Publication: Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?
Date
2002-03
ISSN
Published
2002-03
Author(s)
Abstract
Poor households in rural areas are
particularly vulnerable to risks that reduce incomes and
increase expenditures. Most past research has focused on
risk-coping strategies for the rural poor, specially on
micro-level and household actions. These are risks that can
been shared within a community or extended family. These
strategies are effective for independent risks, but
ineffective for covariate or systemic risks. The authors
focus on private and public mechanisms for managing
covariate risk for natural disasters. When many households
within the same community face risks that create losses for
all, traditional coping mechanisms are likely to fail. Such
covariate risks are not uncommon in many developing
countries, especially where farming remains a major source
of income. The authors focus on risks related to weather
events (such as excess rain, droughts, freezes, and high
winds) that have a severe impact on rural incomes. Weather
insurance could cover the covariate risk for a community of
poor households through formal and informal risk-sharing
arrangements among households that are purchasing these
weather contracts. Given recent Mexican innovations targeted
at helping the poor cope with catastrophe weather events,
the authors use Mexico as a case study. In Mexico, poor
households are exposed to systemic risks, such as droughts
and floods, that affect the economic livelihood of their
region. Catastrophic insurance is useful for small farmers,
although commercially oriented small farmers may wish to
obtain coverage for less catastrophic events. Weather
insurance could meet this need. It pays out according to the
frequency and intensity of specific weather events. Because
weather insurance depends on the occurrences and objective
measure of intensity of a specific event, it does not
require individual farm inspection that can be very costly
for small farm. The authors argue that a key issue of
delivering insurance to small farmers is the existence of
producer organizations. In Mexico, the farmer mutual
insurance funds provide a good example. These funds provide
insurance to their members by pulling together resources to
pay for future indemnities and reinsures itself from major
systemic risks that could hurt simultaneously all their members.
Citation
“Skees, Jerry; Varangis, Panos; Larson, Donald; Siegel, Paul. 2002. Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?. Policy Research Working Paper;No.2812. © World Bank, Washington, D.C.. http://hdl.handle.net/10986/14816 License: CC BY 3.0 IGO.”
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