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Index insurance is having a development impact where it’s needed most

Ceyla Pazarbasioglu's picture
Also available in: العربية | Français | Español

Many of the world’s populations are vulnerable to climate shocks – to drought, flooding, irregular rainfall and natural disasters. For these countries, cities and communities, index-based insurance is a critical risk-management tool which allows victims of such shocks to continue to have access to finance and to build resilience against future risks.

Index, or parametric, insurance pays out benefits based on a pre-determined index for the loss of assets and investments as a result of weather or other catastrophic events. In contrast, traditional insurance relies on  assessments of the actual damage. 
Because index insurance allows for the claims-settlement process to be quicker and more objective, it has great potential to improve risk management and can play an important, positive role in reducing poverty. 
 
Developing this type of insurance is especially relevant in regions like Sub-Saharan Africa, where a very large share of GDP and job creation is in the agricultural sector. For instance, agriculture is the primary source of food and income for Africans, providing up to 60 percent of all jobs on the continent. 
 
Through the Global Index Insurance Facility (GIIF), the World Bank Group is fully committed to the development of local capacity to create, evaluate, price, and distribute index insurance products to help the vulnerable build resilience against natural disasters, climate risks, and food insecurity. 
 
An example of our commitment to fostering capacity was last year’s Borlaug Awards for Field Research and Application at the World Food Prize. The winner, Dr. Andrew Mude of the International Livestock Research Institute, was a World Bank grantee whose livestock index insurance project  was initially supported by GIIF and then was scaled up by the Disaster Risk Finance and Insurance Program (DRFI)
 
However, developing index insurance is not challenge-free.
 
Although being an innovative product, index insurance is rarely offered by insurers in developing countries, because it is perceived to be a difficult and complicated product to evaluate. Most insurers still lack the knowledge and technical capacity to develop sustainable and profitable index insurance products. 
 
With this challenge in mind, the World Bank Group has a role in closing the knowledge gap. Index insurance not only complements our projects, but it also elevates the insurance sector as a whole.  It is our priority to help stakeholders understand and adhere to best practices that support the healthy, sustainable, and responsible development of the index insurance market. 
 
We have a new practical guide – the Risk Modeling Appraising Named Peril Index Insurance Product --  to help the insurance industry navigate through the complexity of management decision-making, risk modeling and product design. We also plan to help organize capacity-building workshops to build technical knowledge.

These efforts to build capacity in developing countries are aimed at helping the index-insurance market grow more quickly and in a more sustainable way, because product offerings will be developed by those who best know the context and the environment. For example, Kenya’s Insurance Regulatory Authority requested our guide be shared with 300 delegates at a professional convention in July. Other countries – including Nigeria, Bangladesh and Ukraine – are expected to develop index-insurance products of their own in the next three years. 
 
With our continued support, we hope that practitioners and regulators will incorporate best practices offered by this publication and knowledge-dissemination activities into their curriculum and development plans. 
 
Better designed index insurance will better protect the poor and the vulnerable against the challenges posed by natural disasters and climate risks.

Image: Dasan Bobo, World Bank

Comments

Submitted by Asif Dowla on

I don't understand why development community keeps on pushing index insurance. The poor people don't want it for good reasons--basis risks and lack of payout during the good times. Maybe we should divert our energy in helping them to become resilient.

Submitted by Richard Zhang on

Index insurance is valuable when think it in longer term - it facilitates the inflow from capital market into insurance, while very difficult if on indemnity base. Basis risk does exist, but most time it works for people concerned, not the other way. Various innovations are under way to reduce basis risk.

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