Sequenced crop evapotranspiration and water requirement in developing a multi-trigger rainfall index insurance and risk-contingent credit

Abstract

AbstractWeather index insurance (WII) has been a promising innovation that protects smallholder farmers against drought risks and provides resilience against adverse rainfall conditions. However, the uptake of WII has been hampered by high spatial and intra-seasonal basis risk. To minimize intra-seasonal basis risk, the standard approaches to designing WII based on seasonal cumulative rainfall have shown to be ineffective in some cases as they do not incorporate different water requirements across each phenological stage of crop growth. One of the challenges in incorporating crop phenology in insurance design is to determine the water requirement in crop growth stages. Borrowing from agronomy, crop science, and agro-meteorology we adopt evapotranspiration methods in determining water requirements for a crop to survive in each stage, that can be used as a trigger level for a WII product. Using daily rainfall and evapotranspiration data, we illustrate the use of Monte Carlo risk modelling to price an operational WII and WII-linked credit product. The risk modelling approach we develop includes incorporation of correlation between rainfall and evapotranspiration indexes that can minimise significant intertemporal basis risk in WII.