The Potential for Scale and Sustainability in Weather Index Insurance

THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE
FOR AGRICULTURE AND RURAL LIVELIHOODS
Glossary
adverse selection: This occurs when potential borrowers or insurees have hidden
information about their risk exposure that is not available to the lender or insurer,
which then becomes more likely to erroneously assess the risk of the borrower
or insuree.
aggregator: An organization that reaches a large number of potential clients through
its natural mandate or business activities, such as a farmers’ organization, financial
service provider, input supplier or community development organization.
basis risk: The potential mismatch between the index-triggered payouts and the actual
losses suffered by the policy holder.
covariate risk: Risk that can affect large numbers of people at one time (e.g. widespread
drought, flooding, earthquake).
index insurance: An insurance product linked to an index highly correlated to local
yields. Contracts are written against specific perils or events monitored at regional
levels; payouts are triggered by pre-specified patterns of the index.
moral hazard: This occurs when individuals engage in hidden activities that increase
their exposure to risk as a result of borrowing or purchasing insurance. These
hidden activities can leave the lender or insurer exposed to higher levels of risk
than had been anticipated when interest or premium rates were established.
parametric insurance product: An insurance product in which payouts are triggered
by an event, such as a catastrophic storm.
transhumance: Seasonal migration of livestock to suitable grazing grounds.
waterlogging: Oversaturation of the soil that can starve plants of the required oxygen.
winterkill: Crop losses due to very cold winter weather.
zero/one contract: A contract structured so that once a threshold has been crossed,
the total possible payout is made.
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