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Index insurance pays out when drought hits
“Satellite index insurance pays automatically when drought hits your farm, without a loss adjuster and without arguments.”
It pays automatically on an index, which is not the same as paying when you have a loss. Measured hedging effectiveness runs 29 to 38%, and the correlation between index and actual loss between 43.8 and 62%. That is better than weather-based cover and it still leaves most of the risk with you.
Where it comes from
The genuine appeal of index insurance: no loss adjuster, no farm visit, a payment triggered by a number. Promoted by insurers, by satellite data providers and by development programmes that have used index products where conventional cover is unaffordable.
Who benefits
Insurers, who avoid loss adjustment costs, and the satellite data providers whose index becomes the trigger. Both are real benefits, and they are not the farmer's benefit.
What the evidence says
The payout follows the index, not your farm. That mismatch is called basis risk and it runs in two directions. You suffer a loss and are not paid. Or you are paid when you had no loss. The second is pleasant and the first can be ruinous.
The measured numbers. A systematic review of 89 peer-reviewed articles across 34 countries found that NDVI dominates, used in 30 of 49 studies that used satellite imagery (NHESS 25:913, 2025):
| Measure | Finding |
|---|---|
| Hedging effectiveness, vegetation-health indices | 38%, 38% and 29% for three indices |
| Hedging effectiveness, rainfall and temperature indices | lower than the above |
| Correlation between index and actual loss | 43.8% to 62% |
| Best case, a pasture production index | almost 90% in some years |
| European share of the literature | 14 of 93 studies, only 5 using satellite data |
| Studies on whether higher resolution cuts basis risk | 2 |
Read hedging effectiveness plainly. Thirty-eight percent means the policy removes about a third of the risk. It is the best-performing option in that review, and it is not what a farmer hears in the word "insurance".
Europe is barely studied. Fifteen percent of the literature, five European studies using satellite data directly. Whatever is true of index insurance in East Africa or India has not been shown for a European farm.
The honest version of the claim. For a farm that cannot get conventional multi-peril cover, partial and automatic beats nothing. That is why this verdict is contested rather than unsupported.
What to say instead
"It pays when the index moves, which is not always when I am hurt." Ask any seller for the measured correlation between their index and assessed losses in your own region, and treat the answer as the product specification. The satellite drought monitoring page explains what the index can and cannot see.