Abstract
Abstract Crop producers face significant and increasing drought risks. We evaluate whether insurances based on globally and freely available satellite-retrieved soil moisture data can reduce farms’ financial drought risk exposure. We design farm individual soil moisture index insurances for wheat, maize and rapeseed production using a case study for Eastern Germany. We find that the satellite-retrieved soil moisture index insurances significantly decrease risk exposure for these crops compared to the situation where production is not insured. The satellite-retrieved index also outperforms one based on soil moisture estimates derived from meteorological measurements at ground stations. Important implications for insurers and policy makers are that they could and should develop better suited insurances. Available satellite-retrieved data can be used to increase farmers’ resilience in a changing climate.
Highlights
Droughts put agricultural production and farmers’ incomes at risk
By assessing the individual risk premium change for all farms, we find that both the satellite-based and the meteorological station-based soil moisture index insurance products significantly decrease farmers’ risk exposure
We find some differences in the performance of the two insurance options for different crops and timeframes, but there is no clear best insurance option regarding the soil moisture estimation method
Summary
Droughts put agricultural production and farmers’ incomes at risk. Systemic drought events are expected to become more frequent and severe in Central Europe due to climate change (e.g. Grillakis, 2019; Kahiluoto et al, 2019; Seneviratne et al, 2010, 2012; Trnka et al, 2014). Research and practice on the use of satellite-retrieved data in drought index insurances considered sensing of the health status of the plant, precipitation and evapotranspiration (see for example Black et al (2016), Bokusheva et al (2016), Enenkel et al (2018), Jensen et al (2019), de Leeuw et al (2014), Roumiguié et al (2017), Vrieling et al (2014) and Vroege, Dalhaus and Finger (2019)) We extend this literature by quantifying the economic benefits of satelliteretrieved soil moisture measurements in an index insurance scheme for single farms. We discuss crucial dataset characteristics and draw conclusions for policy makers, insurance practitioners and future research
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