How to Measure Whether Index Insurance Provides Reliable Protection
Agricultural index insurance offers the promise of an affordable and sustainable insurance product for farmers that can help reduce their vulnerability to aggregate agricultural shocks such as large-scale drought or flooding. However, index insuran...
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World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/07/26578448/measure-whether-index-insurance-provides-reliable-protection http://hdl.handle.net/10986/24825 |
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okr-10986-248252021-04-23T14:04:27Z How to Measure Whether Index Insurance Provides Reliable Protection Morsink, Karlijn Clarke, Daniel Jonathan Mapfumo, Shadreck agriculture index insurance basis risk drought risk flood risk catastrophe insurance disaster risk management Agricultural index insurance offers the promise of an affordable and sustainable insurance product for farmers that can help reduce their vulnerability to aggregate agricultural shocks such as large-scale drought or flooding. However, index insurance provides claim payments based on a trigger that is only imperfectly correlated with losses. This implies that it carries basis risk: it may provide claim payments in years when there are no losses, and no claim payments in years when there are losses. The impact of index insurance on poverty outcomes is highly sensitive to the degree to which the product offers reliable protection. Offering unreliable index insurance may lead to high reputation risk for donors, governments, and the private sector. This study proposes to measure the reliability of index insurance in terms of two policy objectives that stakeholders may have when offering index insurance: the extent to which the insurance captures losses caused by the peril covered by the contract (insured peril basis risk) and the extent to which the insurance covers losses from agricultural production (production smoothing basis risk). For both types of basis risk two indicators are proposed: the probability of catastrophic basis risk and the catastrophic performance ratio. Donors, governments, and insurers can use the proposed monitoring indicators without much prior technical knowledge. Although the indicators specifically focus on agricultural index insurance for low-income farmers, they can be applied to any context where payments are provided based on indices that are correlated with losses. 2016-08-09T16:18:03Z 2016-08-09T16:18:03Z 2016-07 Working Paper http://documents.worldbank.org/curated/en/2016/07/26578448/measure-whether-index-insurance-provides-reliable-protection http://hdl.handle.net/10986/24825 English en_US Policy Research Working Paper;No. 7744 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
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Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English en_US |
| topic |
agriculture index insurance basis risk drought risk flood risk catastrophe insurance disaster risk management |
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agriculture index insurance basis risk drought risk flood risk catastrophe insurance disaster risk management Morsink, Karlijn Clarke, Daniel Jonathan Mapfumo, Shadreck How to Measure Whether Index Insurance Provides Reliable Protection |
| relation |
Policy Research Working Paper;No. 7744 |
| description |
Agricultural index insurance offers the
promise of an affordable and sustainable insurance product
for farmers that can help reduce their vulnerability to
aggregate agricultural shocks such as large-scale drought or
flooding. However, index insurance provides claim payments
based on a trigger that is only imperfectly correlated with
losses. This implies that it carries basis risk: it may
provide claim payments in years when there are no losses,
and no claim payments in years when there are losses. The
impact of index insurance on poverty outcomes is highly
sensitive to the degree to which the product offers reliable
protection. Offering unreliable index insurance may lead to
high reputation risk for donors, governments, and the
private sector. This study proposes to measure the
reliability of index insurance in terms of two policy
objectives that stakeholders may have when offering index
insurance: the extent to which the insurance captures losses
caused by the peril covered by the contract (insured peril
basis risk) and the extent to which the insurance covers
losses from agricultural production (production smoothing
basis risk). For both types of basis risk two indicators are
proposed: the probability of catastrophic basis risk and
the catastrophic performance ratio. Donors, governments, and
insurers can use the proposed monitoring indicators without
much prior technical knowledge. Although the indicators
specifically focus on agricultural index insurance for
low-income farmers, they can be applied to any context where
payments are provided based on indices that are correlated
with losses. |
| format |
Working Paper |
| author |
Morsink, Karlijn Clarke, Daniel Jonathan Mapfumo, Shadreck |
| author_facet |
Morsink, Karlijn Clarke, Daniel Jonathan Mapfumo, Shadreck |
| author_sort |
Morsink, Karlijn |
| title |
How to Measure Whether Index Insurance Provides Reliable Protection |
| title_short |
How to Measure Whether Index Insurance Provides Reliable Protection |
| title_full |
How to Measure Whether Index Insurance Provides Reliable Protection |
| title_fullStr |
How to Measure Whether Index Insurance Provides Reliable Protection |
| title_full_unstemmed |
How to Measure Whether Index Insurance Provides Reliable Protection |
| title_sort |
how to measure whether index insurance provides reliable protection |
| publisher |
World Bank, Washington, DC |
| publishDate |
2016 |
| url |
http://documents.worldbank.org/curated/en/2016/07/26578448/measure-whether-index-insurance-provides-reliable-protection http://hdl.handle.net/10986/24825 |
| _version_ |
1764457748944125952 |