Optimal choice of crop insurance

This paper analyzes how the agricultural insurance market is adapting to climate change, in a context marked by the increasing frequency of extreme weather events. We focus on the optimal decision for a risk-averse farmer who wants to insure his crop with a traditional loss-based insurance or/and index-based insurance while saving his money. Maximizing the farmer's CARA utility function shows that in some cases, a combination of both types of insurance may be more advantageous than a single type of insurance. Furthermore, in our model, the farmer does not insure his entire crop if the market interest rate is strictly positive. Demand for traditional and index insurance depends on price, and agents who are very risk-averse tend to take out traditional insurance rather than index insurance. A numerical application is performed on the French agriculture sector. With panel regression, the estimated results show that mean spring temperature primarily affects winter barley yield and could therefore be a weather indicator for index insurance. Insurance simulations are performed, based on the theoretical model using the estimated results.