Innovations in agricultural and natural disaster insurance

Recent innovations in financial markets bring about new instruments that can be used to provide insurance for agricultural risks. The advantages of index-based insurance contracts make them an attractive tool for risk transfer. In the case of developing countries, index-based insurance allows government to develop agricultural insurance within the country and to transfer the non-diversifiable component of country’s risk to the global markets at highly reduced transaction cost. New institutions have to be formed to implement such a scheme, but the simplicity and transparency of index-based contracts makes those changes easier to implement than with traditional insurance.