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Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?

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Author Info

  • Skees, Jerry
  • Varangis, Panos
  • Larson, Donald
  • Siegel, Paul

Abstract

Poor households in rural areas are particularly vulnerable to risks that reduce incomes and increase expenditures. Most past research has focused on risk-coping strategies for the rural poor, specially on micro-level and household actions. These are risks that can been shared within a community or extended family. These strategies are effective for independent risks, but ineffective for covariate or systemic risks. The authors focus on private and public mechanisms for managing covariate risk for natural disasters. When many households within the same community face risks that create losses for all, traditional coping mechanisms are likely to fail. Such covariate risks are not uncommon in many developing countries, especially where farming remains a major source of income. The authors focus on risks related to weather events (such as excess rain, droughts, freezes, and high winds) that have a severe impact on rural incomes. Weather insurance could cover the covariate risk for a community of poor households through formal and informal risk-sharing arrangements among households that are purchasing these weather contracts. Given recent Mexican innovations targeted at helping the poor cope with catastrophe weather events, the authors use Mexico as a case study. In Mexico, poor households are exposed to systemic risks, such as droughts and floods, that affect the economic livelihood of their region. Catastrophic insurance is useful for small farmers, although commercially oriented small farmers may wish to obtain coverage for less catastrophic events. Weather insurance could meet this need. It pays out according to the frequency and intensity of specific weather events. Because weather insurance depends on the occurrences and objective measure of intensity of a specific event, it does not require individual farm inspection that can be very costly for small farm. The authors argue that a key issue of delivering insurance to small farmers is the existence of producer organ

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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number UNU-WIDER Research Paper DP2002/23.

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Length: 25 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:unu:wpaper:dp2002-23

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Keywords: Risk management; Insurance ; Weather risks; Natural disasters;

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References

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  1. Kaplow, Louis, 1991. " Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, Springer, vol. 4(2), pages 167-75, April.
  2. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-87, May.
  3. Kimberly A. Zeuli, 1999. "New Risk-Management Strategies for Agricultural Cooperatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(5), pages 1234-1239.
  4. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  6. Kunreuther, Howard & Meszaros, Jacqueline & Hogarth, Robin M. & Spranca, Mark, 1995. "Ambiguity and underwriter decision processes," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 337-352, May.
  7. Dawson, P. J., 1988. "Labour on the family farm: A theory under uncertainty," Agricultural Economics, Blackwell, vol. 1(4), pages 365-380, January.
  8. Frank Ellis, 1998. "Household strategies and rural livelihood diversification," Journal of Development Studies, Taylor & Francis Journals, vol. 35(1), pages 1-38.
  9. Skees, Jerry R., 2000. "A role for capital markets in natural disasters: a piece of the food security puzzle," Food Policy, Elsevier, vol. 25(3), pages 365-378, June.
  10. Takeshi Sakurai & Thomas Reardon, 1997. "Potential Demand for Drought Insurance in Burkina Faso and Its Determinants," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1193-1207.
  11. Dawson, P. J., 1988. "Labour on the Family Farm: a Theory under Uncertainty," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 1(4), January.
  12. Skees, Jerry & Hazell, P. B. R. & Miranda, Mario, 1999. "New approaches to crop yield insurance in developing countries:," EPTD discussion papers 55, International Food Policy Research Institute (IFPRI).
  13. Peter B. R. Hazell, 1992. "The appropriate role of agricultural insurance in developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 4(6), pages 567-581, November.
  14. Gautam, Madhur & Hazell, Peter & Alderman, Harold, 1994. "Rural demand for drought insurance," Policy Research Working Paper Series 1383, The World Bank.
  15. Epstein, Richard A, 1996. "Catastrophic Responses to Catastrophic Risks," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 287-308, May.
  16. Kunreuther, Howard & Slovic, Paul, 1978. "Economics, Psychology, and Protective Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 64-69, May.
  17. Jerry R. Skees, 1999. "Opportunities for Improved Efficiency in Risk Sharing Using Capital Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(5), pages 1228-1233.
  18. J. Roy Black & Barry J. Barnett & Yingyao Hu, 1999. "Cooperatives and Capital Markets: The Case of Minnesota-Dakota Sugar Cooperatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(5), pages 1240-1246.
  19. Siegel, Paul B. & Alwang, Jeffrey, 1999. "An asset-based approach to social risk management : a conceptual framework," Social Protection Discussion Papers 21324, The World Bank.
  20. Noll, Roger G, 1996. "The Complex Politics of Catastrophe Economics," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 141-46, May.
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