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Meso-level weather index insurance: Overcoming low risk reduction potential of micro-level approaches

Ron Weber (Department for Agricultural Economics and Rural Development, Georg-August-Universitaet, Goettingen, Germany AND Financial Sector Policy Unit, KfW Development Bank, Frankfurt, Germany)
Wilm Fecke (Department for Agricultural Economics and Rural Development, Georg-August-Universitaet, Goettingen, Germany)
Imke Moeller (Department for Agricultural Economics and Rural Development, Georg-August-Universitaet, Goettingen, Germany)
Oliver Musshoff (Department for Agricultural Economics and Rural Development, Georg-August-Universitaet, Goettingen, Germany)

Agricultural Finance Review

ISSN: 0002-1466

Article publication date: 5 May 2015

651

Abstract

Purpose

Using cotton yield, and rainfall data from Tajikistan, the purpose of this paper is to investigate the magnitude of weather induced revenue losses in cotton production. Hereby the authors look at different risk aggregation levels across political regions (meso-level). The authors then design weather index insurance products able to compensate revenue losses identified and analyze their risk reduction potential.

Design/methodology/approach

The authors design different weather insurance products based on put-options on a cumulated precipitation index. The insurance products are modeled for different inter-regional and intra-regional risk aggregation and risk coverage scenarios. In this attempt the authors deal with the common problem of developing countries in which yield data is often only available on an aggregate level, and weather data is only accessible for a low number of weather stations.

Findings

The authors find that it is feasible to design index-based weather insurance products on the meso-level with a considerable risk reduction potential against weather-induced revenue losses in cotton production. Furthermore, the authors find that risk reduction potential increases on the national level the more subregions are considered for the insurance product design. Moreover, risk reduction potential increases if the index insurance product applied is designed to compensate extreme weather events.

Practical implications

The findings suggest that index-based weather insurance products bear a large risk mitigation potential on an aggregate level. Hence, meso-level insurance should be recognized by institutions with a regional exposure to cost-related weather risks as part of their risk-management strategy.

Originality/value

The authors are the first to investigate the potential of weather index insurance for different risk aggregation levels in developing countries.

Keywords

Acknowledgements

The authors would like to thank the German research foundation “Deutsche Forschungsgemeinschaft (DFG)” for funding this research. The authors furthermore thank Irina Eichenauer from KfW Development Bank for facilitating access to data. The authors are especially grateful to the editors of Agricultural Finance Review, the referees, and the conference participants of the 3rd International Agricultural Risk, Finance, and Insurance Conference (IARFIC) in Zurich 2014. Their comments contributed a lot to improve the quality of this paper. All remaining errors are of the authors’.

Citation

Weber, R., Fecke, W., Moeller, I. and Musshoff, O. (2015), "Meso-level weather index insurance: Overcoming low risk reduction potential of micro-level approaches", Agricultural Finance Review, Vol. 75 No. 1, pp. 31-46. https://doi.org/10.1108/AFR-12-2014-0045

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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