Index-based weather insurance in developing countries
This challenge was introduced by Kati Krähnert, a researcher at DIW German Institute for Economic Research.
Managing the consequences of climate change is one of the most pressing global challenges of our time. Due to climate change, extreme weather events, such as heat waves, droughts, and floods, are expected to become more frequent and intense. The impact of climate change will be particularly damaging for rural households in developing countries, where much of the population depends on natural resources and where governments often lack the financial and technical means to manage increasing climate risk. There is an urgent need for policy interventions that can help households to adapt and reduce their vulnerability to future events. The Paris climate agreement emphasised the importance of supporting developing countries in this task.
In the international policy community, one widely popular adaptation intervention is index-based weather insurance. Index insurance was introduced to help agricultural households in developing countries cope with weather risks. In contrast to conventional insurance, index insurance does not compensate insured households for their specific individual losses. Instead, in index insurance, insured households receive indemnity payments whenever an index measured at a more aggregated geographical level exceeds or falls short of a predefined threshold. Examples of an index include rainfall, temperature, vegetation greenness, average crop yields, and livestock mortality. In the event of a weather disaster, insurance indemnity payments are expected to help households recover from the damage caused by the weather shock. Despite heated debates about index insurance in the policy community, there is little evidence of whether index insurance provides its expected benefits.
Why have fewer households purchased index insurance in developing countries than expected? What are the challenges in implementing index insurance in developing countries? What is the role of (financial) education of households, risk attitudes, trust, and poverty?
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