Seasonal Climate Forecasts and Agricultural Risk Management: Implications for Insurance Design

Seasonal climate forecasts and insurance are two instruments with potential to help manage risks in agricultural production. While both instruments play a distinct role in practice, they interact among themselves and with other production decisions. In particular, we contend that the progress in climate science in providing increasingly accurate seasonal forecasts has implications for the design of agricultural insurance. Early information regarding likely growing conditions will result in shifts in the expected distribution of crop yields, and the payouts associated with an insurance contract. The magnitude of these effects is illustrated using a combination of crop simulation models, and Monte Carlo techniques.