Drought index insurance for Mexico: Protection for low-income cattle farmers

Drought events regularly cause damage to grazing land in Mexico, putting strain on low-income farmers in particular. Together with a local cedent, Swiss Re has developed a satellite-based index insurance product to provide cost-effective protection.

Estimated to have decimated herds by 30%, the 2011 drought in Mexico was just one in a series of severe dry spells to slash livestock production in recent years.

When drought events strike, cattle producers come under enormous strain. "Pasture production is very much dependent on the availability of natural grassland", says Kleoniki Afentoulidou, Product Manager Agriculture at Swiss Re. "If there is little or no rain over the year, there is not enough grass for herds to graze. This, in turn, means farmers have to spend extra money on supplementary fodder to maintain their herds. Being small subsistence farmers, they struggle to absorb this additional cost."

Aiming to offer a sustainable risk mitigation solution to these farmers, Swiss Re's agriculture reinsurance team joined forces with a local cedent, ProAgro (Protección Agropecuaria Compañía de Seguros, S.A.), and successfully developed a satellite-based index insurance product. The product is designed on the basis of the Normalized Difference Vegetative Index (NDVI), an indicator of vegetation growth conditions based on satellite imagery. The underlying approach is to establish a historical NDVI database for each defined pasture resource pixel based on the 15 most recent years for which data are available. Insurance payouts are made if during the insurance period the actual NDVI value falls below a predefined threshold value in the historical NDVI data. In practice, the triggers are set at a level to reflect the onset of pasture production losses due to drought.

For a more reliable and robust product, a ground-truthing exercise was conducted. This involved benchmarking the NDVI index against sampled biomass data on the ground, a method systematically reducing basis risk.

Under the macro-level CADENA catastrophe programme of the Mexican federal government, the product is 100% subsidised and has been sold to the state government of Puebla, for inception at the beginning of June this year.

NDVI index insurance is well suited to help Puebla's state government achieve its main objective, which is to make timely payouts to livestock producers and so enable them to purchase supplementary fodder as needed to maintain their herds. Mario Tiscareno Lopez, Director at ProAgro, says: "New emerging technologies that are currently applied for the agricultural insurance in Mexico help increase insurance penetration and coverage under the CADENA program. This year more than 9,7 million hectares of cropland and more than 5,2 animals are insured." In short, low-income farmers in the state of Puebla now benefit from having an appropriate and cost-effective mechanism in place for when the next drought strikes.


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