The optimal drought index for designing weather index insurance

Janic Bucheli, Tobias Dalhaus and Robert Finger

European Review of Agricultural Economics, 2021, vol. 48, issue 3, 573-597

Abstract: Climate change increases the need for better insurance solutions that enable farmers to cope with drought risks. We design weather index insurance using drought indices based on precipitation, soil moisture and evapotranspiration as underlying drought index and compare their risk-reducing potential for winter wheat producers in Eastern Germany. In general, we find that all drought indices can reduce financial risk exposure. However, the largest risk reduction can be achieved if the underlying drought index is tailored individually for each farm. This implies that insurers should offer insurance with farm-specific underlying drought index.

Keywords: index-based insurance; drought risks; index design; drought indices; quantile regression (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (18)

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