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Weather Index Insurance for Climate Change: Opportunities and Challenges in Lower Income Countries

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Publication date
29/07/2009
Number of Pages
24
Language:
English
Type of Publication:
Articles & Journals
Focus Region:
Global
Focus Topic:
Climate / Weather / Environment
Type of Risk:
Weather & Climate related
Type of Risk Managment Option:
Risk transfer
Commodity:
Crops
Author
Benjamin Collier, Jerry Skees, Barry Barnett
Organization
Global Ag Risk, Inc.

Weather index insurance underwrites a weather risk, typically highly correlated with agricultural production losses, as a proxy for economic loss and is gaining popularity in lower income countries. This instrument, although subject to basis risk and high start-up costs, should reduce costs over traditional agricultural insurance. Multilateral institutions have suggested that weather index insurance could enhance the ability of stakeholders in lower income countries to adapt to climate change. While weather index insurance could have several benefits in this context (e.g. providing a safety net to vulnerable households and price signals regarding the weather risk), climate change impacts increase the price of insurance due to increasing weather risk. Uncertainty about the extent of regional impacts compounds pricing difficulties. Policy recommendations for insurance market development generated by this paper include funding risk assessments, start-up costs and the extreme layer of risk.