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Challenges of insuring weather risk in agriculture

Author

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  • Martin Odening
  • Zhiwei Shen

Abstract

Purpose - – The purpose of this paper is to review some challenges of insuring weather risk in agriculture and to discuss potential remedies for these problems. Design/methodology/approach - – The paper is developed as a narrative on weather insurance based largely on existing literature. Findings - – Weather risks show characteristics that often violate classical requirements for insurability. First, some weather risks, particularly slowly emerging weather perils like drought, are spatially correlated and cause systemic risks. Second, climatic change may increase the volatility of weather variables and lead to non-stationary loss distributions, which causes difficulties in actuarial ratemaking. Third, limited availability of yield and weather data hinders the estimation of reliable loss distributions. Practical implications - – Some of the approaches discussed in this review, such as time diversification, local test procedures and the augmentation of observational data by expert knowledge, can be useful for crop insurance companies to improve their risk management and product design. Originality/value - – This study provides background and development information regarding weather insurance and also presents statistical tools and actuarial methods that support the assessment of weather risks as well as the design of weather and yield insurance products.

Suggested Citation

  • Martin Odening & Zhiwei Shen, 2014. "Challenges of insuring weather risk in agriculture," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 74(2), pages 188-199, July.
    • Handle: RePEc:eme:afrpps:v:74:y:2014:i:2:p:188-199
    DOI: 10.1108/AFR-11-2013-0039
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    Citations

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    Cited by:

    1. B. W. Mazviona, 2022. "Maize Index Insurance And Management Of Climate Change In A Developing Economy," Strategic decisions and risk management, Real Economy Publishing House, vol. 12(4).
    2. Martin Odening & Carsten Croonenbroeck & Rainer Kühl & Jörg Müller & Norbert Hirschauer & Oliver Mußhoff & Frank Offermann, 2018. "Extreme Weather and Drought Damage: Do Farmers Need Government Aid?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 71(20), pages 03-15, October.
    3. A. Ford Ramsey & Barry K. Goodwin, 2019. "Value-at-Risk and Models of Dependence in the U.S. Federal Crop Insurance Program," JRFM, MDPI, vol. 12(2), pages 1-21, April.
    4. Robert Dankiewicz & Olena Prokopchuk & Mykhaylo Malyovanyi, 2021. "Architectonics of Complex Modernization of Agricultural Insurance Market of Ukraine in Conditions of Transformation Processes," Oblik i finansi, Institute of Accounting and Finance, issue 2, pages 74-84, June.
    5. Abrego, Adriana & Guizar, Isai, 2017. "Resilience of Agricultural Microfinance Institutions to Rainfall Shocks," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258031, Agricultural and Applied Economics Association.

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