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Efficiency Of Wind Indexed Typhoon Insurance For Rice

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  • Banerjee, Chirantan
  • Berg, Ernst
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    Abstract

    Index-based weather insurances are innovative tools for mitigating weather risks in agriculture. Several donor agencies and development organisations are investing substantially to propagate these programmes in developing countries. However, often due to high basis risks, these products mitigate risk only through diversification effect, thereby defeating the intended purpose. Besides, they send confusing messages to the farmers regarding the very concept of insurance. Therefore, this paper investigates the efficiency of two such index-based weather insurances in Philippines, designed to mitigate rice yield loss caused by strong typhoon winds. The insurance products are designed assuming negative linear correlation between wind speed and rice yield. To verify, we used satellite data and GIS tools to tabulate typhoon wind speeds, concurrent crop stage and the subsequent rice yield in five provinces which have both the programmes. Regression analyses and Ramsey RESET tests confirm that rice yield loss is not a function of incident typhoon wind speed, irrespective of the crop stage. Basis risk estimations, based on minimum variance hedging ratio for a risk averse expected utility maximising consumer show that the products entail basis risks of the order of 99%. Typhoons damage all crops, but wind indexed insurance is inadequate when the insured crop has low head weight and is agile like rice, since wind onslaughts do not determine the degree of yield loss. Notably, a thorough burn analysis for basis risk is a necessity before investing time and money implementing index-based weather insurance schemes as a tool for poverty alleviation.

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    File URL: http://purl.umn.edu/114240
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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114240.

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    Date of creation: 2011
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    Handle: RePEc:ags:eaae11:114240

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    Related research

    Keywords: Basis risk; Typhoon; Index-based Insurance; Crop Production/Industries; Risk and Uncertainty;

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    References

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    1. Xavier Giné & Robert Townsend & James Vickery, 2008. "Patterns of Rainfall Insurance Participation in Rural India," World Bank Economic Review, World Bank Group, vol. 22(3), pages 539-566, October.
    2. Xiaohui Deng & Barry J. Barnett & Dmitry V. Vedenov & Joe W. West, 2007. "Hedging dairy production losses using weather-based index insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 36(2), pages 271-280, 03.
    3. 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.
    4. Alfons Weersink & Szu-Hsuan Celia Chiang, 2006. "Pricing Weather Insurance with a Random Strike Price: The Ontario Ice-Wine Harvest," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 696-709.
    5. Woodard, Joshua D. & Garcia, Philip, 2007. "Basis Risk and Weather Hedging Effectiveness," 101st Seminar, July 5-6, 2007, Berlin Germany 9254, European Association of Agricultural Economists.
    6. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Is index-based weather insurance useful?
      by Economic Logician in Economic Logic on 2011-11-03 14:14:00
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    Cited by:
    1. Banerjee, Chirantan & Berg, Ernst, 2012. "Policy for implementation of Index Based Weather Insurance revisited: the case of Nicaragua," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122448, European Association of Agricultural Economists.

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