Phenology Information Contributes to Reduce Temporal Basis Risk in Agricultural Weather Index Insurance

Abstract

Weather risks are an essential and increasingly important driver of agricultural income volatility. Agricultural insurances contribute to support farmers to cope with these risks. Among these insurances, weather index insurances (WII) are an innovative tool to cope with climatic risks in agriculture. Using WII, farmers receive an indemnification not based on actual yield reductions but are compensated based on a measured weather index, such as rainfall at a nearby weather station. The discrepancy between experienced losses and actual indemnification, basis risk, is a key challenge. In particular, specifications of WII used so far do not capture critical plant growth phases adequately. Here, we contribute to reduce basis risk by proposing novel procedures how occurrence dates and shifts of growth phases over time and space can be considered and test for their risk reducing potential. Our empirical example addresses drought risks in the critical growth phase around the anthesis stage in winter wheat production in Germany. We find spatially explicit, public and open databases of phenology reports to contribute to reduce basis risk and thus improve the attractiveness of WII. In contrast, we find growth stage modelling based on growing degree days (thermal time) not to result in significant improvements.