Insuring Against the Weather: Addressing the Challenges of Basis Risk in Index Insurance using Gap Insurance
University of Colorado
IFPRI (US and Ethiopia); Oxford University (UK)
Carlos Martins-Filho, Ruth Vargas Hill (US); Alemayehu Seyoum Taffesse (Ethiopia); Stefan Dercon (UK)
This research considers the following question: how can generic weather index products be designed and combined with network based savings, gifts and loans to insure some of the basis risk inherent in these products? The research will focus on developing simple, flexible and inclusive index insurance products, and learning how to link them with savings or credit to reduce the impact of basis risk inherent in any index product. This research will thus also provide some understanding on how linking insurance and credit can strengthen credit markets in rural areas. The work builds on multiple years of panel data collected in Bangladesh and Ethiopia that has characterized the risks of rural households, their coping strategies and the impact of risk on welfare and investment. It will also build on the significant research work undertaken on mutual insurance societies in Ethiopia and microfinance groups in Ethiopia and Bangladesh. The research uses non-parametric techniques to assess the relationship between index variables and yield, and will use experimental economics to assess determinants of demand, the interlinking of insurance, credit and savings and ultimately, the impact of insurance provision.