Fundación PROFIN has developed an innovative index-based insurance scheme that has been piloted in four provinces in the North and Central Altiplano regions of Bolivia. The scheme combines incentives for pro-active risk reduction and a flexible, people-centered index mechanism. In this scheme the trigger is based on the production levels of reference plots of farmland in areas which are geographically similar in terms of temperature, precipitation, humidity, and type of soil.
The reference plots are farmed by farmers who have been identified as good practitioners by their peers. The yields on their plots serve as an indicator of whether production levels have been adversely affected by environmental factors, thus triggering an insurance payout, or by other factors within a farmer’s control. Moral hazard in the scheme – if the reference farmers were to intentionally underperform – is limited by the reputational risks to the farmers in their own communities. The reference farmers also serve as technical assistance agents to promote ideas for increasing yields and reducing disaster impacts.
The system encourages other farmers to match the reference farmers in implementing mitigation efforts to reduce the effects of drought, excess rains, hailstorms and frost, because those farmers run the risk that their own plots will be significantly affected while the reference farmers’ plots will be less affected.