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Concept and Unintended Consequences of Weather Index Insurance: The Case of Mexico

Author

Listed:
  • Fuchs, Alan

    () (University of California, Berkeley)

  • Wolff, Hendrik

    () (Simon Fraser University)

Abstract

Recently, Weather Index Insurance (WII) has received considerable attention as a tool to insure farmers against weather related risks, particularly in developing countries. Donor organizations, local governments, insurance companies, development economists as well as agricultural economists are discussing the costs and benefits of WII. While the literature on WII has mainly focused on many cases in Africa and Asia, in this article we analyze the WII program in Mexico, which is one of the largest WII programs worldwide. In this context we discuss potentially important spill-over effects on related markets which so far have not been considered in the academic literature. First, we argue that WII creates disincentives to invest in other non-insured crops leading to potential overspecialization and monoculture. Secondly, WII generates disincentives to invest in irrigation systems because farmers are insured only as long as production takes place on non-irrigated land. Third, in case of catastrophic events food prices can potentially inflate with indemnity payments at the expense of the uninsured poor. We also suggest that in Mexico the thresholds of the weather index be (continuously) re-calibrated in order to adjust for the development of drought resistant seeds. Finally, the index could relatively easily be extended to account for precipitation variances. We argue that these factors and spillover effects should be accounted for in cost benefit analysis of WII.

Suggested Citation

  • Fuchs, Alan & Wolff, Hendrik, 2011. "Concept and Unintended Consequences of Weather Index Insurance: The Case of Mexico," IZA Discussion Papers 6234, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6234
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    References listed on IDEAS

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    1. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    2. Gin, Xavier & Yang, Dean, 2009. "Insurance, credit, and technology adoption: Field experimental evidencefrom Malawi," Journal of Development Economics, Elsevier, vol. 89(1), pages 1-11, May.
    3. Barry J. Barnett & Olivier Mahul, 2007. "Weather Index Insurance for Agriculture and Rural Areas in Lower-Income Countries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1241-1247.
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    5. Xavier Giné & Robert Townsend & James Vickery, 2007. "Statistical Analysis of Rainfall Insurance Payouts in Southern India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1248-1254.
    6. Hongbin Cai & Yuyu Chen & Hanming Fang & Li-An Zhou, 2009. "Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment," NBER Working Papers 15396, National Bureau of Economic Research, Inc.
    7. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 0(Number 3), pages 1-17, December.
    8. Sommarat Chantarat & Christopher B. Barrett & Andrew G. Mude & Calum G. Turvey, 2007. "Using Weather Index Insurance to Improve Drought Response for Famine Prevention," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1262-1268.
    9. 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.
    10. Olivier Mahul, 2001. "Optimal Insurance Against Climatic Experience," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 593-604.
    11. Barnett, Barry J. & Barrett, Christopher B. & Skees, Jerry R., 2008. "Poverty Traps and Index-Based Risk Transfer Products," World Development, Elsevier, vol. 36(10), pages 1766-1785, October.
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    Cited by:

    1. Antoine Leblois & Philippe Quirion & Agali Alhassane & Seydou Traoré, 2014. "Weather Index Drought Insurance: An Ex Ante Evaluation for Millet Growers in Niger," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 527-551, April.
    2. De Janvry,Alain F., 2015. "Quantifying through ex post assessments the micro-level impacts of sovereign disaster risk financing and insurance programs," Policy Research Working Paper Series 7356, The World Bank.
    3. Fuchs, Alan & Rodriguez-Chamussy, Lourdes, 2014. "Voter response to natural disaster aid : quasi-experimental evidence from drought relief payments in Mexico," Policy Research Working Paper Series 6836, The World Bank.
    4. Pascale Combes Motel & Johanna Choumert & Alexandru Minea & Thomas Sterner, 2014. "Explorations in the Environment–Development Dilemma," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 479-485, April.
    5. repec:spr:nathaz:v:91:y:2018:i:1:d:10.1007_s11069-017-3109-7 is not listed on IDEAS
    6. repec:spr:agfoec:v:6:y:2018:i:1:d:10.1186_s40100-018-0104-6 is not listed on IDEAS
    7. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.
    8. Pascale Combes Motel & Johanna Choumert & Alexandru Minea & Thomas Sterner, 2014. "Explorations in the Environment–Development Dilemma," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 479-485, April.
    9. Castillo, Maria Jose & Boucher, Stephen & Carter, Michael, 2016. "Index Insurance: Using Public Data to Benefit Small-Scale Agriculture," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IFAMA), vol. 0(Special I), pages 1-22, June.

    More about this item

    Keywords

    Weather Index Insurance; policy evaluation; Mexico;

    JEL classification:

    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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