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A viable and cost-effective weather index insurance for rice in Indonesia

Aditya Kusuma, Bethanna Jackson and Ilan Noy ()
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Aditya Kusuma: Victoria University of Wellington
Bethanna Jackson: Victoria University of Wellington

The Geneva Risk and Insurance Review, 2018, vol. 43, issue 2, 186-218

Abstract: Abstract The potentially adverse effects of droughts on agricultural output are obvious. Currently, Indonesian rice farmers have little financial protection from climate risk via catastrophic weather risk transfer tools. Done well, a weather index insurance (WII) program can not only provide resources that enable recovery, but can also facilitate the adoption of prevention and adaptation measures and incentivize risk reduction. However, implementations of WII programs have faced difficulties because of basis risk—among several other obstacles. Here, we quantify the applicability, viability, and likely cost of introducing a WII for droughts for rice production in Indonesia. To reduce basis risk, we construct district-specific indices that are based on the estimation of Panel Geographically Weighted Regressions models. With these spatial models, and detailed district level data on past agricultural productivity and weather conditions, we identify an algorithm that can generate an effective and actuarially sound WII in some districts but not in others. We then measure its effectiveness in reducing income volatility for farmers by reducing this basis risk, at the district level. We end by calculating an actuarially robust and welfare-enhancing price for this scheme and prioritize the districts in which it can be implemented.

Keywords: Index; Parametric; Indonesia; Rice; Agricultural insurance; Drought (search for similar items in EconPapers)
JEL-codes: Q15 Q18 Q54 (search for similar items in EconPapers)
Date: 2018
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Working Paper: A viable and cost-effective weather index insurance for rice in Indonesia (2017) Downloads
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