Drought†Triggered Index Insurance Using Cluster Analysis of Rainfall Affected by Climate Change

Askar Choudhury, James Jones, Adolph Okine and Raquiba (Lena) Choudhury

Journal of Insurance Issues, 2016, vol. 39, issue 2, 169-186

Abstract: Farming often tops the list of agricultural practices that generate income for a large percentage of the population in developing countries, including Ghana. In Ghana, as in other developing countries, changes in weather patterns have negatively impacted crop yields. Traditional agricultural insurance can be a risk management mechanism to recover from these losses. However, traditional insurance has several drawbacks, including high administrative costs and moral hazard. An alternative would be indexbased insurance, such as rainfall†based index insurance. Accordingly, developing an associative model that may include linear or non†linear relationships to establish a correlation of crop yield with rainfall may provide satisfactory results. In addition, the occurrence of a trigger that signals insurance payment due to drought is an important component in the pricing of drought†triggered index insurance. In that regard, we have introduced model†based cluster analysis for determining the drought trigger. Agricultural practices are highly dependent on the specific timing of various climatic conditions for crop growth and crop yield. However, climate change, such as increasing frequency and severity of droughts or floods, could pose severe threats to agricultural practices. Therefore, the effect of climate change needs to be incorporated into the analysis, along with other factors that affect agricultural production. In our study, we have found evidence that crop yield is significantly affected by climate change and, therefore, has the potential for indicating much variation in crop production.

Date: 2016
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