Insurance Contracts Based On Indices, A Step Towards Weather Derivatives

The aim of this paper is to analyze the methodology of structuring an index based insurance contract. The weather has always been the biggest risk factor in agriculture, affecting all aspects of the economic sectors. In the developed countries of the world, there is a significant number of rain-dependent farmers. To gain insight into potential growth of weather markets in developed countries, we are going to analyze the case of India. In 2003, Basix microfinance company in Hyderabad and ICICI Lombard insurance company in Mumbai have launched a pilot weather insurance, which had as basic index phenomena for Mahahbubnagar district of Andhra Pradesh. Further detail can be found in the full-paper. In the paper we will enumerate the appropriate steps in the determining the necessity for the use of index based insurances. The appropriate stages are making a comparison between index based insurances and traditional insurances, and optimizing the use of weather indices in insurance contracts. In order for the contracts to be successful , the recommended steps are : developing a product based in an index, and after the we need to plan and implement the contract. In planning the implementation it is needed that we: identify the risks and areas where they manifest, then identify the best distribution channels; after this we can develop a prototype of the contract. The next step would the testing of the negotiability of the contract, then the contract is opened to be finalized. After this the index based insurance contract can be introduced to the market, but the program needs monitoring in order to insure its successfulness. In order for the market and contract to grow the necessary step are: having access to the necessary meteorological data, determine the optimal way of integrating the contract in the existing economical context, technical feasibility, property rights and the legal framework. In the end, the aim is to familiarize the literacy field and potential beneficiaries of such products and to provide some way to address this market for investment purposes, showing a bridge-point between the traditional insurances and the more elaborated weather derivatives.