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Potential Role for Insurance in Managing Catastrophic Risks in Developing Countries

Published by:
Publication date
Number of Pages
Type of Publication:
Working Papers & Briefs
Focus Region:
Focus Topic:
Climate / Weather / Environment
Type of Risk:
Natural disasters
Type of Risk Managment Option:
Risk transfer
Peter Hazell
International Food Policy Research Institute (IFPRI)

The prevalence of natural disasters is not new and farmers, rural institutions and lenders have, over generations, developed ways of reducing and coping with risk (e.g. crop diversification, transhumant livestock systems, kin support networks, storage and asset accumulation). Although the virtues of these traditional risk management mechanisms are widely recognized, they also have their limitations. They can be costly in terms of the income opportunities that rural people forego (e.g. crop diversification is typically less profitable than specialization). They can discourage investments and technological changes that, while risky, enhance long-term productivity growth. And they have limited capacity to spread covariate risks like droughts that affect most people in a region at the same time. In theory, these limitations would not exist if capital and insurance markets were perfect and could pool risks more widely, but the reality for many risky agricultural regions in developing countries is quite the opposite; relevant capital and insurance markets are poorly developed and they are weakly linked across regions and with urban areas.