On June 24, 2009, USAID's Microenterprise Development office held its 32nd Microfinance Innovations After Hours Seminar on the topic of "The Potential and Limitations of Indes-based Weather Insurance: Mali and Peru."  Speaker Jerry Skees (GlobalAgRisk, Inc.) spoke about his experiences  with weather insurance after such disasters such as the El Nino hurricane for Peru and droughts in Mali.  Lena Heron (USAID Office of Agriculture) moderated the discussion and the question and answer session afterward. 

Click here for a screencast of this presentation.

>> Background
>> Resources
>> Speaker bio
>> PowerPoint Presentation

Background:
Agriculture remains a major activity for nearly 75 percent of the rural poor in the developing world. While progress is being made in microfinance, these services rarely reach the rural poor. Agricultural lending is constrained in many parts of the world because of severe weather risk that affects large numbers at the same time. There is very little agricultural insurance in developing countries. In the past decade progress has been made in the introduction of index-based weather insurance. Index-based weather insurance makes payments based on independent measures, such as rainfall, that are highly correlated with realized losses. This form of insurance is appropriate in developing countries because the use of an index avoids many of the costs associated with assessing losses directly. Nonetheless, we are learning that the applications of index-based weather insurance has limitations.

This seminar will present pre-feasibility work for Mali to illustrate the steps that must be taken to understand if index-based weather insurance has potential. The case is particularly troublesome as it raises the specter that carbon depletion in the soils of many countries in Africa may be undermining the ability to use index-based weather insurance. To be clear, we are far from settled on the seriousness of the problem as it relates to index-based weather insurance. The case of Peru will also be presented. In this case, some significant progress has been made with the introduction of an index-based weather insurance that uses sea surface temperature as the proxy for loss that is created by extreme El Nino events that create catastrophic flooding in the Northern regions of Peru. This product is being presented to the lenders as a form of business interruption insurance. These two cases raise serious questions regarding where weather-index insurance may be most effective. The seminar will strive to provide a clear picture of the potential and the limitations of index-based weather insurance.

Resources:

• Pre-feasibility Analysis: Index-based Weather Risk Transfer in Mali
• After Hours Presentation #9: Index-based Insurance

Speaker bio:
Since 1992, when Jerry Skees led the research and development of the first index insurance program for the United States—the Group Risk Plan—he has been involved with numerous international efforts to extend the use of index insurance to improve financial services in new markets. In 1996 in Nicaragua, Skees and a World Bank team began the first efforts to examine the use of weather index insurance in a lower income country. Work in Nicaragua motivated the World Bank to expand its use of index insurance, and Skees helped obtain the Development Marketplace Grant, through which Skees and the World Bank team continued their work in Nicaragua and started projects in Ethiopia, Morocco, and Tunisia in 1999. In 2001, Skees founded GlobalAgRisk to extend his international work and to place it in a policy and market development framework. Relying on his more than 15 years of experience with index insurance, Skees is leading the GlobalAgRisk team to continually evolve and clarify how index insurance can best be used, resulting in several pioneering transactions in agricultural insurance, natural disaster risk, and rural finance.

Author/Presenter
Jerry Skees

Organization
GlobalAgRisk