Picture-based insurance: is it sustainable? effects on willingness to pay, adverse selection, and moral hazard

Picture-Based Crop Insurance (PBI) offers a new way of delivering affordable and easy-to-understand crop insurance, using farmers’ smartphone pictures to minimize the costs of loss verification. Millions of smallholder farmers lack access to affordable insurance because their farms are simply too small and too remote for insurers to affordably verify damage on insured crops. However, with improvements in technology, insurance companies may no longer need to send an insurance agent to verify a farmer’s claim in person. They could simply appraise losses by processing smartphone pictures of damaged crops, taken by farmers themselves, as long as these pictures reliably document crop damage due to a natural disaster and document that crops were managed appropriately until that event.
A previous project note (Kramer et al., 2017)1 shows that farmers are able and willing to take such pictures, that crop damage is visible and quantifiable through pictures, and that picture-based loss assessment can capture damage that a weather index-based insurance product would not be able to detect. Thus, from a practical point of view, PBI seems to be a viable insurance approach that is worth developing further for implementation at a larger scale. However, insurance markets may fail not only because of high loss verification costs, but also because of low demand, adverse selection (farmers enrolling plots more prone to damage), and moral hazard (farmers reducing effort on their plots once insured). These factors could raise insurance premiums to unsustainable levels, crowding out demand.