Climate risk management with insurance or tax-exempted provisions? An empirical case study of hail and frost risk for wine and apple production in Styria

Abstract

Agriculture is affected in multiple respects by climate change and highly vulnerable to climate risks. To cope with these challenges, appropriate risk management strategies, which consider economic aspects besides effectiveness and technical feasibility become increasingly important. This includes financial coverage of production losses, primarily by risk-pooling through the insurance system in combination with subsidised insurance rates. Alternative options, for instance tax-exempted provisions, are frequently discussed, especially in case of rare events.This study compares the existing insurance system for wine and apple production in Austria with a potential system for tax-exempted provisions. A micro-economic simulation model (ACRISIM) with a Monte Carlo simulation over 25 years is used to estimate the economic situation of six model farms, representing typical farm structures in Styria. Three different financial risk management options are analysed under different magnitude of hail and spring frost risks: (i) hail and spring frost insurance (ii) hail insurance and provisions to cover spring frost damages and (iii) provisions to cover hail and spring frost damages. The results provide a deeper understanding of provisions and identify conditions under which each option may be preferred. The results show that under certain circumstances, tax-exempted provisions could be an alternative risk management tool and that a significant tax advantage of provisions exists. However, in most cases the insurance system is beneficiary.