This document is written to inform a broad range of decision makers about progress that is being made in risk transfer for natural disaster risk. While the focus is on agriculture, obviously many of the same concepts can be used for other sectors that are exposed to natural disaster risk. Two basic innovations dominate the conceptual framework: 1) use of index-based insurance; and 2) layering risk to facilitate risk transfer. In many cases, individuals will self-insure against the layer of risk that is composed of highprobability, low-consequence losses. Some form of government intervention may be required to achieve ligher levels of risk transfer in the layer of risk that is composed of low-probability, high-consequence losses. Between these two extremes is a layer of risk that, with appropriate risk transfer and pooling structures, can be transferred using market mechanisms.
Since catastrophe risks (CAT risks) are one of the impediments to market development, a framework for government action in the management of agricultural risk that includes models for government intermediation of catastrophic risk through Government Disaster Options for CAT Risk (DOC) has been developed, proposing that governments buy index-based catastrophic risk coverage in international markets and offer them at rates that are lower than global market rates to local insurers who would pass these savings on to end users in developing countries. This would mitigate large loss/infrequent risks that are usually difficult and expensive to reinsure in traditional reinsurance markets, and would ultimately allow local insurers to cover more people against the extreme risks in an ex ante fashion.
Several case studies are presented to illustrate how these concepts are being applied in countries around the world. While the specifics vary based on the needs of each country, all of the cases involve the use of index insurance and/or layering of risk to facilitate risk transfer. The final chapter of this document describes potential future roles for the World Bank in the area of agricultural risk management.