Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?

This paper addresses many of the risk-coping strategies for the rural poor, with a focus on micro level and household actions. Further, the paper uses Mexico as a case study and informs about:

• Innovations targeted at helping the poor deal with systemic risks;
• Success of farmer mutual insurance funds in providing insurance to their members by pulling together resources to pay for future indemnities and reinsuring itself from major systemic risks.

The paper finds that:

• Rural poor are particularly vulnerable to risks that reduce incomes and increase expenditures;
• Two sources of covariate risk are common:
  • Market risks (prices for output and inputs);
  • Natural disaster risks.
• Market mechanisms are generally available for managing some market-related risks;
• Traditional coping mechanisms are likely to fail in case of covariate or systemic risks;
• Insurance alone is not sufficient to address the problems faced by rural households when natural disasters occur.

Finally, the authors suggest developing systems that could help create efficient and affordable risk sharing instruments for multiple purposes. They illustrate the use of weather index contracts that facilitate:

• Use as an objective means of providing disaster aid based on relative risk so as not to favor high risk regions;
• Use by governments to fund disaster aid;
• Use by intermediaries in the economy to help manage natural disaster risk;
• Direct use as insurance to households against certain local natural disasters.