One the major problems with disaster insurance is the disruption in infrastructure and government function makes it difficult to process specific claims information in a timely manner. As the delays in processing claims after the 2016 Baton Rouge flood illustrate, this is difficult even in developed countries. It becomes impossible in developing countries, making traditional insurance useless for insuring against disaster risk. Index insurance pays claims based based on the occurrence of a predefined index event, without proof of specific loss. This can include rainfall within a given time period for crop insurance, river or coastal flooding levels, seismic measures for earthquakes, etc. The policy pays off based on the occurrence and severity of the event, which can be monitored in real time. For example, at the individual level, a farmer with index based crop insurance will automatically get a payment if rainfall during the grown season falls below predefined levels. This eliminates the cost and infrastructure for claims management and individual risk assessment, allowing crop insurance to be provided to subsistence level farmers where the payments may only be a few dollars.
At the country level, the index insurance provider can monitor an event such as a hurricane in real time and pay claims to the country within days of the event. This provides money for immediate relief, which is critical in countries who limited infrastructure may have been incapacitated by the event. It also keeps the country from being captive of outside NGOs which might otherwise have undue power because they control the only available relief funding.
Index insurance can be paid for by a group of individuals, the country, or it can be a vehicle for international aid organizations to provide reliable and efficiently administered relief. The disadvantage of the index insurance is that it only provides coverage for the specific predefined events, it is not general disaster insurance. It also only provides relief if the event exceeds the predefined threshold – an event that is marginally below the threshold triggers for payouts. Lump-sum payments to the country may be diminished or lost because of corruption or incompetence.
Index Insurance Resources
FAQ – Index-based livestock insurance
General Bibliography
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