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Abstract
Index insurance, which indemnifies agricultural producers based on an objectively observable variable
that is highly correlated with production losses but which cannot be influenced by the producer, can
provide adequate protection against catastrophic droughts without suffering from the moral hazard and
adverse selection problems that typically cause conventional agricultural insurance programs to fail.
Using historical maize and cotton yield data from nine districts in Zimbabwe, we find that catastrophic
drought insurance contracts based on the Normalized Difference Vegetation Index (NDVI) can be
constructed whose indemnities exhibit higher correlations with yield losses compared to the conventional
rainfall index. In addition the NDVI contracts can be offered within the 5–10 per cent premium range
considered reasonably affordable to many poor smallholder farmers in Zimbabwe.