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A viable and cost-effective weather index insurance for rice in Indonesia

Author

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  • Aditya Kusuma

    (Victoria University of Wellington)

  • Bethanna Jackson

    (Victoria University of Wellington)

  • Ilan Noy

    (Victoria University of Wellington)

Abstract

The potentially adverse effects of droughts on agricultural output are obvious. Currently, Indonesian rice farmers have little financial protection from climate risk via catastrophic weather risk transfer tools. Done well, a weather index insurance (WII) program can not only provide resources that enable recovery, but can also facilitate the adoption of prevention and adaptation measures and incentivize risk reduction. However, implementations of WII programs have faced difficulties because of basis risk—among several other obstacles. Here, we quantify the applicability, viability, and likely cost of introducing a WII for droughts for rice production in Indonesia. To reduce basis risk, we construct district-specific indices that are based on the estimation of Panel Geographically Weighted Regressions models. With these spatial models, and detailed district level data on past agricultural productivity and weather conditions, we identify an algorithm that can generate an effective and actuarially sound WII in some districts but not in others. We then measure its effectiveness in reducing income volatility for farmers by reducing this basis risk, at the district level. We end by calculating an actuarially robust and welfare-enhancing price for this scheme and prioritize the districts in which it can be implemented.

Suggested Citation

  • Aditya Kusuma & Bethanna Jackson & Ilan Noy, 2018. "A viable and cost-effective weather index insurance for rice in Indonesia," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(2), pages 186-218, September.
    • Handle: RePEc:kap:geneva:v:43:y:2018:i:2:d:10.1057_s10713-018-0033-z
    DOI: 10.1057/s10713-018-0033-z
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    More about this item

    Keywords

    Index; Parametric; Indonesia; Rice; Agricultural insurance; Drought;
    All these keywords.

    JEL classification:

    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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