Weather Index Based Microinsurance for Agriculture Industry

Abstract

Abstract Agriculture is particularly susceptible to weather fluctuations. Climate change and agriculture productivity are inextricably linked. Thus, agriculture insurance should be introduced in Malaysia to manage losses and help small farmers to be aid from financial risk that is linked to the impact of the weather conditions on the crop yield. This study presents an investigation on the implementation of weather index based crop insurance contract for the states with the high correlation between the crop production and weather indices. The main aim of the study is to identify the appropriateness of the index insurance to selected crops in different regions in Malaysia. The Rainfall Anamoly Index and Standardized Precipitation Index are chosen in this study. Crop data is detrended to remove presence of time trend before determining the correlation between weather indices. The study continued with the computation of the trigger and exit thresholds for weather indices that corresponds to the crop loss using model-based clustering which will be used to calculate the expected annual loss and pure premium for each crop in different locations. The results showed that only several crops in certain locations are affected by weather. This research also includes farmers’ affordability to pay for premium.