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Index-based weather insurance for developing countries: A review of evidence and a set of propositions for up-scaling

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  • Michael R. CARTER

    () (University of Wisconsin)

  • Alain de JANVRY

    (University of California Berkeley)

  • Elisabeth SADOULET

    (University of California Berkeley)

  • Alexandros SARRIS

    (University of Athens)

Abstract

Index-based weather insurance is a major institutional innovation that could revolutionize access to formal insurance for millions of smallholder farmers and related individuals. It has been introduced in pilot or experimental form in many countries at the individual or institutional level. Significant efforts have been made in research to assess its impacts on shock coping and risk management, and to contribute to improvements in design and implementation. While impacts have typically been positive where uptake has occurred, uptake has generally been low and in most cases under conditions that were not sustainable. This paper addresses the reasons for this current discrepancy between promise and reality. We conclude on perspectives for improvements in product design, complementary interventions to boost uptake, and strategies for sustainable scaling up of uptake. Specific recommendations include: (1) The first-order importance of reducing basis risk, pursuing for this multiple technological, contractual, and institutional innovations. (2) The need to use risk layering, combining the use of insurance, credit, savings, and risk-reducing investments to optimally address different categories of risk. For this, these various financial products should be offered in a coordinated fashion. (3) Calling on a role for state intervention on two fronts. One is the implementation of public certification standards for maximum basis risk of insurance contracts; the other is “smart” subsidies for learning, data accumulation, initial re-insurance, and catastrophic risks. (4) Using twin-track institutional-level index insurance contracts combined with intra-institution distribution of payouts to reduce basis risk and improve the quality of insurance. For this, credible intra-institutional rules for idiosyncratic transfers must be carefully designed. Finally (5), the need for further research on the determinants of behavior toward risk and insurance, the design of index-based insurance products combined with others risk handling financial instruments, and rigorous impact analyses of on-going programs and experiments.

Suggested Citation

  • Michael R. CARTER & Alain de JANVRY & Elisabeth SADOULET & Alexandros SARRIS, 2014. "Index-based weather insurance for developing countries: A review of evidence and a set of propositions for up-scaling," Working Papers P111, FERDI.
  • Handle: RePEc:fdi:wpaper:1800
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    References listed on IDEAS

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    Cited by:

    1. Carter, Michael R. & Cheng, Lan & Sarris, Alexandros, 2016. "Where and how index insurance can boost the adoption of improved agricultural technologies," Journal of Development Economics, Elsevier, vol. 118(C), pages 59-71.
    2. repec:eee:wdevel:v:107:y:2018:i:c:p:163-175 is not listed on IDEAS
    3. Chen, Huang, 2015. "Expectations, Index Qualities and Basis Risks in Explaining Farmers' Pessimism in Purchasing Weather Index Insurance," 2015 Conference, August 9-14, 2015, Milan, Italy 211461, International Association of Agricultural Economists.
    4. Sommarat Chantarat, 2015. "Index-based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Countries," PIER Discussion Papers 10., Puey Ungphakorn Institute for Economic Research, revised Nov 2015.
    5. Van Campenhout, Bjorn, 2016. "Risk and Sustainable Crop Intensification," 2016 AAAE Fifth International Conference, September 23-26, 2016, Addis Ababa, Ethiopia 246917, African Association of Agricultural Economists (AAAE).
    6. Platteau, Jean-Philippe & De Bock, Ombeline & Gelade, Wouter, 2017. "The Demand for Microinsurance: A Literature Review," World Development, Elsevier, vol. 94(C), pages 139-156.

    More about this item

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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