Policy for implementation of Index Based Weather Insurance revisited: the case of Nicaragua
AbstractInternational development organisations, through partnerships with local insurance companies, have been promoting weather index based insurance (WIBI) in developing countries. Due to lower operational costs, they expect shorter pay-off period, often overlooking high initial design costs. Experiences however show high post-pilot mortality of these programmes. Literatures report lack of insurance participation. We propose lack of push from insurance providers as an additional factor. To verify, cash flows of a Nicaraguan groundnut based WIBI and a comparable but hypothetical named peril insurance are simulated against 80 scenarios. Additionally, a test of stochastic dominance of their estimated Net Present Values show that WIBI take comparatively longer to pay-off yielding lower returns with considerable risk. WIBI, given its advantages is undoubtedly an efficient agricultural risk management tool. Therefore, to make it sustainable, long-term pilots and technical assistance is required until the product pays-off and yield profits for insurance providers.
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Bibliographic InfoPaper provided by European Association of Agricultural Economists in its series 123rd Seminar, February 23-24, 2012, Dublin, Ireland with number 122448.
Date of creation: 23 Feb 2012
Date of revision:
Index based rainfall insurance; weather derivative; operational cost; Nicaragua; International Development; Risk and Uncertainty;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2012-05-15 (Agricultural Economics)
- NEP-ALL-2012-05-15 (All new papers)
- NEP-ENV-2012-05-15 (Environmental Economics)
- NEP-IAS-2012-05-15 (Insurance Economics)
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