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Can financial markets be tapped to help poor people cope with weather risks ?

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  • 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 organizations. In Mexico, the farmer mutual insurance funds provide a good example. These funds provide insurance to their members by pulling together resources to pay for future indemnities and reinsures itself from major systemic risks that could hurt simultaneously all their members.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2812.

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Date of creation: 31 Mar 2002
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Handle: RePEc:wbk:wbrwps:2812

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Keywords: Insurance&Risk Mitigation; Payment Systems&Infrastructure; Health Economics&Finance; Labor Policies; Environmental Economics&Policies; Health Economics&Finance; Environmental Economics&Policies; Banks&Banking Reform; Hazard Risk Management; Insurance&Risk Mitigation;

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  1. Peter B. R. Hazell, 1992. "The appropriate role of agricultural insurance in developing countries," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 4(6), pages 567-581, November.
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  4. Skees, Jerry & Hazell, P. B. R. & Miranda, Mario, 1999. "New approaches to crop yield insurance in developing countries:," EPTD discussion papers, International Food Policy Research Institute (IFPRI) 55, International Food Policy Research Institute (IFPRI).
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  11. Jerry R. Skees, 1999. "Opportunities for Improved Efficiency in Risk Sharing Using Capital Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 81(5), pages 1228-1233.
  12. Gautam, Madhur & Hazell, Peter & Alderman, Harold, 1994. "Rural demand for drought insurance," Policy Research Working Paper Series, The World Bank 1383, The World Bank.
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  14. Skees, Jerry R., 2000. "A role for capital markets in natural disasters: a piece of the food security puzzle," Food Policy, Elsevier, Elsevier, vol. 25(3), pages 365-378, June.
  15. Epstein, Richard A, 1996. "Catastrophic Responses to Catastrophic Risks," Journal of Risk and Uncertainty, Springer, Springer, vol. 12(2-3), pages 287-308, May.
  16. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
  17. Noll, Roger G, 1996. "The Complex Politics of Catastrophe Economics," Journal of Risk and Uncertainty, Springer, Springer, vol. 12(2-3), pages 141-46, May.
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  20. Dawson, P. J., 1988. "Labour on the family farm: A theory under uncertainty," Agricultural Economics, Blackwell, Blackwell, vol. 1(4), pages 365-380, January.
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