Real Options and Reduction of Basic Risk of Index‐Based Climate Agricultural Insurance

This article is a discussion of the concept of index‐based agricultural insurance and the possible role of real options to reduce the basic risk. Indeed, to address the consequences of variability of weather within climate, experiments based on indexed agricultural insurance have been implemented in recent years. However, this locally defined insurance scheme has a weak point called the basic risk, i.e., the difference between the reality of climatic shocks and the payment of compensation. Real options allow this gap to be filled by offering alternatives to farmers. This article is the first to discuss the use of real options in the basic risk management of index‐based climate agricultural insurance. The implications for farmers in developing countries, insurers, and local and institutional organizations and communities are important: better management of operating conditions, optimized financial management, and consideration of real climatic conditions.