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Factors influencing Shaanxi and Gansu farmers' willingness to purchase weather insurance

  • Rong Kong
  • Calum G. Turvey
  • Guangwen He
  • Jiujie Ma
  • Patrick Meagher

Purpose – China frequently suffers from weather-related natural disasters and weather risk is recognized as a source of wide-spread systemic risk throughout large swaths of China. During these periods farmers' crops are at risk and for a largely poor population few can afford the turmoil to livelihoods that goes along with drought. The purpose of this paper is to investigate the willingness of Shaanxi and Gansu farmers to purchase weather insurance. Design/methodology/approach – This paper is based on surveyed results of 890 farm households in Shaanxi and Gansu provinces. The survey was designed specifically to extract willingness to pay for weather insurance. Factor affecting willingness to pay are explained using linear regression. Findings – The authors find strong evidence that the demand for drought insurance is downward sloping and also believe from the analysis that the demand is fairly elastic. This suggests that price matters and the results suggest that in order for wide spread adoption of weather insurance farmers will require a substantial premium, perhaps in the order of 80 per cent, as is being applied to current crop insurance initiatives. The authors find, as expected, that crop producers would be willing to pay more for insurance than livestock producers, but also find, as one would expect, that the key indicator is risk. Using a Pert distribution, the authors constructed from information gathered from farmers the expected values and standard deviations of gross revenues and yields of the most prominent crop and constructed the coefficient of variation. It was found in both cases that the higher the CV the greater the willingness to pay. Originality/value – The authors believe that this is the first willingness-to-pay study of weather insurance uptake in China. The authors used a unique “experimental” design and investigation technique to determine weather insurance demand.

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Article provided by Emerald Group Publishing in its journal China Agricultural Economic Review.

Volume (Year): 3 (2011)
Issue (Month): 4 (November)
Pages: 423-440

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Handle: RePEc:eme:caerpp:v:3:y:2011:i:4:p:423-440
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  1. Martin, Steven W. & Barnett, Barry J. & Coble, Keith H., 2001. "Developing And Pricing Precipitation Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), July.
  2. Turvey, Calum G., 2001. "The Pricing Of Degree-Day Weather Options," Working Papers 34109, University of Guelph, Department of Food, Agricultural and Resource Economics.
  3. H. Holly Wang & Shaomin Huang & Linxiu Zhang & Scott Rozelle & Yuanyuan Yan, 2010. "A comparison of rural and urban healthcare consumption and health insurance," China Agricultural Economic Review, Emerald Group Publishing, vol. 2(2), pages 212-227, May.
  4. Rajiv Seth & Valeed A. Ansari & Manipadma Datta, 2009. "Weather-risk hedging by farmers: An empirical study of willingness-to-pay in Rajasthan, India," Journal of Risk Finance, Emerald Group Publishing, vol. 10(1), pages 54-66, January.
  5. Hanson, Terrill R. & Shaik, Saleem & Coble, Keith H. & Edwards, Seanicaa & Miller, J. Corey, 2008. "Identifying Risk Factors Affecting Weather- and Disease-Related Losses in the U.S. Farm-Raised Catfish Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(1), April.
  6. Rajiv Seth & Valeed A. Ansari & Manipadma Datta, 2009. "Design and use of weather derivatives for farmers: the case of hedging rain risk by soyabean growers in Jhalawar district in India," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 1(1), pages 49-63.
  7. Xavier Giné & Robert M. Townsend & James Vickery, 2007. "Patterns of rainfall insurance participation in rural India," Staff Reports 302, Federal Reserve Bank of New York.
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  9. Shaik, Saleem & Coble, Keith H. & Knight, Thomas O. & Baquet, Alan E. & Patrick, George F., 2008. "Crop Revenue and Yield Insurance Demand: A Subjective Probability Approach," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 40(03), December.
  10. 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.
  11. Jeffrey S. Pai & Milton S. Boyd, 2010. "A decision framework for optimal crop reinsurance selection," China Agricultural Economic Review, Emerald Group Publishing, vol. 2(2), pages 148-166, May.
  12. 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.
  13. Oliver Musshoff & Norbert Hirschauer & Martin Odening, 2008. "Portfolio effects and the willingness to pay for weather insurances," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 83-97, September.
  14. Stephen R. Boucher & Michael R. Carter & Catherine Guirkinger, 2008. "Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 409-423.
  15. Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
  16. Sommarat Chaniarat & Calum G. Turvey & Andrew G. Mude & Christopher B. Barrett, 2008. "Improving humanitarian response to slow-onset disasters using famine-indexed weather derivatives," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 169-195, September.
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