Farmers face a variety of market and production risks that make their incomes volatile from year to year. In many cases, farmers also confront the risk of catastrophe, as, for example, when crops are destroyed by drought or pest outbreaks or when assets and lives are lost to hurricanes and floods. These risks are particularly burdensome to the poor, including many small farmers. Unless adequately managed, they can slow economic development and poverty reduction and contribute to humanitarian crises. Covariate risks, especially those that involve catastrophic losses, pose special difficulties and costs. Past attempts by governments and relief agencies to help manage covariate risks have been costly and often ineffective. Today there is much interest in index insurance products that might provide a more effective and market-mediated solution.
International Food Policy Research Institute (IFPRI)