Global Index Insurance Facility Factsheet

Global Index Insurance Facility Factsheet: Insurance providers in Africa and other developing regions rarely offer the hazard insurance familiar to industrialized countries. Earthquake, flood, and hurricane victims often lose their homes in an instant, recovering none of their investment unless they are fortunate enough to be part of a donor-funded disaster relief program. Likewise, droughts can wipe out the crops that farmers rely on for income.

IFC, together with the International Bank for Reconstruction and Development (IBRD), also a member of the World Bank Group, has established the Global Index Insurance Facility (GIIF) to address this problem. GIIF takes an innovative index-based approach to insurance that aims to expand access to insurance products in developing countries, and particularly to farmers and people in agrarian communities.

With traditional insurance, a farmer insures crops for loss, so if 20 percent of crop yield is damaged, for example, the insurance company pays damages. This system creates moral hazard and requires that claims are individually checked for actual yield loss leading to high transaction costs and the frequent need to subsidize premiums. Results of this type of insurance are often poor for the insured and the insurer, and the complexities involved provide little incentive to expand such insurance provision into emerging or frontier markets where it is needed most.

Under an index-based insurance scheme, losses resulting from weather and catastrophic events are assigned values on a predefined basis, using an index. When one of those events is triggered the insured party receives an insurance payment according to the pre-defined payment formula. For example, insurance will be paid out in the event of drought as a result of less than an anticipated amount of rain, a wind storm of certain category, or an earthquake registering a certain Richter scale, occurring within a fixed distance from a location.

This innovative approach to insurance provision means that policyholders qualify for payouts as soon as the statistical indexes are triggered, without having to wait for claims to be settled in the traditional way. The insurance will pay if the index is triggered, irrespective of the actual loss.

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