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Climate Change, Weather Insurance Design and Hedging Effectiveness

  • Ines Kapphan

    ()

    (IED, ETH Zurich, Sonneggstrasse 33, Zurich 8092, Switzerland.)

  • Pierluigi Calanca

    (University of Bern, Oeschger Center, Climate Change Research, Switzerland. E-mails: pierluigi.calanca@art.admin.ch; annelie.holzkaemper@art.admin.ch)

  • Annelie Holzkaemper

    (University of Bern, Oeschger Center, Climate Change Research, Switzerland. E-mails: pierluigi.calanca@art.admin.ch; annelie.holzkaemper@art.admin.ch)

Registered author(s):

    Insurers have relied on historical data to design weather insurance contracts. In light of climate change, we examine the effects of this practice on the hedging effectiveness and profitability of insurance contracts. Using synthetic crop and weather data for today's and future climatic conditions we derive adjusted weather insurance contracts that account for shifts in the distribution of weather and yields. In our scenario, hedging benefits from adjusted contracts almost triple and expected profits increase by about 240 per cent. We further investigate the effect on risk reduction (for the insured) and profits (for the insurer) from hedging future weather risk with non-adjusted contracts based on historical data. In this case, insurers generate profits that are significantly smaller than for adjusted contracts, or even face substantial losses. Moreover, non-adjusted contracts that create higher profits than the adjusted counterparts cause negative hedging benefits for the insured.

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    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.

    Volume (Year): 37 (2012)
    Issue (Month): 2 (April)
    Pages: 286-317

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    Handle: RePEc:pal:gpprii:v:37:y:2012:i:2:p:286-317
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    1. Finger, Robert & Schmid, St├ęphanie, 2007. "Modelling Agricultural Production Risk and the Adaptation to Climate Change," MPRA Paper 3943, University Library of Munich, Germany.
    2. Oliver Musshoff & Martin Odening & Wei Xu, 2009. "Management of climate risks in agriculture-will weather derivatives permeate?," Applied Economics, Taylor & Francis Journals, vol. 43(9), pages 1067-1077.
    3. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(03), December.
    4. Bruce A. McCarl & Xavier Villavicencio & Ximing Wu, 2008. "Climate Change and Future Analysis: Is Stationarity Dying?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(5), pages 1241-1247.
    5. repec:reg:rpubli:291 is not listed on IDEAS
    6. Gunnar Breustedt & Raushan Bokusheva & Olaf Heidelbach, 2008. "Evaluating the Potential of Index Insurance Schemes to Reduce Crop Yield Risk in an Arid Region," Journal of Agricultural Economics, Wiley Blackwell, vol. 59(2), pages 312-328, 06.
    7. M. Moriondo & C. Giannakopoulos & M. Bindi, 2011. "Climate change impact assessment: the role of climate extremes in crop yield simulation," Climatic Change, Springer, vol. 104(3), pages 679-701, February.
    8. Kapphan, Ines, 2011. "Weather insurance design with optimal hedging effectiveness," MPRA Paper 35861, University Library of Munich, Germany.
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