Basis risk
Basis risk is the difference between an index and the shock that the index is supposed to be a proxy for. A payout triggered by an index may be higher or lower than the beneficiary's losses, leading to overpayment or shortfall respectively. Where there are differences of opinion amongst stakeholders over what the index is supposed to be a proxy for, the precise definition of basis risk can be contested. For example, disagreement may arise over whether an agricultural insurance product that uses a rainfall-based index covers drought-induced crop disease and pest damage (Centre for Disaster Protection).
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This technical brief, authored by CERDI and supported by the Centre for Disaster Protection, provides an in-depth analysis of flood risk in Chad.
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This insight paper examines the challenge of handling basis risk in disaster risk financing systems.
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This report lays out a vision for new systems of financing to respond to the changing nature of global refugee crises.
Read moreParametric insurance
Insurance that pays when an agreed indicator reaches a set level, not actual losses.
Disaster
A severe event causing widespread harm that exceeds a community’s ability to cope alone.
Indemnity insurance
Insurance that pays based on assessed losses after damage to a specific asset.
Resilience
The ability to withstand shocks, adapt, recover and continue functioning over time.
Catastrophe bond
A catastrophe bond (cat bond) is a risk-transfer financial instrument that allows governments or insurers to transfer disaster risk to capital market investors.
Contingent loan (or credit) and grants
A pre approved loan released automatically when agreed crisis conditions or triggers are met.
