Ex-ante evaluation of weather-based index insurance and area-yield insurance for reducing crop yield risk

Abstract

The study introduces an ex-ante evaluation concept into the analysis of weather-based index insurance effectiveness. We conduct our ex ante analysis by distinguishing between two consecutive periods: the first period is used for determining insurance parameters and optimal number of insurance contracts for an arable farmer; and the subsequent one is considered for the evaluation of the risk reduction due to the insurance contract defined in the first period. The study also employs the common ex-post approach by specifying and evaluating insurance contracts by means of the same period. We compare the empirical results obtained from these alternative evaluation approaches and thus investigate the ability to forecast empirically insurance schemes risk reduction. In addition to weather-based index insurance, we consider two area-yield insurance products and a farm yield insurance. Our empirical results indicate that the common ex-post approach overestimates the risk reduction substantially for most index insurance schemes. Farm yield insurance seems to be robust tothe choice of the empirical approach.