As we discussed in an earlier entry, a composite scheme that combines an NDVI and a Weather Index represents the latest development, and possibly the future, of Agricultural Insurance. The reason this new scheme is considered so promising is that it achieves greater yield accuracy alongside a similar ease of implementation. This can be seen in the comparative chart below.

Source: Patankar (2009)

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In the face of the shortcomings of weather index and yield based insurance, a new solution based on remote sensing applications has been proposed to provide an accurate and effective Insurance program. Currently being researched by the CIRM, remote sensing refers to the use of Imagery from Satellites orbiting space to estimate production yields in landholdings through a variety of methods. These include estimating the rainfall in a given area by measuring the temperature of storm clouds, a technique known as Thermal Infra Red (TIR), and measuring the foliage, or ‘greeness’, of a specific area through measuring the wavelength of radiations absorbed by leaves, creating what is known as the Normalized Difference Vegetative Index (NDVI). The NDVI and TIR help solve the issue of a lack of ground-based weather collection infrastructure, as they can be remotely calculated from Satellites. Thus, they bypass one of the biggest drawbacks of a traditional Weather Index based scheme. Moreover, an NDVI based production yield has been shown to share a far greater correlation to actual production yields, leading to more accurate estimates and therefore a more effective insurance product. Finally, NDVI schemes are also extremely advantageous because they are considered faster to estimate, easier to scale, and cheaper to implement than traditional weather index schemes.

An example of satellite imagery measuring a plant’s ‘greeness’

Source: Upadhyay Gargi, Ray S S, Panigrahy Sushma (2008)

Yet, just as with all the other Insurance solutions detailed before, the NDVI based schemes also suffer from certain issues. One of the primary concerns with an NDVI solution is that a large amount of agricultural land mapping must be carried out for the NDVI scheme to be put into place. This is because each landholding must be assigned into a specific grid, based on latitude and longitude, as the estimates of production within each production grid are used as proxies for the yields of the landholdings within the grid. Such information will most likely not be known by the policyholder, and will have to be attained through comprehensive land mapping, which may be a time consuming process. Another important concern is that an NDVI estimate may be prone to moral hazards, with policyholders potentially damaging their landholdings to lower production estimates and avail higher payouts. However, this problem can seemingly be overcome by combining the NDVI with the Weather Index to form a new composite index, seeing as moral hazard does not affect Weather Indexes as much. We shall discuss this new form of insurance in a future entry.

NDVI Insurance schemes have already been implemented throughout the world, as shown in the below table.

Source: Patankar (2009)

In regards to developing countries, India and nations in Western Africa have led the way in the implementation of NDVI schemes. In fact, a new set of NDVI insurance schemes in Western Africa is currently being researched and proposed by a team led by Michael Carter and Rachid Laajaj. This is not entirely surprising as India and Western Africa are particularly well suited to the requirements of NDVI. Both areas do not have extensive cloud cover, an impediment to NDVI measurement, as they have large, vast plains. Moreover, both India and Western Africa tend to grow the same crop, usually paddy, across large land areas, making NDVI measurement all the more accurate. In contrast, countries such as Sri Lanka, with small plot areas and high levels of cloud cover, are unsuited to NDVI Insurance schemes due to the difficulty of NDVI measurement in the given areas. This then represents yet another shortcoming of NDVI Insurance – it can only be implemented in locations that meet a very specific set of agricultural and geographical criteria. Outside of these areas, it is an ostensibly impractical insurance solution. However, the fact remains that in suitable locations, NDVI Insurance schemes carry many advantage and can possibly be used in conjunction with older schemes to create viable Insurance solutions. We shall explore this idea further in the next entry.