Insurance industry is currently slowly transiting from the traditional crop insurance (yield index) to the weather index-based crop insurance in the recent years. Namely, index insurance is relatively new risk management tool where payouts are based on weather data, rather than actual damage on fields. For example, in the case of drought, farmers receive a damage payout if rainfall falls below an agreed threshold.

The focus of insurance companies towards this kind of insurance is increased due to several reasons. Firstly, the company spend less time and money for each insurance application. Usually, farmers within one region are covered by the group insurance policy. Secondly, this form of insurance is generally cheaper than multi-peril crop insurance, representing the more targeted risk coverage (e.g. covering only the drought risk). Representing the cost-effective coverage, index-insurance can help many farmers (especially smallholders) to secure their production. Thirdly, within this setting, the costs of on-site visits are cut down, avoiding the need for in-field damage assessment. Additionally, the index insurance was usually promoted to private drought insurance markets, however public schemes are possible as well. Namely, governments may better mitigate losses in years of prevalent natural calamities (such as drought, flood, etc.). At the same time, the social and economic status of agricultural producers is secured. It works best combined with other disaster management strategies or farmer credit programs (e.g. in India).

Beside all advantages, there is a potential challenge related to introduction of index-insurance products. Once insurers need to design an accurate index, all weather parameters needs to be included. For example, when it comes to identification of drought indices there are several prevailing parameters to be followed: the rainfall quantity, the time of the event, the temperature, as well as their mutual synergy. Therefore, very often the accuracy of index insurance is hampered by the non-availability of historical weather data, lack access to weather stations or unsuitable density of weather stations. In general, the lack of data is the main bottleneck. Additionally, all parameters need to be aligned with the real weather conditions on farms.

In order to minimize the risk within the index insurance, the insurance industry is looking for solutions that can provide more accurate data using the novel technologies. Namely, several novel technologies like satellites, blockchain, mobile technologies, etc. are implemented into the tools and services for agri-insurance sector. Through the usage of reliable data sources and modern technologies, the index insurance can improve both - farm production and risk management, representing the alternative, transparent and modern form of insurance. Moreover, with such an efficient coverage, farmers become more sustainable and resilient to unpredictable climate as well.