experience to date in developing countries has been that index-based insurance requires subsidies in order to be commercially viable. subsidies usually take one of two forms: governments may support the establishment of insurance programmes through provision of data necessary to calculate indices and through assistance with promotion and training, or they may provide direct support, often by subsidising premium payments. the question that needs to be addressed is whether such subsidies represent a good use of scarce national resources. a second important issue concerns who will be insured under index-based insurance contracts. perhaps surprisingly, farmers may not be the most obvious choice. the use of index insurance by financial institutions and farm input suppliers who extend credit to low income farmers in developing countries may be a more cost-effective use and enable such bulk buyers of insurance to hedge against default by farmers and thus continue to deal with those who have a high risk of defaulting.