-insurance program, which builds on traditional schemes. We prove that index-based schemes that offer variable reimbursing according to climate-induced crop damage allow to manage similar climate risks with significantly lower policy prices.