The increasing availability of satellite data at higher spatial, temporal and spectral resolutions is enabling new applications in agriculture and economic development, including agricultural insurance. Yet, effectively using satellite data in this context requires blending technical knowledge about their capabilities and limitations with an understanding of their influence on the value of risk-reduction programmes. In this Review, we discuss how approaches to estimate agricultural losses for index insurance have evolved from costly field-sampling-based campaigns towards lower-cost techniques using weather and satellite data. We identify advances in remote sensing and crop modelling for assessing agricultural conditions, but reliably and cheaply assessing production losses remains challenging in complex landscapes. We illustrate how an economic framework can be used to gauge and enhance the value of insurance based on earth-observation data, emphasizing that even as yield-estimation techniques improve, the value of an index insurance contract for the insured depends largely on how well it captures the losses when people suffer most. Strategically improving the collection and accessibility of reliable ground-reference data on crop types and production would facilitate this task. Audits to account for inevitable misestimation complement efforts to detect and protect against large losses.