Double trigger agricultural insurance products with weather index and yield index

Abstract

Purpose Agricultural weather index insurance (WII) has been introduced in pilot or experimental form in many countries. However, the effective demand for WII is often limited by the impact of the basis risk. Thus, the purpose of this paper is to propose a new type of double trigger product, named “supplement” type, to reduce basis risk and improve the performance of the standalone WII. Design/methodology/approach Two measures of performance are introduced by the certainty equivalent income of expected utility theory. Through the Monte Carlo experiments and empirical study, this paper compares the performance of three types of double trigger products. Findings The findings indicate that the supplement type can significantly improve the performance of the single weather index product. First, it covers the downside basis risk and the catastrophic basis risk when the standalone WII fails to do so, especially in case of extreme losses. Second, it is superior when the correlation between the weather index and the yield index is not so strong, and can further enhance the performance of insurance even when the weather index and the yield index are highly correlated, for which the standalone WII could perform well. Originality/value The supplement type double trigger product proposed in this paper as an enhancement version finds a more preferable way to improve the standalone WII with relative lower complexity.

Farmers’ Demand for Informal Risk Management Strategy and Weather Index Insurance: Evidence from China

“…One of the promising means to ensure the stability of rural society when faced with natural hazards and disasters is to establish an agricultural insurance system (Skees et al 2002;Wang et al 2011). Since 2004, policy-based, multiperil crop insurance (MPCI) has developed rapidly with government fiscal support in China (Wang et al 2011;Xiao and Yao 2019). But the MPCI's sustainability is plagued by high administrative costs, moral hazard, and adverse selection (Berhane et al 2013;Zhao et al 2016;Ye et al 2017).…”

“…Basis risk increases farmers' costs and makes taking up WII a costly gamble rather than a useful risk management tool, and is often known as the major obstacle to the increasing uptake rate of WII (Akter et al 2009;Hazell and Hess 2010;Clarke 2011;Miranda and Farrin 2012;Castellani et al 2014;Jensen et al 2016). The effective demand for WII is often limited by the impact of the basis risk, and considerably lowers the demand for WII products because the contracts fail to provide protections against agricultural risks, especially for low-income farmers (Sarris 2013;Clarke and Dercon 2016;Clement et al 2018;Liu et al 2019;Xiao and Yao 2019). Therefore, it is unclear whether farmers prefer to adopt WII or informal risk management methods.…”

Urban Flood Loss Assessment and Index Insurance Compensation Estimation by Integrating Remote Sensing and Rainfall Multi-Source Data: A Case Study of the 2021 Henan Rainstorm

“…(1) Design of compensation structure for flood index insurance Inspired by current forms of insurance payouts [46,60], flood index insurance compensation was designed as a tiered trigger. The compensation design for flood index insurance is shown in Equation ( 5), and the compensation structure is shown in Figure 2.…”

“…That is, the data are collected during the policy period, recorded over a long time series, independently verifiable, and closely related to losses. Therefore, in this paper, the trigger parameter was chosen to be rainfall [23,46,47], which is the core flood-causing factor. However, rainfall data have high spatial variability [48,49], and using them alone to determine insurance compensation is prone to high basis difference risk [44].…”

The impact of weather index insurance on agricultural technology adoption evidence from field economic experiment in China

“…Third, the participants drew lots to determine personal loss, and then compared it with his indemnity. The difference was the basis risk which is an important factor affecting the performance of weather index insurance (Xiao and Yao, 2018).…”