Pre-Feasibility Analysis: Index-Based Weather Risk Transfer in Mali
This pre-feasibility analysis presents the basic conditions necessary to support development of a market for index-based insurance products that may allow either farmers or lenders to transfer highly correlated drought risk. Malian farmers and microfinance lenders are exposed to the risk of extreme drought. When lenders lend to many farmers, the correlated losses from drought create significant default risk. MFIs that serve agriculture face a problem with donors reluctant to increase their exposure to this non-diversifiable risk. A market to transfer drought risk could improve lenders' access to capital. Weather insurance would encourage greater use of capital and technology to provide a safety net for the poor. The key preconditions to developing a weather insurance market include an assessment of:
- Legal and regulatory environment;
- Users' acceptance of the concept;
- Quality of weather infrastructure;
- Correlation of weather events across space;
- Potential for developing a weather index that matches crop yields.
Developing rainfall-based weather index insurance for Mali will be quite challenging. Any rainfall index insurance will need to be a complex product potentially reflecting compounding variables like length of time with little or no rainfall and intensity of rainfall.
