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Combining participating insurance and financial policies: A new risk management instrument against natural disasters in agriculture

Author

Listed:
  • Geoffroy Enjolras
  • Robert Kast

Abstract

Purpose - The purpose of this paper is to examine a new insurance policy against natural disasters. Design/methodology/approach - The authors propose an optimisation model, which involves both the insurer and the farmer. The farmer decides to insure his farm if and only if insurance improves the utility he is expecting over a given year. Therefore, the paper takes the perspective of an insurer who wants to maximise the farmer's wealth, so that he will be more likely to subscribe the policy. The choice and combination of the policies are then determined and designed by the insurer to reach that aim. Findings - The paper proves that the market for insurance could grow with a combination of participating contracts and market-based instruments. The first cover individual risks while the second cover systematic risks. Practical implications - The new policy leads both the insurer to manage small and large risks and the insured to be financially interested. It also provides an optimal coverage against natural events for insured farmers. Originality/value - The paper offers many perspectives for the renewal of the crop insurance market using new instruments.

Suggested Citation

  • Geoffroy Enjolras & Robert Kast, 2012. "Combining participating insurance and financial policies: A new risk management instrument against natural disasters in agriculture," Agricultural Finance Review, Emerald Group Publishing, vol. 72(1), pages 156-178, May.
  • Handle: RePEc:eme:afrpps:v:72:y:2012:i:1:p:156-178
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    References listed on IDEAS

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    1. Barry Smit & Mark Skinner, 2002. "Adaptation options in agriculture to climate change: a typology," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 7(1), pages 85-114, March.
    2. Neil A. Doherty & Harris Schlesinger, 2001. "Insurance Contracts and Securitization," CESifo Working Paper Series 559, CESifo Group Munich.
    3. Xavier Giné & Robert Townsend & James Vickery, 2007. "Statistical Analysis of Rainfall Insurance Payouts in Southern India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1248-1254.
    4. Doherty, Neil A & Dionne, Georges, 1993. "Insurance with Undiversifiable Risk: Contract Structure and Organizational Form of Insurance Firms," Journal of Risk and Uncertainty, Springer, vol. 6(2), pages 187-203, April.
    5. 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.
    6. Joseph W. Glauber, 2004. "Crop Insurance Reconsidered," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1179-1195.
    7. Olivier Mahul, 2001. "Managing Catastrophic Risk Through Insurance and Securitization," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 656-661.
    8. Bharat Ramaswami & Terry L. Roe, 2004. "Aggregation in Area-Yield Crop Insurance: The Linear Additive Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 420-431.
    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. Schlesinger, Harris, 1999. "Decomposing catastrophic risk," Insurance: Mathematics and Economics, Elsevier, vol. 24(1-2), pages 95-101, March.
    11. Marshall, John M, 1974. "Insurance Theory: Reserves versus Mutuality," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 476-492, December.
    12. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
    13. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
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    Cited by:

    1. Ayenew, Habtamu Yesigat & Sauer, Johannes & Abate-Kassa, Getachew, 2016. "Cost of Risk Exposure, Farm Disinvestment and Adaptation to Climate Uncertainties: The Case of Arable Farms in the EU," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235595, Agricultural and Applied Economics Association.

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