Flexible weather index-based insurance design

Abstract

This study investigates the performance of a flexible index design for weather index-based insurances using farm-level panel data on wheat production from Kazakhstan. The proposed flexible design is a generic framework that uses Growing Degree Days to determine annual variable start and end dates for the insured period. This approach reflects the progress of phenological plant growth phases more accurately than fixed periods and hence is expected to reduce the basis risk of the index insurance. In addition, we develop an economic framework that focuses on the role of downside risks and apply Quantile Regression to tailor optimal insurance specifications. This framework is then used to compare the downside risks associated with the use of flexible and fixed insurance periods. The results show that the introduction of flexibility in the index design leads to a reduction in farmers’ downside risk exposure and to a more efficient contract design.