Challenges of insuring weather risk in agriculture

Abstract

Purpose

The purpose of this paper is to review some challenges of insuring weather risk in agriculture and to discuss potential remedies for these problems.

Design/methodology/approach

The paper is developed as a narrative on weather insurance based largely on existing literature.

Findings

Weather risks show characteristics that often violate classical requirements for insurability. First, some weather risks, particularly slowly emerging weather perils like drought, are spatially correlated and cause systemic risks. Second, climatic change may increase the volatility of weather variables and lead to non-stationary loss distributions, which causes difficulties in actuarial ratemaking. Third, limited availability of yield and weather data hinders the estimation of reliable loss distributions.

Practical implications

Some of the approaches discussed in this review, such as time diversification, local test procedures and the augmentation of observational data by expert knowledge, can be useful for crop insurance companies to improve their risk management and product design.

Originality/value

This study provides background and development information regarding weather insurance and also presents statistical tools and actuarial methods that support the assessment of weather risks as well as the design of weather and yield insurance products.

Citation

Odening, M. and Shen, Z. (2014), "Challenges of insuring weather risk in agriculture", Agricultural Finance Review, Vol. 74 No. 2, pp. 188-199. https://doi.org/10.1108/AFR-11-2013-0039