Agricultural producers and other rural residents are often exposed to a variety of biological, geological, and climatic factors that can negatively affect household income and/or wealth, as well as tremendous variability in output and/or input prices. Given this environment, risk-averse individuals often make investment decisions that reduce risk exposure but also reduce the potential for income gains and wealth accumulation, ttus, risk contributes to the "poverty trap" experienced by rural people in many developing countries. For a variety of reasons, markets for transferring these risks are typically either very limited or nonexistent, ttis "market failure" has stimulated a number of policy responses. Many developed countries have highly subsidized, farm-level agricultural insurance programs. Critics argue that, in addition to being very expensive, these programs stimulate rentseeking activity, are highly inefficient, and may actually increase risk exposure by encouraging agricultural production in high-risk environments. Given fiscal constraints in most developing countries, highly subsidized, farm-level agricultural insurance programs are not a realistic policy option. Index-based insurance prod ucts have been proposed as an alternative risk-transfer mechanism for rural areas in developing countries. While not a panacea for all risk problems, index-based insurance products may prove to be valuable instruments for transferring the financial impacts of low-frequency, high-consequence systemic risks out of rural areas. For a variety of reasons, however, government intervention may be required to generate socially optimal quantities of risk transfer. Governments must carefully consider the extent and nature of any intervention in markets for index-based insurance products, ttese efforts can be facilitated by international organizations policy advice, lending instruments, technical support (WMO and FAO in particular) and monitoring and evaluation systems.
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