Overview

Uninsured risk has far reaching consequences for rural growth as well as poverty reduction. While there are a range of informal mechanisms to insure rural households from the impact of shocks, they are a modest component of a risk layering strategy, even for well off households and even less protective for low income households. Formal insurance mechanisms - including conceptually similar credit access- have inherent market imperfections. State interventions to address these limitations, however, have proven costly and generally poorly targeted. Recent developments in micro finance as well as in insurance marketing have opened new possibilities for household risk reduction. Index insurance, such as weather indexing, addresses other inherent problems in insurance by using an indicator that is not affected by individual behavior and may address monitoring costs and moral hazard. A number of innovations using index insurance are currently being tried in diverse setting ranging from India and Mongolia to Malawi. Marketing costs may still limit the provision of such insurance to small farmers but even in such cases micro-finance institutes may serve as market intermediaries. Moreover, it may also be possible to insure state and sub-national governments to achieve counter-cyclical funding of programs. In this vein, municipal governments in Mexico have embarked on insurance to finance disaster contingency while the World Food Program has insured a portion of its emergency assistance to Ethiopia. Humanitarian organizations and NGOs may also seek insurance in this manner.

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