Drought Insurance Research Articles

Assessing farmers’ intention to adopt drought insurance. A combined perspective from the extended theory of planned behavior and behavioral reasoning theory

Agriculture in Mediterranean climates, such as that of southern Spain, is highly vulnerable to climate change, and particularly to hydrological drought. Financial instruments such as weather index-based insurance have been developed in response to increasing climate risks. In previous studies of intention to adopt this type of insurance, little attention has been paid to farmers’ underlying psychological motivations related to their perceptions of climate change, reasons for or against insurance adoption, attitudes toward insurance, subjective norms, or perceived control over the instrument. To comprehensively address this gap, a combined exploratory model based on the theory of planned behavior and behavioral reasoning theory is proposed. Specifically, the aim of this research is to analyze the psychological factors that determine farmers' intention to adopt drought insurance. The conceptual model is tested on a sample of 146 farmers from an irrigated area in the lower Guadalquivir region of Andalusia. The data are analyzed using partial least squares structural equation modeling (PLS-SEM). Contrary to expectations, the results of the study suggest that belief in climate change does not significantly influence the reasons for or against insurance adoption, nor the attitudes toward or perceived control over it. The recommendations drawn from this study can contribute to the design of more effective policies and communication strategies that address farmers' psychological perceptions and motivations, thereby helping to boost the adoption of drought insurance.

Climate Change Inculcate Crop Loss and Livelihood: A Case of Drought in Bangladesh

Crop loss is multidimensional and associated with drought and the consequences of climate change. Drought damages crops and make losses to the marginalized people and make them more vulnerable in different channels alike other disasters. The work has been carried out in the Northwest region of Barind in Bangladesh to explore relevant issues that may lead crop damage by frequent drought. Research used various methods in this study to get together both qualitative and quantitative information along with primary and secondary sources. Survey was conducted using semi-structured questionnaire with the sample population. Few selective case studies were made to obtain more information on crop loss and drought. In this study, Ordinary Least Square technique was utilized. The model of crop loss: C= α0 + α1X1 + α2X2 + α3X3 + α4X4 + α5X5 + α6X6 + α7X7 + α8X8 + α9X9 + µ1 The study explored few variables including income of the households, their age, sex and migration that have no important influence on crop production and loss owing to drought. Other variables such as frequency of drought, study areas, sustenance, livelihood and agricultural land have the significant influence on crop loss and livelihood. It was mentioned by the households that frequency of drought is increasing two decades with increase the number of hot days. Result indicates the meaningful relationship between drought frequency and crop losses. Few adaptation measures like re-sowing, early sowing, late planting can reduce crop loss. A wide range of alternatives for livelihood activities such as small business, van pulling, handiworks and seedling production for nursery business were identified by this study. Drought insurance policy, early warning system, future research on emerging issues and local level knowledge are important for climate change adaptation and resilience. IUBAT Review—A Multidisciplinary Academic Journal, 7(1): 171-185

Understanding German farmers’ intention to adopt drought insurance

Climate risks, particularly droughts and heat waves, negatively affect agricultural incomes worldwide. Drought insurance is promising to mitigate resulting income losses at the farm level. As the proportion of German farmers insured against drought is low, policymakers and insurers aim to increase the appeal of drought insurance to farmers. However, to accelerate their efforts in this regard, more information regarding farmers' intention to adopt drought insurance beyond current adoption is needed. To obtain initial insights, we surveyed 127 German farmers in a risk management context and applied a modified transtheoretical model of behavioral change. This revealed detailed information on the gradual adoption of drought insurance. Given a heterogenous distribution among the gradual stages of adoption, a binomial logit model was estimated instead of an ordered logit to investigate farmers' current intention to adopt drought insurance. Furthermore, the machine learning technique of least absolute shrinkage and selection operator (LASSO) was applied to select the most relevant features to be used as explanatory variables in the estimation. The results show that farmers' gender and risk attitude, land tenure, how severely they were affected previously by weather risks, and the level of trust in index insurance products have a statistically significant effect on farmers' intention to adopt drought insurance. Additionally, this study provides insights into farmers' reasons against drought insurance. As such, the results are important to policymakers considering policy intervention, insurers interested in farmers' intention to insure and to researchers focusing on farmers’ adaptation to climate change.

A non-parametric approach to determine an efficient premium for drought insurance

Insurance to deal with prolonged drought periods in rural Africa requires a practical method to estimate accurate premium values that minimize economic losses. We use non-parametric methods to determine the risk non-neutral insurer’s premium for drought insurance on rain-fed crops. Premium values are estimated on the basis of percentage of the expected yield losses over the potential yields. Expected yield losses are estimated based on data on the levels of rainfall, potential evapotranspiration and water-holding capacity of the soil, and water requirement of the crop. Maize crop in West Kenya, and rice crop in the Central High Plains of Madagascar are taken as case studies. To check if farmer’s choice of starting seasons affects the expected yields and the values of premium, we employ forecasted yields for two different sowing dates (October vs. November) for maize, and two different transplantation dates (November vs. December) for rice. The mean-variance (E-V), the First-Degree Stochastic Dominance (FSD), and the Second-Degree Stochastic Dominance (SSD) efficiency criteria are used to rank each pair of distributions. Results show that an insurer for maize production in Western Kenya would require a premium value between 43 and 55% of the potential yields to fully cover the loss caused by lack of rainfall. Under E-V and FSD, the two yield distributions cannot be ranked, but under SSD the yield distribution of the October-sown maize dominates that of November. For lowland rice in the Central High Plains of Madagascar, all three efficiency criteria indicate that the yield distribution of the December-transplanted rice dominates that of November and the premium values are less than 4 % of the potential yields.

Assessing the demand for hydrological drought insurance in irrigated agriculture

Concerns about hydrological drought risk and irrigation water supply reliability have grown in recent years due to the increasing demand for water for irrigation and other uses, and the decline in water availability due to climate change. Hydrological drought insurance hedging against water supply gaps can be a key instrument for adapting irrigated agriculture to this new scenario, since it improves the resilience of the irrigation sector, which is having to cope with increasing uncertainty and vulnerability. The objective of this paper is to assess farmers’ willingness to pay (WTP) for index-based hydrological drought insurance under different policy designs, considering several different amounts of insured capital, insurance deductibles, and contract terms. To that end, it uses a discrete choice experiment as the valuation method and the Sector BXII irrigation district (southern Spain) as a case study. The results show that farmers would be willing to pay for the proposed hydrological drought insurance, stating a higher preference for policy designs with lower amounts of insured capital, lower deductibles, and shorter contract terms. Moreover, the results also show the existence of heterogeneity among farmers’ preferences, depending on their socio-economic characteristics. Finally, we compare the distribution of farmers’ WTP for different policy design options of the proposed insurance with the commercial premium estimated using actuarial analysis. The comparison confirms that only the options with lower levels of insured capital present a mean WTP below the commercial premium, while the rest of the policy design options would need to be subsidized like other agricultural insurance schemes to make them attractive to most farmers.

Climate-sensitive hydrological drought insurance for irrigated agriculture under deep uncertainty. Insightful results from the Cega River Basin in Spain

This paper assesses the feasibility and robustness of an index-based insurance scheme against hydrological droughts under climate change. To this end, we develop a grand ensemble that samples both modeling and scenario uncertainty in the estimation of the insurance risk premium, so to reveal potential unfavorable surprises and minimize regret in the design of the proposed insurance scheme. The grand ensemble combines four microeconomic models and seven GAMLSS models, which are run for three alternative climate change scenarios: stationary climate/no climate change, RCP 2.6, and RCP 8.5. Methods are illustrated with an application to the Cega River Sub-basin (CRS) in central Spain. Results indicate that for a conventional deductible of 30%, the proposed index-based insurance scheme would be actuarially feasible and affordable under all models for the stationary climate scenario (i.e., robust). For climate change scenarios RCP 2.6 and 8.5 and a 30% deductible, the suggested index-based insurance would be actuarially feasible under most models, albeit some outliers point towards potential unfavorable surprises. Lower deductibles decrease feasibility, particularly for deductibles <10%.

Hydrological Drought-Indexed Insurance for Irrigated Agriculture in a Highly Regulated System

Water scarcity is an increasingly recurring problem for irrigated agriculture in Mediterranean regions. It is, therefore, necessary to establish technical and financial measures to enable irrigators to deal with this problem. This study presents a new index-based drought insurance scheme in an irrigation district in the Jucar river basin in Spain, a highly regulated water system. Three insurance scheme options were evaluated and, the values of the fair risk premiums, the maximum compensation, and the deductible franchise were established. These insurance schemes were designed in agreement with the preexisting drought system operating rules to reduce moral hazard and adverse selection. Risk-reducing and effective evaluation methods were used to determine the insurance coverage’s viability for irrigators: standard deviation gross margin, minimum gross margin, and RMSL. The proposed insurances were also evaluated using synthetic hydrological time series generated with a stochastic ARMA model through a basin-wide water resource simulation model developed in the DSS Shell AQUATOOL. Financial indicators, such as the basis risk and claim ratio were applied to analyze the economic feasibility for insurance companies. The results show that a suitable and efficient option is an early-bird contract combined with a trigger of emergency or alert state in a multi-year contract. This type of specialized insurance helps to fill the existing gap in traditional insurance schemes for irrigated crops and offered additional coverage to farmers under drought and water scarcity conditions.

Gender and Willingness to Pay for Insured Loans: Empirical Evidence from Ghana

This study investigates the willingness to pay (WTP) for index-based drought insurance coupled with agricultural loans by product design and gender, using a contingent valuation method. The empirical estimations reveal several important findings. First, females have lower mean WTP than male farmers for each product design. Second, females do not express preference differences between insured loan product designs while males do. In fact, males prefer insured loans that make payouts directly to them and prefer insured loans without design risk.

Assessing the Demand for Hydrological Drought Insurance in Irrigated Agriculture

Assessing the Demand for Hydrological Drought Insurance in Irrigated Agriculture

Defining drought from the perspective of Australian farmers

This study examines drought from the perspective of farm businesses in order to develop new outcome-based drought indicators. An empirical analysis of Australian farms is presented drawing on data from the Australian Agricultural and Grazing Industry Survey and the related farmpredict micro-simulation model. Farmer drought self-assessment data are used to identify factors influencing farmer perceptions of drought beyond seasonal weather conditions. The results suggest farmers have updated their perception of drought over time to account for long-term shifts in the Australian climate. While instructive, farmer self-assessments cannot be used as drought indicators in practice due to moral hazard issues. In this study, the farmpredict model is applied to develop an objective outcome-based drought indicator for Australian farms. This indicator measures the effects of seasonal weather conditions on farm profits accounting for both production and price impacts. Compared with simple meteorological indexes, this new indicator is more strongly correlated both with actual farm outcomes and with farmers’ own drought assessments. In future, this farm drought indicator could help to address asymmetric information (moral hazard and adverse selection) problems which constrain both government drought programs and private drought insurance markets.

Assessment of a Spatially and Temporally Consistent MODIS Derived NDVI Product for Application in Index-Based Drought Insurance

In arid and semi-arid regions of Eastern and Southern Africa, drought can be devastating to pastoralists who depend on healthy vegetation for their herds. The Kenya Livestock Insurance Program (KLIP) addresses this challenge through its insurance program that relies on a vegetation index product derived from eMODIS NDVI (enhanced Normalized Difference Vegetation Index). Insurance payouts are triggered when index values fall below a certain threshold for a Unit Area of Insurance (UAI). The objective of this study is to produce an updated, cloud-based NDVI product, potentially allowing for earlier payouts that may help herders to prevent, minimize, or offset drought-induced losses. The new product, named reNDVI (rapid enhanced NDVI), provides an updated cloud filtering algorithm and brings the entire processing chain to the cloud. Access to the scripts used for the processing described and resulting data is openly available. To test the performance of the new product, we provide a robust evaluation of reNDVI and eMODIS NDVI and their derived payout indices against historical drought, payouts provided, and mortality data. The implications of potential payout differences are also discussed. The products show good comparability; the monthly average NDVI per UAI has correlation values over 0.95 and MAPD under 5% for most UAIs. However, there are moderate differences when assessing year-to-year payout amounts triggered. Because the payouts are currently calculated based on the 20th and first percentile of index values from 2003–2016, payouts are very sensitive to even small changes in NDVI. Where livestock mortality was available, payouts for reNDVI and eMODIS had similar correlations (r = 0.453 and r = 0.478, respectively) with mortality rates. Therefore, with the potential reduced latency and updated cloud filtering, the reNDVI product could be a suitable replacement for eMODIS in the Kenya Livestock Insurance Program. The updated reNDVI product shows promise as a vegetation index that could address a pressing drought insurance challenge.

Identifying Precipitation and Reference Evapotranspiration Trends in West Africa to Support Drought Insurance

West Africa represents a wide gradient of climates, extending from tropical conditions along the Guinea Coast to the dry deserts of the south Sahara, and it has some of the lowest income, most vulnerable populations on the planet, which increases catastrophic impacts of low and high frequency climate variability. This paper investigates low and high frequency climate variability in West African monthly and seasonal precipitation and reference evapotranspiration from the early 1980s to 2016. We examine the impact of those trends and how they interact with payouts from index insurance products. Understanding low and high frequency variability in precipitation and reference evapotranspiration at these scales can provide insight into trends during periods critical to agricultural performance across the region. For index insurance, it is important to identify low-frequency variability, which can result in radical departures between designed/planned and actual insurance payouts, especially in the later part of a 30-year period, a common climate analysis period. We find that evaporative demand and precipitation are not perfect substitutes for monitoring crop deficits and that there may be space to use both for index insurance design. We also show that low yields—aligned with the need for insurance payouts—can be predicted using classification trees that include both precipitation and reference evapotranspiration.

Using a regional climate model to develop index-based drought insurance for sovereign disaster risk transfer

PurposeExamine the usability of rainfall and temperature outputs of a regional climate model (RCM) and meteorological drought indices to develop a macro-level risk transfer product to compensate the government of Central Java, Indonesia, for drought-related disaster payments to rice farmers.Design/methodology/approachBased on 0.5° gridded rainfall and temperature data (1960–2015) and projections of the WRF-RCM (2016–2040), the Standardized Precipitation Index (SPI) and the Standardized Precipitation Evapotranspiration Index (SPEI) are calculated for Central Java over different time spans. The drought indices are correlated to annual and seasonal rice production, based on which a weather index insurance structure is developed.FindingsThe six-month SPI correlates best with the wet season rice production, which generates most output in Central Java. The SPI time series reveals that drought severity increases in future years (2016–2040) and leads to higher payouts from the weather index structure compared to the historical period (1960–2015).Practical implicationsThe developed methodology in using SPI for historical and projected periods allows the development of weather index insurance in other regions which have a clear link between rainfall deficit and agricultural production volatility.Originality/valueMeteorological drought indices are a viable alternative for weather index insurance, which is usually based on rainfall amounts. RCM outputs provide valuable insights into future climate variability and drought risk and prolong the time series, which should result in more robust weather index insurance products.

Hydrological drought insurance for irrigated agriculture in southern Spain

In Mediterranean-climate regions, irrigated agriculture is especially vulnerable to the risk of hydrological drought, and irrigators are particularly concerned about the negative effects of water supply failures. This paper proposes a new index-based drought insurance scheme to cover the risk of water supply failures in irrigated agriculture that overcomes the problems currently hindering the development of this kind of insurance, especially those related to arbitrariness in annual water allotments decision-making. Although the proposal is tailored to Spain, it can be easily adapted to other countries or regions because its main features can also be implemented worldwide. The scheme proposed is a promising instrument to help irrigators manage the risk related to hydrological droughts since it has been proved to be technically feasible. The main contribution of this paper is the innovative actuarial analysis implemented, which is aimed at calculating fair premiums. Considering that recent changes in the institutional framework (new demands, new storage capacity, and revised basin and drought management plans) make historical records unsuitable for this purpose, the actuarial analysis applied is based on a stochastic hydrological model able to simulate future hydrological situations under updated settings. Simulation results have shown that irrigated agriculture in southern Spain is expected to be more vulnerable to hydrological droughts. In fact, incidence rates are likely to increase because of the new institutional framework, leading to relatively high fair premiums. Only by implementing high ordinary deductibles can the hypothetical cost of commercial premiums be affordable for irrigators, accounting for less than 10% of their current variable costs.

Weather Station Locations are Significant for Drought Insurance

Weather Station Locations are Significant for Drought Insurance

Liquidity constraints, informal institutions, and the adoption of weather insurance: A randomized controlled Trial in Ethiopia

We report the results of a drought insurance experiment in Ethiopia, and examine whether uptake of index-based insurance is enhanced if we allow farmers to pay after harvest (addressing a liquidity constraint). We also test to what extent uptake can be enhanced by promoting insurance via informal risk-sharing institutions (Iddirs), to reduce trust and information problems. The delayed payment insurance product increases uptake substantially when compared to standard insurance, from 8% to 24%, and leveraging informal institutions results in even greater uptake (43%). We also find suggestive evidence that the delayed premium product is indeed better at targeting the liquidity constrained. However, default rates associated with delayed payments are relatively high and concentrated in a small number of Iddirs – potentially compromising the economic viability of the novel product. We discuss how default rates can be reduced.

Insuring Water Supply in Irrigated Agriculture: A Proposal for Hydrological Drought Index-Based Insurance in Spain

In Mediterranean-climate regions, irrigated agriculture is especially vulnerable to the risk of hydrological drought and irrigators are particularly concerned about its negative effects. During a hydrological drought episode, irrigators receive insufficient water to meet their crops’ water needs, giving rise to the so-called ‘water supply gap’. In such circumstances, agricultural production and irrigators’ incomes are considerably reduced. In order to minimize the negative effects associated with water supply gaps, a new index-based drought insurance scheme for irrigation is proposed, linked to the variable ‘stock of water available in reservoirs’. The proposal, although tailored to Spain, could be easily adapted to other countries or regions because the features of hydrological drought risk are similar worldwide. It is expected that the proposed scheme will improve drought risk management in irrigated agriculture, stabilizing irrigators’ incomes and guaranteeing the sustainability of irrigated agriculture in the face of global change.

Adaptation to Climate Change: The Case of Uganda

Uganda, like several other countries, awaits a significant change in its climate and anticipates adverse effects as a result of the change. Some of the anticipated effects include: drought; agricultural destruction; transport encumbrances and destruction of lives and property due to floods; reduction in biomass and hydroelectric energy production; increase in water-borne diseases due to floods and poor sanitation; increase in Malaria incidence; social discomfort due to higher temperatures and, spill-over economic effects like reduced donor aid. All these events combined will adversely affect the country’s economy if necessary action is not taken in time. The country has documented a number measures to help it adapt to future climate change but practical efforts to implement these measures are hardly visible. This paper proposes that to be on the safe side, among other strategies, the country’s way forward should include: modernization of agriculture; adoption of drought insurance schemes; economic diversification; construction of roads with adequate drainage; use of oil revenue to extend piped water supply to the country’s entire population; intensification of domestic revenue mobilization to reduce dependence on donor aid; gradual substitution of biomass and hydroelectric energy usage with oil energy usage and, incorporation of climate change coping mechanisms in people’s lifestyles. It is of absolute importance that the country takes the necessary precautionary action in time. Keywords: climate change, adaptation, sustainable development, drought, floods, agriculture modernisation DOI : 10.7176/JESD/10-6-01 Publication date :March 31 st 2019

Large scale extreme risk assessment using copulas: an application to drought events under climate change for Austria

Droughts pose a significant challenge to farmers, insurers as well as governments around the world and the situation is expected to worsen in the future due to climate change. We present a large scale drought risk assessment approach that can be used for current and future risk management purposes. Our suggested methodology is a combination of a large scale agricultural computational modelling -, extreme value-, as well as copula approach to upscale local crop yield risks to the national scale. We show that combining regional probabilistic estimates will significantly underestimate losses if the dependencies between regions during drought events are not taken explicitly into account. Among the many ways to use these results it is shown how it enables the assessment of current and future costs of subsidized drought insurance in Austria.

Ecological Vulnerability Through Insurance? Potential Unintended Consequences of Livestock Drought Insurance

Increasingly frequent and severe droughts pose one of the greatest challenges for dryland pastoralists in the Horn of Africa. Livestock drought insurance (LDI) has been proposed as a means to manage these risks. However, LDI may have unintended side effects, such as inducing unsustainable herd sizes leading to long-term pasture degradation. These issues are infeasible to study empirically given that none of the emerging LDI programs has existed at scale for any extended period of time. Thus, we study the potential long-term effects of LDI on pasture conditions at scale with the help of an agent-based model. We particularly consider the possibility that if insurance is taken up at scale, the quick herd size recovery that insurance enables after droughts can disrupt natural pasture recovery dynamics, with the potential to degrade the long-run carrying capacity of the vegetation. Our results show that, especially if pastures are very sensitive to grazing, insurance can indeed cause and/or intensify ecological instability. Furthermore, unfortunately, these unintended ecological consequences are most likely where insurance is needed the most. Designing the insurance product in the light of these insights may dampen these effects.