Remote sensing in an index-based insurance design for hedging economic impacts on rice cultivation

Abstract

Rice production in Ecuador is steadily affected by extreme climatic events that make it difficult for farmers to cope with production risk, threatening rural livelihoods and food security in the country. Developing agricultural insurance is a policy option that has gained traction in the last decade. Index-based agricultural insurance has become a promising alternative that allows insurance companies to ascertain and quantify losses without verifying a catastrophic event in situ, lowering operative costs and easing implementation. But its development can be hindered by basis risk, which occurs when real losses in farms do not fit accurately with the selected index. Avoiding basis risk requires assessing the variability within the insurance application area and considering it for representative index selection. In this context, we have designed an index-based insurance (IBI) that uses a vegetation index (normalized difference vegetation index – NDVI) as an indicator of drought and flood impact on rice in the canton of Babahoyo (Ecuador). Babahoyo was divided in two agro-ecological homogeneous zones (AHZs) to account for variability, and two NDVI threshold values were defined to consider, first, the event impact on crops (physiological threshold) and, second, its impact on the gross margin (economic threshold). This design allows us to set up accurate insurance premiums and compensation that fit the particular conditions of each AHZ, reducing basis risk.