IDEAS home Printed from https://ideas.repec.org/a/bla/jrinsu/v80y2013i2p351-372.html
   My bibliography  Save this article

Systemic Weather Risk and Crop Insurance: The Case of China

Author

Listed:
  • Ostap Okhrin
  • Martin Odening
  • Wei Xu

Abstract

The supply of affordable crop insurance is hampered by the existence of systemic weather risk which results in large risk premiums. In this article, we assess the systemic nature of weather risk for 17 agricultural production regions in China and explore the possibility of spatial diversification of this risk. We simulate the buffer load of hypothetical temperature-based insurance and investigate the relation between the size of the buffer load and the size of the trading area of the insurance. The analysis makes use of a hierarchical Archimedean copula approach (HAC) which allows flexible modeling of the joint loss distribution and reveals the dependence structure of losses in different insured regions. Our results show a significant decrease of the required risk loading when the insured area expands. Nevertheless, a considerable part of undiversifiable risk remains with the insurer. We find that the spatial diversification effect depends on the type of the weather index and the strike level of the insurance. Our findings are relevant for insurers and insurance regulators as they shed light on the viability of private crop insurance in China.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ostap Okhrin & Martin Odening & Wei Xu, 2013. "Systemic Weather Risk and Crop Insurance: The Case of China," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 351-372, June.
  • Handle: RePEc:bla:jrinsu:v:80:y:2013:i:2:p:351-372
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/j.1539-6975.2012.01476.x
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Vedenov, Dmitry V., 2008. "Application of Copulas to Estimation of Joint Crop Yield Distributions," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6264, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Wei Xu & Guenther Filler & Martin Odening & Ostap Okhrin, 2010. "On the systemic nature of weather risk," Agricultural Finance Review, Emerald Group Publishing, vol. 70(2), pages 267-284, August.
    3. Genest, Christian & Rémillard, Bruno & Beaudoin, David, 2009. "Goodness-of-fit tests for copulas: A review and a power study," Insurance: Mathematics and Economics, Elsevier, vol. 44(2), pages 199-213, April.
    4. Sean D. Campbell & Francis X. Diebold, 2005. "Weather Forecasting for Weather Derivatives," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 6-16, March.
    5. Cornelia Savu & Mark Trede, 2010. "Hierarchies of Archimedean copulas," Quantitative Finance, Taylor & Francis Journals, vol. 10(3), pages 295-304.
    6. Vedenov, Dmitry V. & Epperson, James E. & Barnett, Barry J., 2006. "Designing Catastrophe Bonds to Securitize Systemic Risks in Agriculture: The Case of Georgia Cotton," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(2), pages 1-21, August.
    7. J. David Cummins & Philippe Trainar, 2009. "Securitization, Insurance, and Reinsurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 463-492, September.
    8. Niall Whelan, 2004. "Sampling from Archimedean copulas," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 339-352.
    9. 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.
    10. Ostap Okhrin & Yarema Okhrin & Wolfgang Schmid, 2009. "Properties of Hierarchical Archimedean Copulas," SFB 649 Discussion Papers SFB649DP2009-014, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    11. H. Holly Wang & Hao Zhang, 2003. "On the Possibility of a Private Crop Insurance Market: A Spatial Statistics Approach," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(1), pages 111-124, March.
    12. Pauline Barrieu & Nicole El Karoui, 2002. "Reinsuring Climatic Risk Using Optimally Designed Weather Bonds," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 27(2), pages 87-113, December.
    13. Calum G. Turvey & Rong Kong, 2010. "Weather risk and the viability of weather insurance in China's Gansu, Shaanxi, and Henan provinces," China Agricultural Economic Review, Emerald Group Publishing, vol. 2(1), pages 5-24, February.
    14. Liebscher, Eckhard, 2008. "Construction of asymmetric multivariate copulas," Journal of Multivariate Analysis, Elsevier, vol. 99(10), pages 2234-2250, November.
    15. 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.
    16. Paul Embrechts, 2009. "Copulas: A Personal View," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 639-650, September.
    17. Mario J. Miranda & Joseph W. Glauber, 1997. "Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 206-215.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yuehua Zhang & Ying Cao & H. Holly Wang, 2018. "Cheating? The Case of Producers’ Under‐Reporting Behavior in Hog Insurance in China," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 66(3), pages 489-510, September.
    2. Lu Zong & Manuela Ender, 2016. "Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China," IJFS, MDPI, vol. 4(3), pages 1-17, September.
    3. Ying-Erh Chen & Barry K Goodwin, 2015. "Policy Design of Multi-Year Crop Insurance Contracts with Partial Payments," PLOS ONE, Public Library of Science, vol. 10(12), pages 1-15, December.
    4. Nikolaus Hautsch & Peter Malec & Melanie Schienle, 2014. "Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 12(1), pages 89-121.
    5. Nicole Wiebach & Lutz Hildebrandt, 2010. "Context Effects as Customer Reaction on Delisting of Brands," SFB 649 Discussion Papers SFB649DP2010-056, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    6. Awondo, Sebastain N., 2019. "Efficiency of region-wide catastrophic weather risk pools: Implications for African Risk Capacity insurance program," Journal of Development Economics, Elsevier, vol. 136(C), pages 111-118.
    7. Gong, Xuche & Feng, Hongli & Hennessy, David A., 2018. "Systemic Risk, Geography and Area Insurance," 2018 Annual Meeting, August 5-7, Washington, D.C. 274479, Agricultural and Applied Economics Association.
    8. Sheng, Di & Lambert, Dayton M. & Hellwinckel, Chad, 2016. "A Copula-based Approach to Simulate Climate Impacts on Yield: Some Preliminary Findings," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230006, Southern Agricultural Economics Association.
    9. Xiaofeng Cao & Ostap Okhrin & Martin Odening & Matthias Ritter, 2015. "Modelling spatio-temporal variability of temperature," Computational Statistics, Springer, vol. 30(3), pages 745-766, September.
    10. Zhu, Wenjun & Wang, Chou-Wen & Tan, Ken Seng, 2016. "Structure and estimation of Lévy subordinated hierarchical Archimedean copulas (LSHAC): Theory and empirical tests," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 20-36.
    11. Wu, Yang-Che, 2020. "Equilibrium in natural catastrophe insurance market under disaster-resistant technologies, financial innovations and government interventions," Insurance: Mathematics and Economics, Elsevier, vol. 95(C), pages 116-128.
    12. Zhiwei Shen & Martin Odening & Ostap Okhrin, 2016. "Can expert knowledge compensate for data scarcity in crop insurance pricing?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 43(2), pages 237-269.
    13. Franziska Schulze, 2010. "Spatial Dependencies in German Matching Functions," SFB 649 Discussion Papers SFB649DP2010-054, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    14. Xiaotao Li & Jinzheng Ren & Beibei Niu & Haiping Wu, 2020. "Grain Area Yield Index Insurance Ratemaking Based on Time–Space Risk Adjustment in China," Sustainability, MDPI, vol. 12(6), pages 1-15, March.
    15. Ostap Okhrin & Alexander Ristig & Jeffrey Sheen & Stefan Trück, 2015. "Conditional Systemic Risk with Penalized Copula," SFB 649 Discussion Papers SFB649DP2015-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    16. Christian Biener & Martin Eling & Shailee Pradhan, 2015. "Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2013 Update," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 18(1), pages 129-141, March.
    17. Lysa Porth & Milton Boyd & Jeffrey Pai, 2016. "Reducing Risk Through Pooling and Selective Reinsurance Using Simulated Annealing: An Example from Crop Insurance," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 163-191, September.
    18. Basteck, Christian & Daniëls, Tijmen R., 2011. "Every symmetric 3×3 global game of strategic complementarities has noise-independent selection," Journal of Mathematical Economics, Elsevier, vol. 47(6), pages 749-754.
    19. 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, January.
    20. Ceballos, Francisco, 2016. "Estimating spatial basis risk in rainfall index insurance: Methodology and application to excess rainfall insurance in Uruguay," IFPRI discussion papers 1595, International Food Policy Research Institute (IFPRI).
    21. Enno Mammen & Christoph Rothe & Melanie Schienle, 2010. "Nonparametric Regression with Nonparametrically Generated Covariates," SFB 649 Discussion Papers SFB649DP2010-059, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    22. Feng, Xiaoguang & Hayes, Dermot, 2014. "Is Government Involvement Really Necessary: Implications for Systemic Risk and Crop Reinsurance Contracts," 2014 AAEA: Crop Insurance and the 2014 Farm Bill Symposium: Implementing Change in U.S. Agricultural Policy, October 8-9, 2014, Louisville, KY 184241, Agricultural and Applied Economics Association.
    23. Franziska Gaupp & Georg Pflug & Stefan Hochrainer‐Stigler & Jim Hall & Simon Dadson, 2017. "Dependency of Crop Production between Global Breadbaskets: A Copula Approach for the Assessment of Global and Regional Risk Pools," Risk Analysis, John Wiley & Sons, vol. 37(11), pages 2212-2228, November.
    24. Lysa Porth & Milton Boyd & Jeffrey Pai, 2016. "Reducing Risk Through Pooling and Selective Reinsurance Using Simulated Annealing: An Example from Crop Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 163-191, September.
    25. Ben Ammar, Semir & Braun, Alexander & Eling, Martin, 2015. "Alternative Risk Transfer and Insurance-Linked Securities: Trends, Challenges and New Market Opportunities," I.VW HSG Schriftenreihe, University of St.Gallen, Institute of Insurance Economics (I.VW-HSG), volume 56, number 56, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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, January.
    2. Wei Xu & Guenther Filler & Martin Odening & Ostap Okhrin, 2010. "On the systemic nature of weather risk," Agricultural Finance Review, Emerald Group Publishing, vol. 70(2), pages 267-284, August.
    3. Awondo, Sebastain N., 2019. "Efficiency of region-wide catastrophic weather risk pools: Implications for African Risk Capacity insurance program," Journal of Development Economics, Elsevier, vol. 136(C), pages 111-118.
    4. Feng, Xiaoguang & Hayes, Dermot J., 2014. "Is Government Involvement Really Necessary: Implications for Systemic Risk and Crop Reinsurance Contracts," ISU General Staff Papers 201410010700001002, Iowa State University, Department of Economics.
    5. Awondo, Sebastain N. & Shurley, Don W., 2017. "On the Efficiency of Pseudo Risk Pools and Proxy Yield Data on Crop Insurance and Reinsurance in U.S," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258566, Agricultural and Applied Economics Association.
    6. Göran Kauermann & Renate Meyer, 2014. "Penalized marginal likelihood estimation of finite mixtures of Archimedean copulas," Computational Statistics, Springer, vol. 29(1), pages 283-306, February.
    7. Wu, Shaomin, 2014. "Construction of asymmetric copulas and its application in two-dimensional reliability modelling," European Journal of Operational Research, Elsevier, vol. 238(2), pages 476-485.
    8. Chung, Wonho, 2013. "Reducing the Social Cost of Federal Crop Insurance: A Role for US Government Hedging with Weather Derivatives," Journal of Rural Development/Nongchon-Gyeongje, Korea Rural Economic Institute, vol. 36(2), pages 1-26, August.
    9. Ming Wang & Tao Ye & Peijun Shi, 2016. "Factors Affecting Farmers’ Crop Insurance Participation in China," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 64(3), pages 479-492, September.
    10. Zhiwei Shen & Martin Odening & Ostap Okhrin, 2016. "Can expert knowledge compensate for data scarcity in crop insurance pricing?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 43(2), pages 237-269.
    11. Hofert, Marius & Mächler, Martin & McNeil, Alexander J., 2012. "Likelihood inference for Archimedean copulas in high dimensions under known margins," Journal of Multivariate Analysis, Elsevier, vol. 110(C), pages 133-150.
    12. Liu, X. & Xu, W. & Odening, M., 2011. "Lassen sich Ertragsrisiken in der Landwirtschaft global diversifizieren?," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 46, March.
    13. Göran Kauermann & Christian Schellhase & David Ruppert, 2013. "Flexible Copula Density Estimation with Penalized Hierarchical B-splines," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 40(4), pages 685-705, December.
    14. Lysa Porth & Milton Boyd & Jeffrey Pai, 2016. "Reducing Risk Through Pooling and Selective Reinsurance Using Simulated Annealing: An Example from Crop Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 163-191, September.
    15. Vitor Ozaki, 2009. "Pricing farm-level agricultural insurance: a Bayesian approach," Empirical Economics, Springer, vol. 36(2), pages 231-242, May.
    16. Ostap Okhrin & Alexander Ristig, 2012. "Hierarchical Archimedean Copulae: The HAC Package," SFB 649 Discussion Papers SFB649DP2012-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    17. Xu, Wei & Odening, Martin & Musshoff, Oliver, 2008. "Optimal Design of Weather Bonds," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6781, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    18. Xiaotao Li & Jinzheng Ren & Beibei Niu & Haiping Wu, 2020. "Grain Area Yield Index Insurance Ratemaking Based on Time–Space Risk Adjustment in China," Sustainability, MDPI, vol. 12(6), pages 1-15, March.
    19. Penikas, H., 2010. "Financial Applications of Copula-Models," Journal of the New Economic Association, New Economic Association, issue 7, pages 24-44.
    20. Diers, Dorothea & Eling, Martin & Marek, Sebastian D., 2012. "Dependence modeling in non-life insurance using the Bernstein copula," Insurance: Mathematics and Economics, Elsevier, vol. 50(3), pages 430-436.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • Q19 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jrinsu:v:80:y:2013:i:2:p:351-372. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/ariaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/ariaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.