Indexing the soil 29
Historically, low premium volumes and expensive operating costs have
created a critical obstacle for insurance market expansion in the Global
South, where indemnity insurance is typically regarded as financially
untenable. In the aftermath of natural disasters, infrastructure damage
makes field assessments difficult and slow. In this respect, the advantage of
index insurance lies in its cost efficiency. Instead of examining the damage
suffered item by item, as traditional forms of insurance do, index insurance
objectifies environmental risks as geographically standardised phenomena.
This is the reason it can operate automatically and symmetrically in relation
to each policyholder within a specified area.
Assembling the index
It is important to understand that index insurance does not exist as a readymade tool that travels easily and can be readily applied to different environmental settings. Rather, as an instrument, it comes into existence through
an intricate design process for a specific purpose; it requires that various
actors and institutions – from smallholder farmers to professionals in data
analysis and finance – come together to form a network that is able to model
predictively and yield the intermittent weight of environmental shocks.
Additionally, index insurance is commonly bundled with other financial
services, such as credit.
As detailed by RM (11–13), such a network includes, first, the product
design team, a separate entity often consisting of international experts with
special skills required for developing the instrument. Second, the data processing team makes automated real-time data-based claim processing possible. Information sources can include weather stations, remote sensing
technology, and satellites. Third, data providers are public or private institutions that provide both historical and real-time information for pricing and
automatic claim processing. Fourth, the network depends on the activity
of a regulator that sets norms and approves the issuing of a product. Fifth,
the insurer then issues the product, collects premiums, reinsures part of the
portfolio, and handles any claims that arise. Sixth, the reinsurer underwrites
some or all of the insured risks. Because index insurance protects against
systemic risks, a large part of the insurer’s portfolio should be reinsured
on the global financial markets. Seventh, the insured party carries out the
transaction to transfer risks to the financial market. Eighth, and finally,
the policyholder is often not the same as the insured party. For example,
in the case of smallholder farmers, the policyholder is usually an aggregator
that makes the issuing of policies more attractive to insurers; this role can
be played by, for instance, a cooperative, a microfinance institution, or a
commercial bank.
In the rest of this section we analyse the key moments of the work that
lead up to the finished index. These include: how data is gathered; how coverage is determined and how the payouts are structured; the importance of
Historically, low premium volumes and expensive operating costs have
created a critical obstacle for insurance market expansion in the Global
South, where indemnity insurance is typically regarded as financially
untenable. In the aftermath of natural disasters, infrastructure damage
makes field assessments difficult and slow. In this respect, the advantage of
index insurance lies in its cost efficiency. Instead of examining the damage
suffered item by item, as traditional forms of insurance do, index insurance
objectifies environmental risks as geographically standardised phenomena.
This is the reason it can operate automatically and symmetrically in relation
to each policyholder within a specified area.
Assembling the index
It is important to understand that index insurance does not exist as a readymade tool that travels easily and can be readily applied to different environmental settings. Rather, as an instrument, it comes into existence through
an intricate design process for a specific purpose; it requires that various
actors and institutions – from smallholder farmers to professionals in data
analysis and finance – come together to form a network that is able to model
predictively and yield the intermittent weight of environmental shocks.
Additionally, index insurance is commonly bundled with other financial
services, such as credit.
As detailed by RM (11–13), such a network includes, first, the product
design team, a separate entity often consisting of international experts with
special skills required for developing the instrument. Second, the data processing team makes automated real-time data-based claim processing possible. Information sources can include weather stations, remote sensing
technology, and satellites. Third, data providers are public or private institutions that provide both historical and real-time information for pricing and
automatic claim processing. Fourth, the network depends on the activity
of a regulator that sets norms and approves the issuing of a product. Fifth,
the insurer then issues the product, collects premiums, reinsures part of the
portfolio, and handles any claims that arise. Sixth, the reinsurer underwrites
some or all of the insured risks. Because index insurance protects against
systemic risks, a large part of the insurer’s portfolio should be reinsured
on the global financial markets. Seventh, the insured party carries out the
transaction to transfer risks to the financial market. Eighth, and finally,
the policyholder is often not the same as the insured party. For example,
in the case of smallholder farmers, the policyholder is usually an aggregator
that makes the issuing of policies more attractive to insurers; this role can
be played by, for instance, a cooperative, a microfinance institution, or a
commercial bank.
In the rest of this section we analyse the key moments of the work that
lead up to the finished index. These include: how data is gathered; how coverage is determined and how the payouts are structured; the importance of