Abstract
Heat can cause substantial yield losses in crop production and climate change is increasing the risk of this kind of damage. Weather index insurance can help to reduce the financial losses resulting from heat exposure. This paper introduces crop-specific payout functions based on restricted cubic splines in heat index insurance. The use of restricted cubic splines is a cutting-edge method to reflect empirically estimated temperature effects on crop yields and to estimate temperature-related yield losses. The integration of these temperature effects in payout functions facilitates insurance design and allows hourly temperatures to be used as the underlying index. An empirical analysis is used to assess heat stress effects for a panel of East German winter wheat and winter rapeseed producers, to calibrate insurance contracts accordingly and simulate the resulting risk reducing capacities. We find that the insurance scheme introduced here leads to statistically and economically significant out-of-sample risk reducing capacities for farmers, i.e. risk premiums are reduced by up to approximately 20% at the median, in comparison to the uninsured status and at the actuarially fair premium. Moreover, we highlight that policy-makers can support the cost-efficient provision of market-based weather index insurance by fostering data collection and data provision.
Highlights
Heat stress is a major driver of crop yield losses and its relevance is growing due to climate change (Lobell et al, 2011a; Schlenker and Roberts, 2009; Asseng et al, 2015; Tack et al, 2015; Lesk et al, 2016; Ortiz-Bobea et al, 2019)
We introduce novel and crop-specific payout functions based on restricted cubic splines into a heat index insurance design to reflect empirically estimated hourly temperature effects on crop yields
This paper aims to bridge this research gap by proposing a novel payout function based on the use of restricted cubic splines in weather index insurance design and illustrates its application for large-scale winter wheat and winter rapeseed producers in Eastern Germany
Summary
Heat stress is a major driver of crop yield losses and its relevance is growing due to climate change (Lobell et al, 2011a; Schlenker and Roberts, 2009; Asseng et al, 2015; Tack et al, 2015; Lesk et al, 2016; Ortiz-Bobea et al, 2019). Weather index insurance, including heat index insurance, permits timely indemnification and the insurability of systemic and specific risks, such as heat stress, at low costs and can avoid moral hazard and adverse selection problems that can cause insurance market failure (Barnett and Mahul, 2007; Barnett et al, 2008; Vroege et al, 2019; Benami et al, 2021). For these reasons, private insurance suppliers have recently introduced several weather index insurance schemes in Euro pean agriculture.
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