EFFICIENCY OF WIND INDEXED TYPHOON INSURANCE FOR RICE

Abstract

Index-based weather insurances are innovative tools for mitigating weather risks in agriculture. Several donor agencies and development organisations are investing substantially to propagate these programmes in developing countries. However, often due to high basis risks, these products mitigate risk only through diversification effect, thereby defeating the intended purpose. Besides, they send confusing messages to the farmers regarding the very concept of insurance. Therefore, this paper investigates the efficiency of two such index-based weather insurances in Philippines, designed to mitigate rice yield loss caused by strong typhoon winds. The insurance products are designed assuming negative linear correlation between wind speed and rice yield. To verify, we used satellite data and GIS tools to tabulate typhoon wind speeds, concurrent crop stage and the subsequent rice yield in five provinces which have both the programmes. Regression analyses and Ramsey RESET tests confirm that rice yield loss is not a function of incident typhoon wind speed, irrespective of the crop stage. Basis risk estimations, based on minimum variance hedging ratio for a risk averse expected utility maximising consumer show that the products entail basis risks of the order of 99%. Typhoons damage all crops, but wind indexed insurance is inadequate when the insured crop has low head weight and is agile like rice, since wind onslaughts do not determine the degree of yield loss. Notably, a thorough burn analysis for basis risk is a necessity before investing time and money implementing index-based weather insurance schemes as a tool for poverty alleviation.Basis risk, Typhoon, Index-based Insurance, Crop Production/Industries, Risk and Uncertainty,