Managing Agricultural Production Risk - Innovations in Developing Countries

This document aims to demonstrate how formal global markets can be used to insure natural disaster and weather risks in developing countries. It stresses that the key challenge remains on how to make insurance against extreme weather events both more effective and affordable. As per the paper, two major issues obstruct the development of risk transfer markets for agricultural losses caused by such events:

• Organizing ex-ante financing for highly correlated losses that result in extremely large financial exposure;
• High transaction costs due to asymmetric information problems such as moral hazard and adverse selection.

The document introduces:

• Several sources of risk that create poverty traps for poor households and that impede the development process.
• Index insurance and highlights its use at the micro, meso, and macro-levels for risk transfer.

The paper further discusses the following in detail:

• Developed country approaches to agricultural risk;
• Innovation in managing production risk;
• New approach to agricultural risk management in developing countries.

The paper finally sets out policy and operational implications for governments and the World Bank operational agenda to facilitate the development of innovation in agricultural risk management:

• Governments need to:
  • Identify the risk profile for private and public assets and business flows;
  • Quantify the impact of this risk on the economy and revenues;
  • Design a rural risk management framework;
  • Implement risk reduction and risk transfer.
• The World Bank activities include:
  • Educational efforts;
  • Incorporation of risk management into holistic rural development strategies;
  • Investment lending operations designed to encourage the development of risk transfer markets;
  • Ex-ante coordination of donor responses to natural disasters;
  • Monitoring and evaluation of the performance of index insurance instruments.