Weather index-based insurances for farmers in the North China Plain: An analysis of risk reduction potential and basis risk
AbstractPurpose – The purpose of this paper is to analyze the extent to which weather index-based insurances can contribute to reducing shortfall risks of revenues of a representative average farm that produces corn or wheat in the North China Plain (NCP). The geographical basis risk is quantified to analyze the spatial dependency of weather patterns between established weather stations in the area and locations where the local weather patterns are unknown. Design/methodology/approach – Data are based on the Statistical Yearbook of China and the Chinese Meteorological Administration. Methods of insurance valuation are burn analysis and index value simulation. Risk reduction is measured non-parametrically and parametrically by the change of the standard deviation and the value at risk of revenues. The geographical basis risk is quantified by setting up a decorrelation function. Findings – Results suggest significant differences in the potential risk reduction between corn and wheat when using insurance based on a precipitation index. The spatial analysis suggests a potential to expand the insurance around a reference weather station up to community level. Research limitations/implications – Findings are limited by a weak database in China and, in particular, by the unavailability of individual farm data. Moreover, the low density of weather stations currently limits the examination of the approach in a broader context. Practical implications – The risk reduction potential of the proposed insurance is encouraging. From a policy point of view, the approach used here can support the adjustment of insurers towards different crops. Originality/value – This paper is believed to be the first that investigates a weather index-based insurance designed for an average farm in the NCP and the quantification of geographical basis risk.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Agricultural Finance Review.
Volume (Year): 71 (2011)
Issue (Month): 2 (July)
Contact details of provider:
Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barry K. Goodwin, 2001. "Problems with Market Insurance in Agriculture," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 643-649.
- Martin Odening & Oliver Musshoff & Wei Xu, 2007. "Analysis of rainfall derivatives using daily precipitation models: opportunities and pitfalls," Agricultural Finance Review, Emerald Group Publishing, vol. 67(1), pages 135-156, May.
- Calum G. Turvey, 2005. "The pricing of degree-day weather options," Agricultural Finance Review, Emerald Group Publishing, vol. 65(1), pages 59-85, May.
- Jerry R. Skees, 2008. "Challenges for use of index-based weather insurance in lower income countries," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 197-217, September.
- Cooper, Joseph C. & Langemeier, Michael R. & Schnitkey, Gary D. & Zulauf, Carl R., 2009. "Constructing Farm Level Yield Densities from Aggregated Data: Analysis and Comparison of Approaches," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49216, Agricultural and Applied Economics Association.
- Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
- Mark R. Manfredo & Raymond M. Leuthold, 1998. "Agricultural Applications of Value-at-Risk Analysis: A Perspective," Finance 9805002, EconWPA.
- Barry K. Goodwin & Alan P. Ker, 1998. "Nonparametric Estimation of Crop Yield Distributions: Implications for Rating Group-Risk Crop Insurance Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 139-153.
- Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
- Turvey, Calum G., 2002. "Insuring Heat Related Risks In Agriculture With Degree-Day Weather Derivatives," 2002 Annual meeting, July 28-31, Long Beach, CA 19896, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Skees, Jerry & Gober, Stephanie & Varangis, Panos & Lester, Rodney & Kalavakonda, Vijay, 2001. "Developing rainfall-based index insurance in Morocco," Policy Research Working Paper Series 2577, The World Bank.
- Debrah, Siegfried & Hall, Harry H., 1989. "Data aggregation and farm risk analysis," Agricultural Systems, Elsevier, vol. 31(3), pages 239-245.
- Alan Ker & A. Tolga Ergun, 2007. "On the Revelation of Private Information in the U.S. Crop Insurance Program," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(4), pages 761-776.
- Ernst Berg & Bernhard Schmitz, 2008. "Weather-based instruments in the context of whole-farm risk management," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 119-133, September.
- Daniele Simone Torriani & Pierluigi Calanca & Martin Beniston & Jürg Fuhrer, 2008. "Hedging with weather derivatives to cope with climate variability and change in grain maize production," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 67-81, September.
- Jerry R. Skees & Barry J. Barnett, 2006. "Enhancing microfinance using index-based risk-transfer products," Agricultural Finance Review, Emerald Group Publishing, vol. 66(2), pages 235-250, September.
- Shen, Zhiwei & Odening, Martin, 2012.
"Coping with Systemic Risk in Index-based Crop Insurance,"
123rd Seminar, February 23-24, 2012, Dublin, Ireland
122555, European Association of Agricultural Economists.
- Zhiwei Shen & Martin Odening, 2013. "Coping with systemic risk in index-based crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 44(1), pages 1-13, 01.
- Weber, Ron & Musshoff, Oliver, 2012. "Microfinance for agricultural firms - What can we learn from bank data?," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126708, International Association of Agricultural Economists.
- Weber, Ron & Musshoff, Oliver, 2012. "Microfinance for Agricultural Firms- Credit Access and Loan Repayment in Tanzania," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122552, European Association of Agricultural Economists.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister).
If references are entirely missing, you can add them using this form.