Structure ofindex insurance contracts

tte terminology used to describe features of index insurance contracts resembles that used for futures and options contracts rather than for other insurance contracts. Rather than referring to the point at which payments begin as a trigger, for example, index contracts typically refer to it as a strike, ttey also pay in increments called ticks. Consider a contract being written to protect against deficient cumulative rainfall during a cropping season, tte writer of the contract may choose to make a fixed payment for every one millimetre (mm) of rainfall below the strike. If an individual purchases a contract where the strike is one hundred millimetres of rain and the limit is fifty mm, the amount of payment for each tick would be a function of how much liability is purchased, ttere are fifty ticks between the one hundred mm strike and fifty mm limit, ttus, if $50,000 of liability were purchased, the payment for each one mm below one hundred mm would be equal to $50,000/(100 - 50), or $1,000. Once the tick and the payment for each tick are known, the indemnity payments are easy to calculate. A realized rainfall of ninety mm, for example, results in ten payment ticks of $1,000 each, for an indemnity payment of $10,000. Figure 22.1 maps the payout structure for a hypothetical $50,000 rainfall contract with a strike of one hundred mm and a limit of fifty mm.

In developed countries, index contracts that protect against unfavourable weather events are now sufficiently well developed that some standardized contracts are

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