Index insurance for weather risk in lower income countries
This primer focuses on innovation in weather insurance designed to fit the special circumstances of lower-income countries where rural and agricultural financial markets are largely underdeveloped. Weather insurance is important to the long-term economic development of lower-income countries as a means of spurring rural finance and agricultural and rural development. Weather insurance can also help alleviate chronic poverty. The lack of access to weather insurance can cause rural and farm households in lower-income countries to consume their assets to survive an extreme weather event, or their assets may be destroyed, throwing these households into a cycle of poverty with no means of recovery. To be clear, the lack of weather insurance may be only one of several constraints that are slowing progress in economic development and rural financial markets in lower-income countries.
As critical as viable insurance markets are for economic stability and development in lower-income countries, creating these markets is a difficult undertaking. Looking to models from higher-income countries provides unsatisfactory answers. For example, agricultural insurance in higher-income countries is typically heavily subsidized. Lower-income countries cannot afford such heavy subsidies, particularly because a much larger percentage of the population is usually engaged in agriculture. Equally challenging, farm households in lower-income countries typically operate much smaller farm units, compounding the difficulty of providing rural financial services.
Other financial services, such as savings and loans, are also more accessible to small households in higher-income countries, allowing them to take more risk such as adopting new technologies and other activities to develop their businesses. This is the path to economic growth. Without strong financial services, countries are limited in their growth: limited formal rural financial markets can hinder development and the ability of the rural poor to climb out of poverty. Given the dominance of agriculturally dependent populations in lower-income countries and the typical pattern of a larger percentage of the poor living in rural areas, it is appropriate that national policy work toward building stronger rural financial services. This primer focuses on a new approach to weather insurance—index insurance—that can help develop and strengthen rural financial services. The intent is to provide the reader with the needed information to determine the potential viability of using index insurance for weather risk.
The document is structured as follows:
- Effects of weather risk in lower-income countries
- Importance of weather insurance for lower-income countries
- Traditional weather insurance for mitigating agricultural weather risks
- A new approach – index insurance for weather risk
- Role of governments and donors
- Preconditions for and restrictions to index insurance
- Feasibility study for index insurance
- Pilot-testing of index insurance
- Applications of index insurance
This primer is clearly a very valuable addition to a growing body of reference material on this subject and is highly recommended to those wishing to make informed decisions about incorporating index insurance into their activities.