Index-Based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Asian Countries

This paper explores innovations in index-based risk transfer products (IBRTPs) as a means to address important insurance market imperfections that have precluded the emergence and sustainability of formal insurance markets in developing countries, where uninsured natural disaster risk remains a leading impediment of economic development. Using a combination of disaggregated nationwide weather, remote sensing and household livelihood data commonly available in developing countries, the paper provides analytical framework and empirical illustration on showing design nationwide and scalable IBRTP contracts, to analyse hedging effectiveness and welfare impacts at the micro level, and to explore cost effective risk-financing options. Thai rice production is used in our analysis with the goal to extend the methodology and implications to enhance development of national and regional disaster risk management in Asia.