Since 1992, when Jerry Skees led the research and development of the first index insurance program for the United States—the Group Risk Plan—he has been involved with numerous international efforts to extend the use of index insurance to improve financial services in new markets. In 1996 in Nicaragua, Skees and a World Bank team began the first efforts to examine the use of weather index insurance in a lower income country. Work in Nicaragua motivated the World Bank to expand its use of index insurance, and Skees helped obtain the Development Marketplace Grant, through which Skees and the World Bank team continued their work in Nicaragua and started projects in Ethiopia, Morocco, and Tunisia in 1999. In 2001, Skees founded GlobalAgRisk to extend his international work and to place it in a policy and market development framework. Relying on his more than 15 years of experience with index insurance, Skees is leading the GlobalAgRisk team to continually evolve and clarify how index insurance can best be used, resulting in several pioneering transactions in agricultural insurance, natural disaster risk, and rural finance.

Access to financial services in rural areas is seen as a key factor to keep people from falling into chronic poverty, and over the longer term, to help people rise out of chronic poverty. Catastrophic weather risks create serious constraints to the development of credit, savings, and insurance services for rural households. Because catastrophic events can create widespread losses, local banks and insurers are simply unable to pool and manage these extreme risks on their own. Two key constraints must be addressed to make catastrophic weather risk products sustainable. First, catastrophic weather risk must be transferred out of the vulnerable community and region, ideally by using the international reinsurance market which manages major risks throughout the world. Second, the risk transfer process must be efficient and affordable, since high transaction costs impede the development of insurance markets in lower income countries. GlobalAgRisk focuses on developing innovative risk transfer mechanisms to address both constraints, creating opportunities for more complete financial markets.

Index insurance uses an objective third-party measure that becomes a proxy for loss because the measure is highly correlated with losses. Index insurance can only be purchased by an entity holding an insurable interest. The two most common examples of index insurance are area-yield index insurance and weather index insurance. Measures of river flows, model-generated data using satellite images, and area livestock mortality rates have also been used. While we use index insurance in most settings, our team is also prepared to develop these contracts as derivatives in the proper setting.

Structuring a linkage between banking and index insurance has the potential to improve the efficiency of rural financial services by transferring catastrophic weather risk out of agriculture and reducing the costs of product delivery. In some cases, we recommend using index insurance to protect lenders’ portfolio risk as a means of increasing access to credit and introducing these products in new markets. Bundled index insurance products can also be used to improve risk transfer for intermediaries in the agricultural value-chain which should also increase the economic opportunities of poor households. Because of our experience with feasibility assessment, product design, and our ongoing research for better solutions for the transfer of natural disaster risk in agriculture, we continue to lead in the development of new ideas for reducing the constraints to risk transfer markets.