This study explores the feasibility of weather index insurance (WII) in providing cost-effective risk management benefits to rural people for coping with catastrophic events. It uses a case study on drought coverage for maize production in three provinces in eastern Indonesia: East Java, West Nusa Tenggara and East Lombok. Prototype WII contracts were developed for selected areas within these provinces. The contracts were found to provide appropriate coverage for crop losses resulting from rainfall deficit, but the estimated premiums for farmers would be expensive. An initial estimation suggests that coupling WII with credit from formal financial institutions could reduce the cost of borrowing for farmers. However, the actual economic or commercial feasibility of WII products can only be made after substantial test marketing of these products demonstrates their attractiveness. The study concludes that WII may offer a promising approach to insuring maize production in Indonesia, but the instrument is likely to apply only to specific crops in specific areas. WII should not be considered a universal solution for lowering the risk of agricultural production across the whole country.
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International Finance Corporation