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The optimal drought index for designing weather index insurance

Author

Listed:
  • Janic Bucheli
  • Tobias Dalhaus
  • Robert Finger

Abstract

Climate change increases the need for better insurance solutions that enable farmers to cope with drought risks. We design weather index insurance using drought indices based on precipitation, soil moisture and evapotranspiration as underlying drought index and compare their risk-reducing potential for winter wheat producers in Eastern Germany. In general, we find that all drought indices can reduce financial risk exposure. However, the largest risk reduction can be achieved if the underlying drought index is tailored individually for each farm. This implies that insurers should offer insurance with farm-specific underlying drought index.

Suggested Citation

  • Janic Bucheli & Tobias Dalhaus & Robert Finger, 2021. "The optimal drought index for designing weather index insurance," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 48(3), pages 573-597.
    • Handle: RePEc:oup:erevae:v:48:y:2021:i:3:p:573-597.
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    File URL: http://hdl.handle.net/10.1093/erae/jbaa014
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