Coping with Systemic Risk in Index-based Crop Insurance

Zhiwei Shen and Martin Odening

No 122555, 123rd Seminar, February 23-24, 2012, Dublin, Ireland from European Association of Agricultural Economists

Abstract: The implementation of index-based crop insurance is often impeded by the existence of systemic risk of insured losses. We assess the effectiveness of two strategies for coping with systemic risk: regional diversification and securitization with catastrophe (CAT) bonds. The analysis is conducted in an equilibrium pricing framework which allows the optimal price of the insurance and the number of traded contracts to be determined. We also explore the role of basis risk and risk aversion of market agents. The model is applied to a hypothetical area yield insurance for rice producers in northeast China. If yields in two regions are positively correlated, we find that enlarging the insured area leads to an increasing insurance premium. Unless capital market investors are very risk averse, a CAT bond written on an area yield index outperforms regional diversification in terms of certainty equivalents of both farmers and insurers.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 22
Date: 2012-02-23
New Economics Papers: this item is included in nep-agr, nep-ias and nep-upt
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Citations: View citations in EconPapers (2)

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Journal Article: Coping with systemic risk in index-based crop insurance (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaa123:122555

DOI: 10.22004/ag.econ.122555

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