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Climate Change, Weather Insurance Design and Hedging Effectiveness

Author

Listed:
  • Ines Kapphan

    (IED, ETH Zurich, Sonneggstrasse 33, Zurich 8092, Switzerland.)

  • Pierluigi Calanca

    (University of Bern, Oeschger Center, Climate Change Research, Switzerland. E-mails: pierluigi.calanca@art.admin.ch; annelie.holzkaemper@art.admin.ch)

  • Annelie Holzkaemper

    (University of Bern, Oeschger Center, Climate Change Research, Switzerland. E-mails: pierluigi.calanca@art.admin.ch; annelie.holzkaemper@art.admin.ch)

Abstract

Insurers have relied on historical data to design weather insurance contracts. In light of climate change, we examine the effects of this practice on the hedging effectiveness and profitability of insurance contracts. Using synthetic crop and weather data for today's and future climatic conditions we derive adjusted weather insurance contracts that account for shifts in the distribution of weather and yields. In our scenario, hedging benefits from adjusted contracts almost triple and expected profits increase by about 240 per cent. We further investigate the effect on risk reduction (for the insured) and profits (for the insurer) from hedging future weather risk with non-adjusted contracts based on historical data. In this case, insurers generate profits that are significantly smaller than for adjusted contracts, or even face substantial losses. Moreover, non-adjusted contracts that create higher profits than the adjusted counterparts cause negative hedging benefits for the insured.

Suggested Citation

  • Ines Kapphan & Pierluigi Calanca & Annelie Holzkaemper, 2012. "Climate Change, Weather Insurance Design and Hedging Effectiveness," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 37(2), pages 286-317, April.
    • Handle: RePEc:pal:gpprii:v:37:y:2012:i:2:p:286-317
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    References listed on IDEAS

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    2. Sheng, Di & Lambert, Dayton M. & Hellwinckel, Chad, 2016. "A Copula-based Approach to Simulate Climate Impacts on Yield: Some Preliminary Findings," 2016 Annual Meeting, February 6-9, 2016, San Antonio, Texas 230006, Southern Agricultural Economics Association.
    3. Schmidt, Lorenz & Odening, Martin & Schlanstein, Johann & Ritter, Matthias, 2022. "Exploring the weather-yield nexus with artificial neural networks," Agricultural Systems, Elsevier, vol. 196(C).
    4. Christian Hott & Judith Regner, 2023. "Weather extremes, agriculture and the value of weather index insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 48(2), pages 230-259, September.
    5. Wienand Kölle & Andrea Martínez Salgueiro & Matthias Buchholz & Oliver Musshoff, 2021. "Can satellite‐based weather index insurance improve the hedging of yield risk of perennial non‐irrigated olive trees in Spain?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(1), pages 66-93, January.
    6. Christian Biener & Martin Eling, 2013. "Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2012 Update," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 16(2), pages 219-231, September.

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