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Abstract

This article focuses on innovation in weather insurance designed to fit the special circum-stances of the poor in lower income countries where rural and agricultural financial markets are largely underdeveloped. Index insurance is an innovation that circumvents many of the fundamental problems that hamper the development of insurance for weather risks in lower in-come countries. With index insurance, payments are made based upon an objective and inde-pendent index that serves as a proxy for significant losses to crops, livestock, or other prop-erty. For example, the index can be based upon extreme rainfall measures that create either drought or flooding. Weather stations or even satellite imagery coupled with computer models can be used to create reliable “indexes” as the basis of payments. This article reviews this innovation by providing the background for its development and the motivation for using the innovation for the poor.

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