Weather Index Derivatives in Risk Transfer for Agricultural Natural Hazards

The article begins by briefly reviewing agricultural risk management strategies used by farm households and some of the unique problems associated with agricultural insurance. Especially, the experience of developed countries is highlighted to make the case for why such approaches cannot work well in lower-income countries. The article introduces innovations that use index-based insurance products, and gives a pricing model for weather index derivatives which is deduced with utility-based pricing, and then, the article reviews both the advantages and disadvantages of index-based agricultural insurance and its applicable scope.