Weather Index Insurance and Shock Coping

Weather risk and incomplete insurance
markets are significant contributors to poverty for rural
households in developing countries. Weather index insurance
has emerged as a possible tool for overcoming these
challenges. This paper provides evidence on the impact of
weather index insurance from a pioneering, large-scale
insurance program in Mexico. The focus of this analysis is
on the ex-post effects of insurance payments. A regression
discontinuity design provides find evidence that payments
from weather index insurance allow farmers to cultivate a
larger land area in the season following a weather shock.
Households in municipalities receiving payment also appear
to have larger per capita expenditures and income in the
subsequent year, although there is suggestive evidence that
some of this increase is offset by a decrease in
remittances. While the cost of insurance appears to be high
relative to the payouts, the benefits exceed the costs for a
substantial range of outcomes.