PowerPoint Presentation

Index InsuranceIn the absence of crop insurance, farmers are less likely to specialize in agriculture, more likely to grow multiple crops and less likely to add the optimal inputs these cropsAs a result, international groups such as the World Bank are interested in creating crop insurance coverage in developing countriesThere is enormous interest in this topic outside the USAn example of index insurance

Index insurance does not require historic farm level yield data and does not expose the company to moral hazard or adverse selectionLosses are poolable on a global basisThis would eliminate the need for deep pocket reinsurers such as the US Federal Government The first challenge is to link weather to a particular farmThe simplest method sets the value of rainfall at out-of-sample locations equal to the rainfall recorded at the nearest observed siteAnother method, estimates rainfall as a weighted average of surrounding observed values, in which the weights are inversely proportional to the squared distances from the unobserved site NOAA Data

Kriging techniques form a predictor that is equal to a weighted average of the data in the sample. The weights used in the average estimated from the dataKriging techniques have been shown to provide predictors that are both statistically unbiased and efficientKriging produces a smoothed rainfall surface, fit all existing data and which maintains the spatial correlation structureIDW produces point estimatesThe two methods provide similar values at each point

RatesRainfall distributions were found to have a gamma distributionRain was then linked to yields using plant growth models so that the farmer could buy protection against a rain event that would trigger yield lossPremium rates allowed the insurance company to break even over a 5,000 year periodHistoric analysis over 60 years showed that the program would also have been fairly priced during that period

Climate.comCompany sells index insurance in the USMust compete against heavily subsidized competition, premium rates seem highRecently began selling competing, subsidized productsMay eventually ask for a subsidyEnormous value in other countriesMonsanto purchase?