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Agricultural index insurance indemnifies a farmer against losses based on an index that is correlated with, but not identical to, her or his individual outcomes. In practice, the level of correlation may be modest, exposing insured farmers to residual, basis risk. In this article, we study the impact of basis risk on the demand for index insurance under risk and compound risk aversion. We simulate the impact of basis risk on the demand for index insurance by Malian cotton farmers using data from field experiments that reveal the distributions of risk and compound risk aversion. The analysis shows that compound risk aversion depresses demand for a conventional index insurance contract some 13 percentage points below what would be predicted based on risk aversion alone. We then analyze an innovative multiscale index insurance contract that reduces basis risk relative to conventional, single-scale index insurance contract. Simulations indicate that demand for this multiscale contract would be some 40% higher than the demand for an equivalently priced conventional contract in the population of Malian cotton farmers. Finally, we report and discuss the actual uptake of a multiscale contract introduced in Mali.

Grassland based farming systems are exposed to extreme weather events causing volatile farm incomes. Grazing and lacking yield measurements make it largely impossible to insure grassland production with traditional insurance products. In contrast, index insurance products have the potential to insure grasslands, as their payoff relies on an endogenous index that is highly correlated to, but independent of, the actual grass yield. To support future development of these products, we provide the first systematic overview of 12 index insurances put into practise for grasslands in Europe and North America. Additionally, based on this overview, we present prevailing findings that are important for further research and insurance practitioners. We find that a large diversity of index insurance types is applied in practise, including insurance solutions based on regional yield levels, weather variables or satellite imagery. We reveal separated insurance markets (i.e. country-specific products), which prevent knowledge spillovers and lead to largely isolated product developments. Thus, grassland insurance schemes can be improved by knowledge exchange and combining methods that are applied elsewhere. More specifically, insurances tailored to single farm's risk exposure, the combination of satellite with other geodata (e.g. land use information) or adapting legal specifications that disadvantage some types of insurances can improve an insurance's risk reducing capacity and make grassland based farming systems more resilient to weather extremes. This paper provides an entry point for such process, ensuring the development of efficient measures for farmers to cope with climatic risks., Agricultural Systems, 168, ISSN:0308-521X