IDEAS home Printed from
   My bibliography  Save this paper

New approaches for index insurance


  • Skees, Jerry R.
  • Collier, Benjamin


The El Niño Southern Oscillation (ENSO) is a climate event associated with warming sea surface temperatures in the Pacific Ocean. In years of extreme El Niño events, areas in northern Peru experience catastrophic flooding. As of 2010, it is possible for stakeholders in northern Peru to purchase a new form of insurance that pays out just as flooding begins and stakeholders begin incurring extra costs and consequential losses. Given the high basis risk associated with selling index insurance to households, this insurance is designed for firms and institutions that serve households that are highly exposed to El Niño. ENSO insurance is sold by a Peruvian insurance company, and a major global reinsurer carries most of the risk. This new insurance product is the first insurance to use sea surface temperature as the proxy for catastrophic losses and also the first regulated “forecast index insurance” product in the world. This innovation could enhance progress in developing index-based insurance products for extreme weather events. Recent years have seen a growing number of pilot tests of index insurance for weather risk, motivated by an increased understanding of how natural disasters affect developing countries. Beyond immediate suffering (including deaths, destroyed assets, and lost income), disasters have troublesome indirect effects: economic growth can be disrupted, the poor are thrust into permanent poverty traps, and the mere presence of these risks constrains access to financial services and causes many decisionmakers to pursue low-return, low-risk strategies that impede economic progress. Much of the development of index insurance focuses on agriculture, because activities associated with agriculture remain the primary livelihood strategies for the rural poor in developing countries. Thus far, most index insurance pilots have involved products targeted at households—that is, micro-level products. Index insurance uses an objective measure (an index) of a natural event known to cause losses (such as excess rain, high river levels, or extreme sea surface temperatures). Using an index as the proxy for loss dispenses with expensive loss assessments. Furthermore, use of an index diminishes moral hazard and adverse selection, problems that plague traditional forms of insurance. Given these advantages, index insurance may be well suited to developing countries where data are sparse and delivery of financial services to smallholder households increases the per-unit cost of traditional insurance. Despite the promise of index insurance, uptake by smallholder households is slow. Presently, index insurance may be better suited for risk aggregators—that is, groups or institutions that aggregate the risk of households either through the services they provide or through informal risk-sharing arrangements (for example, agricultural lenders, firms in the value chain, and farmer associations). Focusing first on risk aggregators should also help build linkages and sustainable products that will directly serve smallholder households.

Suggested Citation

  • Skees, Jerry R. & Collier, Benjamin, 2010. "New approaches for index insurance," 2020 vision briefs 18(11), International Food Policy Research Institute (IFPRI).
  • Handle: RePEc:fpr:2020br:18(11)

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Joanne Linnerooth-Bayer & Stefan Hochrainer-Stigler, 2015. "Financial instruments for disaster risk management and climate change adaptation," Climatic Change, Springer, vol. 133(1), pages 85-100, November.
    2. de Nicola, Francesca, 2015. "Handling the weather : insurance, savings, and credit in West Africa," Policy Research Working Paper Series 7187, The World Bank.

    More about this item


    ENSO insurance; Farmers; Flooding; forecast index; index insurance;

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fpr:2020br:18(11). See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.