TY - JOUR
T1 - The Viability of Weather-index Insurance in Managing Drought Risk in Rural Australia
AU - Adeyinka, Adewuyi Ayodele
AU - Krishnamurti, Chandrasekhar
AU - Maraseni, Tek Narayan
AU - Chantarat, Sommarat
N1 - Publisher Copyright:
© 2016, © 2016 Institute of Rural Management.
PY - 2016/10/1
Y1 - 2016/10/1
N2 - Agriculture is the trade of rural Australians and managing weather risk have implications for Australian demographics. Consequently, we looked into the strategies farmers adopted to manage their revenue risk due to drought with a focus on wheat farmers. The prospects of managing the challenges of indemnity-based insurance with rainfall index insurance were discussed. We established the relationship between yield and cumulative standardized precipitation indices and concluded that a strong relationship between the rainfall index and yield does not necessarily lead to high hedging efficiency. The hedging efficiency of the product was analyzed using the mean root square loss, conditional tail expectation and certainty equivalence of revenue while the spatial and temporal nature of the risk were captured with loss ratios. It was observed that the inverse relationship between price and yield offsets some risks and reduces the efficiency of weather hedges. Differences were observed in the hedging efficiency across locations and efficiency was noted to be dependent on the methodology adopted. The results from the loss ratio analysis showed that pooling insurance contracts reduced risk to the insurer. We concluded that other variables would have to be taken into consideration in order to make the design of weather-index insurance more robust and that tax incentives on insurance premium would motivate farmers to be profitable.
AB - Agriculture is the trade of rural Australians and managing weather risk have implications for Australian demographics. Consequently, we looked into the strategies farmers adopted to manage their revenue risk due to drought with a focus on wheat farmers. The prospects of managing the challenges of indemnity-based insurance with rainfall index insurance were discussed. We established the relationship between yield and cumulative standardized precipitation indices and concluded that a strong relationship between the rainfall index and yield does not necessarily lead to high hedging efficiency. The hedging efficiency of the product was analyzed using the mean root square loss, conditional tail expectation and certainty equivalence of revenue while the spatial and temporal nature of the risk were captured with loss ratios. It was observed that the inverse relationship between price and yield offsets some risks and reduces the efficiency of weather hedges. Differences were observed in the hedging efficiency across locations and efficiency was noted to be dependent on the methodology adopted. The results from the loss ratio analysis showed that pooling insurance contracts reduced risk to the insurer. We concluded that other variables would have to be taken into consideration in order to make the design of weather-index insurance more robust and that tax incentives on insurance premium would motivate farmers to be profitable.
KW - Drought
KW - hedging efficiency
KW - loss ratio
KW - regression analyses
KW - willingness to pay and weather-index insurance
UR - http://www.scopus.com/inward/record.url?scp=85002044963&partnerID=8YFLogxK
U2 - 10.1177/0973005216660897
DO - 10.1177/0973005216660897
M3 - Article
SN - 0973-0052
VL - 12
SP - 125
EP - 142
JO - International Journal of Rural Management
JF - International Journal of Rural Management
IS - 2
ER -