This paper contributes to the literature on insurance in developing countries by investigating whether there is a case for
government intervention through the introduction of index-based rainfall insurance. To do so, it looks at the case of
Uganda, using new data from the Uganda National Panel Survey (UNPS) to analyse the mechanisms employed by rural
dwellers to insure themselves against risks, and to evaluate to what extent these methods are effective.
The seasonality and risk associated with agriculture leaves Uganda’s rural population vulnerable to uncertain income
streams and negative shocks from extreme weather, which can result in considerable consumption drops and food
insecurity. Findings suggest that although households in rural Uganda use an array of tools in efforts to insure themselves
against negative income shocks, existing insurance mechanisms are insufficient to fully protect them from these risks.
Testing Deaton’s (1990) theory of full insurance also suggests that the degree of village-level mutual insurance is far from
perfect. Due to the shortcomings of these existing insurance mechanisms, index-based rainfall insurance has the potential
to considerably improve the welfare of rural dwellers in Uganda.