Market development of weather index insurance

• Main Author: Tan, Shengyang.
• Other Authors: Tiong Lee Kong, Robert
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Engineering::Environmental engineering
• Online Access: http://hdl.handle.net/10356/52879
• Institution: Nanyang Technological University

This report will be looking first at the differences between the traditional indemnity-based insurance and Weather Index Insurance. Traditional indemnity-based insurance issues indemnity payout when crop loss occurs and the payout is based on either cost incurred or expected revenue, which involves a loss assessment that an assessor will make an assessment on-site based on the actual crops in the field. Traditional insurance faces problems such as moral hazard where the policyholders may engage in hidden activities and increasing the risk exposure of their activities causing insurer to bear higher risk than the calculated premium. Adverse selection is another problem where the insurer is unable to differentiate high-risk producers and might result in more high-risk farmers taking up insurance and increase the risk exposure beyond the calculated premium. Weather index insurance is based upon a weather index such as rainfall index. The indemnity payouts are dependent on the amount of rainfall during the specified period and the rainfall data are easily available through the government weather stations and there is no need for on-farm loss adjustments which allows quicker payouts. Weather Index Insurance faces one major challenge that is basis risk, which this report will be focusing on reducing a specific basis risk caused by the inability of rainfall weather index to reflect accurately the drought risks and the vulnerability of crops at different periods.