Weather extremes, agriculture and the value of weather index insurance

Abstract

AbstractThis paper evaluates the potential value of a weather index insurance for the agriculture sector in an high income country (Germany). In our theoretical analysis we model an index insurance, a loss-based insurance market as well as a combination of both kinds of insurance and compare the resulting expected utility of a risk averse crop farmer. To find a suitable index, we conduct a panel estimation and evaluate the link between different weather variables and losses of crop farmers in Germany. Following our estimation, mean temperatures in summer have the highest potential for an valuable index insurance. Finally, we simulate the theoretical model using the results from the estimation and using different thresholds for the definition of a NatCat. According to this simulation, index-insurance is more attractive for the lower and more frequently occurring losses and loss-based insurance is more attractive for rare high losses. A combination of both kinds of insurance could be optimal for intermediate cases.