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Challenges of insuring weather risk in agriculture

Challenges of insuring weather risk in agriculture Purpose – The purpose of this paper is to review some challenges of insuring weather risk in agriculture and to discuss potential remedies for these problems. Design/methodology/approach – The paper is developed as a narrative on weather insurance based largely on existing literature. Findings – Weather risks show characteristics that often violate classical requirements for insurability. First, some weather risks, particularly slowly emerging weather perils like drought, are spatially correlated and cause systemic risks. Second, climatic change may increase the volatility of weather variables and lead to non‐stationary loss distributions, which causes difficulties in actuarial ratemaking. Third, limited availability of yield and weather data hinders the estimation of reliable loss distributions. Practical implications – Some of the approaches discussed in this review, such as time diversification, local test procedures and the augmentation of observational data by expert knowledge, can be useful for crop insurance companies to improve their risk management and product design. Originality/value – This study provides background and development information regarding weather insurance and also presents statistical tools and actuarial methods that support the assessment of weather risks as well as the design of weather and yield insurance products. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

Challenges of insuring weather risk in agriculture

Agricultural Finance Review , Volume 74 (2): 12 – Jul 1, 2014

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Publisher
Emerald Publishing
Copyright
Copyright © 2014 Emerald Group Publishing Limited. All rights reserved.
ISSN
0002-1466
DOI
10.1108/AFR-11-2013-0039
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to review some challenges of insuring weather risk in agriculture and to discuss potential remedies for these problems. Design/methodology/approach – The paper is developed as a narrative on weather insurance based largely on existing literature. Findings – Weather risks show characteristics that often violate classical requirements for insurability. First, some weather risks, particularly slowly emerging weather perils like drought, are spatially correlated and cause systemic risks. Second, climatic change may increase the volatility of weather variables and lead to non‐stationary loss distributions, which causes difficulties in actuarial ratemaking. Third, limited availability of yield and weather data hinders the estimation of reliable loss distributions. Practical implications – Some of the approaches discussed in this review, such as time diversification, local test procedures and the augmentation of observational data by expert knowledge, can be useful for crop insurance companies to improve their risk management and product design. Originality/value – This study provides background and development information regarding weather insurance and also presents statistical tools and actuarial methods that support the assessment of weather risks as well as the design of weather and yield insurance products.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Jul 1, 2014

Keywords: Climate change; Crop insurance; Data scarcity; Weather risk

References