THE ESSENTIALS OF RAINFALL DERIVATIVES AND INSURANCE

This paper investigates the use of rainfall insurance to manage agricultural production risks. A number of rainfall insurance products are presented along with a raitonal model which identifies the economics of rainfall. The use of rainfall insurance will increase in future years as capital markets, financial institutions, reinsurance companies, crop insurance companies, and hedge funds collectively organize to share and distribute weather risks. The focus of this paper is in fact directed towards the intermediation function of risk markets rather than on end user benefits.