On the Risk Efficiency of a Weather Index Insurance Product for the Brazilian Semiarid Region

Abstract

Abstract Weather index insurance (WII) has long been advertised as a viable alternative to crop yield insurance. WII products were first developed to assist climate-vulnerable farmers from developing countries where establishing a well-structured crop insurance market is expressively difficult due to the poor transport infrastructure and the prevalence of sparsely distributed small-scale farms. In Brazil, the semiarid region stands out as the one that concentrates the ideal conditions for the implementation of a WII product since it houses thousands of climate-vulnerable farmers. With this in mind, we designed and priced a WII product for farmers from the semiarid region of Brazil and posteriorly investigated its risk efficiency. To do so, we first investigated crop yield responses to aridity, enabling the selection of locations for which the WII product was posteriorly assessed. Second, we grouped selected locations into specific contracts according to geographical proximity and evaluated each of these contracts to attest the risk efficiency of the proposed WII product using the method of stochastic efficiency with respect to a function (SERF), which identifies utility efficient alternatives for a range of risk attitudes. Our results show that the WII product may be effective in protecting farmers from adverse variations in production revenue, possibly being attractive for utility-maximizer farmers that are sufficiently risk averse.