There is much debate about the implications of climate change for index insurance, centered around the following three questions. Can index insurance contribute to adaptation strategies in developing countries? Can it play a role in managing the uncertainty associated with climate change? And does climate change challenge the viability of index-based insurance products? There are at least three ways in which index insurance might help build adaptive capacity: as a risk transfer mechanism within a comprehensive strategy for managing climate risk in the face of climate change; as a mechanism to help people access the resources needed to escape climate-related poverty; and as a mechanism to incentivize risk reduction. A comprehensive strategy for adaptation in the agricultural sector, for example, could include adapted crop varieties, microirrigation, rainwater harvesting and improved soil conservation practices. However, a certain 
amount of risk would remain – and this remaining risk might be covered by index insurance. The second way index insurance can contribute to adaptation is through building more resilient livelihoods by enabling access to increased credit, technology and inputs. Insured loans allow lenders to recuperate their money even in a year where the climate causes production losses. The loans allow people to invest in more intensive livelihood strategies which may help them to escape poverty traps. The increase in wealth and in economic resilience allows people to buffer themselves from the direct impacts of the climate. Beyond this, a key challenge in designing insurance in the face of climate change is to incentivize risk reduction through price signals and risk management stipulations. For example, contracts could stipulate that certain risk reduction mechanisms, such as the adoption of wind-resistant cropping patterns or drought-tolerant crop varieties, must be in place if crops are to be covered. In Ethiopia, a pilot project is testing a scheme in which cash-constrained farmers pay for insurance premiums through their labor on community assets which reduce risk, such as water-harvesting structures. The cost of the premiums in this project contains a component that is a price signal to reflect long-term trends (Oxfam America, 2009; see ‘A farmercentric approach in Ethiopia’ on page 44 and ‘Climate variability and change and index insurance’ on page 38).