Index insurance is a promising mitigation tool for addressing climate risks and natural disasters, thereby improving farmer resilience and adaptation to climate change. However, insurance products cannot perfectly cover all climate shocks experienced by farmers while incentivizing adaptation practices, creating the need for a complementary risk mitigation tool such as a fund.

In this Capstone, data from the R4 project in Ethiopia was analyzed to quantify the historical mismatch between weather-based index insurance payouts and farmer needs to inform the design of such a fund. Data from farmer focus groups provided insight into the years farmers historically experienced as less productive, while index insurance payouts are based on an index that combines measurements of rainfall and vegetation, and that is in active use across hundreds of villages. This estimation was used to determine the size of a complementary fund that may allow a given village, region, or project to partially address basis risk, understood as the risk of losing productivity that is not captured by the index. The Capstone builds on the work of two previous SIPA capstone projects that focused on the benefits of index insurance for access to credit and the implementation of climate-smart practices. This team highlighted key considerations for designing a fund, including guidelines and assumptions for the establishment and management of the complementary fund capable of allocating more frequent payouts, a known preference for farmers. These recommendations will inform current and future development projects that include index insurance schemes or that look for alternatives to it.