Agricultural insurance protects against loss of or damage to crops or livestock. It has great potential to provide value to low-income farmers and their communities, both by protecting farmers when shocks occur and by encouraging greater investment in crops. However, in practice its effectiveness has often been constrained by the difficulty of designing good products and by demand constraints.
Agricultural insurance can indemnify policyholders for losses, though such indemnity products are relatively rare due to the high costs of administration and the risk of fraud. More commonly, agricultural microinsurance is index-based, providing farmers with payouts tied to the performance of an index (such as a rainfall gauge), rather than indemnifying them for crop losses actually experienced.