The Application Of Weather Index In Agricultural Insurance

As China is one of the countries suffering the most from agricultural disasters in the world,China has been continuously exploring ways to find suitable risk management tools to deal with natural risks.Compared with conventional agricultural insurance,weather index insurance has been advocated as good tool to replace to conventional agricultural insurance by many scholars due to its advantages of reducing adverse selection,administrative and moral hazard.There are two goals for implementing weather index protection:risk management and income support.Whether weather index insurance can achieve risk management objectives replacing conventional agricultural insurance?Can weather index insurance reduce the leakage of funds by relying on the advantages of loss assessment to achieve the objective of income support?In view of above question at first it analyze development of agricultural insurance in China and the international development tendency which is background of this research.Then it evaluates weather index insurance by probability distribution,quantity statistics,data simulation and other methods using the panel data of household-level productions and county-level productions from 2004 to 2011 in China's 31 provinces.Based on the measurement of the probability distribution of reduction in four kinds of crops,the systematic risk in the county-level and the possible spatial basis risk fter the implementation of the weather index insurance,it simulate the cost-benefit situation after the implementation of the weather index insurance.Finally,weather index insurance as risk management tool is evaluated.The main contents and related conclusions of this research are as follows:Part 1:Based on evaluating the basic insurability and the insurability of systemic risk for weather index insurance,it makes judgment on the potential possibility of risk management objective.Using the crop yield data of four kinds of crops in China,the probability distribution of crop reduction and the county's systematical risk in China and each province are analyzed.Thinking of the current production situation of households in China,the basic insurability of weather index insurance(small probability and large losses)and the insurability of systemic risk for weather index insurance can be evaluated.The results showed that:Although the probability of crop reduction in a certain reduction range is relatively low,due to the small scale of operation and diversification of households in China,the total value of losses is low.Therefore,it cannot meet the basic insurability of insurance.We also find that the systemic risk of the four kinds of crops in China is relatively weak,so that there is a big error when adoption of weather index insurance.The systematic risk of crop production in county-level in China cannot meet the requirements of meteorological index insurance.All in all,thinking of the basic insurability and the insurability of systemic risk for weather index insurance,we find that weather index insurance does not have the insurable conditions in our country.Therefore,the potential of the risk management objectives of weather index insurance is poor.Part 2:It calculate the size of spatial basis risk in the operation of weather index insurance,so as to evaluate the realization of risk management objectives of weather index insurance.After merging the crop yield data of households and the crop yield data of county,the spatial basis risk of county in four kinds of crops in China is measured.Based on this,the realization of risk management function of weather index insurance is evaluated.The results show that:Firstly,the spatial basis risk of 4 kinds of crops may be large if whether index insurance is implemented,including whether index insurance(household)and whether index insurance(money).Secondly,when the event of spatial basis risk(household)error occurred,although households may not experience a critical loss and receive indemnity payment,in most cases it appears that households may experience a critical loss and not receive indemnity payment.Due to spatial basis risk(money)the indemnity payment received by households is less than the actual loss rate corresponding indemnity payment in most cases.Thirdly,it is a big challenge for implementation of weather index insurance to achieve the objective of risk management.Part 3:The applicability of weather index insurance is discussed based on analysis of cost-benefit.It simulates the error cost caused by special basis risk and the operating costs savings for adoption of weather index insurance.And we can judge the possibility of its implementation in China by comparing the costs and benefits when adoption of weather index insurance.The results show that:When keeping the same insurance level with conventional agricultural insurance,the weather index insurance is implemented based on that households have to pay more premiums than the agricultural insurance.So this part of the premiums paid will become the cost of weather index insurance implementation.The benefits from weather index insurance are reduced the expenses in loss assessment.But due to the limited amount of benefits,the excess premiums paid by households still is more than the expenses in loss assessment.That means the effect of implementing weather index insurance will be worse than that of conventional agricultural insurance.Therefore,weather index insurance as a risk management tool should not be implemented in a wide range in China.Weather index insurance cannot replace the conventional agricultural insurance to achieve the risk management objectives.Finally,the conclusions are summarized,and meanwhile it discusses the objective of income support in weather index insure.Then this paper puts forward the idea of improving China's crop insurance is:it makes income support as policy target,and adopts the system that is similar with special savings of urban residents' provident fund with the use of weather index's trigger mechanism.In this way more founds can be saved to support the income of households,so that it can is achieve the objective of income support.