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Climate Change, Weather Insurance Design and Hedging Effectiveness

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Ines Kapphan & Pierluigi Calanca & Annelie Holzkaemper, 2012. "Climate Change, Weather Insurance Design and Hedging Effectiveness," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 37(2), pages 286-317, April.
  • Handle: RePEc:pal:gpprii:v:37:y:2012:i:2:p:286-317
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    References listed on IDEAS

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    1. Robert Finger & St├ęphanie Schmid, 2008. "Modeling agricultural production risk and the adaptation to climate change," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 25-41, May.
    2. 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.
    3. repec:reg:rpubli:291 is not listed on IDEAS
    4. 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.
    5. 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.
    6. Kapphan, Ines, 2011. "Weather insurance design with optimal hedging effectiveness," MPRA Paper 35861, University Library of Munich, Germany.
    7. 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, June.
    8. 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.
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    Cited by:

    1. Sheng, Di & Lambert, Dayton M. & Hellwinckel, Chad, 2016. "A Copula-based Approach to Simulate Climate Impacts on Yield: Some Preliminary Findings," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230006, Southern Agricultural Economics Association.

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