1. Organising ex ante financing for highly correlated losses that result in extremely large financial exposure; and
2. High transaction costs due to asymmetric information problems such as moral hazard and adverse selection.

The document begins with an overview of risk and how decision makers currently cope with and manage risk in developing countries and examines the impediments to developing effective risk transfer markets. A review of the experience of some developed countries then follows. Consideration is also given to alternative solutions that might be possible by introducing the concept of weather index insurance and the advantages of such systems for developing countries. Two basic innovations dominate the conceptual framework behind this proposal:

1. Use of index-based insurance; and
2. Layering risk to facilitate risk transfer.