Can Satellite-Based Weather Index Insurance Hedge the Mortality Risk of Pine Stands?

Abstract

Due to rising temperatures, forest stands are increasingly exposed to drought stress, which affects forest productivity through lower growth rates and higher mortality rates. Satellite-based index insurance could be an option for hedging the mortality risk of trees. Therefore, we calculated three remotely-sensed vegetation health indices from MODerate-resolution Imaging Spectroradiometer (MODIS) satellite images. As indices for index insurance we use the Vegetation Condition Index (VCI), the Temperature Condition Index (TCI) and the Vegetation Health Index (VHI). We generate temperature, precipitation and a combined index of the two as benchmark indices. For 12 pine stands in northeastern Germany, we calculate the hedging effectiveness for hypothetically designed index insurance contracts based on satellite and meteorological indices. Both station- and satellite-based insurance contracts have been shown to be effective in hedging standing timber mortality risk. The average hedging effectiveness ranges from 36% for TCI-based to 48% for VHI-based index insurance contracts.