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Innovative tools to address drought risk in grazing lands
Research Areas
  • Agrarian economy
Drought spells can impose severe impacts in most vulnerable farms. It is well known that uninsured exposure exacerbates income inequality in farming systems. However, high administrative costs of traditional insurance hinder small farmers? access to risk management tools. The existence of moral hazard and systemic risk prevents the implementation of traditional insurance programs to address drought risk in rural areas. Innovative technologies like satellite images are being used to derive vegetation index which are highly correlated with drought impacts. The implementation of this technology in agricultural insurance may help to overcome some of the limitations of traditional insurance. However, basis risk has been identified as one of the main problems that hinder the acceptance of index insurance. In this paper we focus on the analyses of basis risk under different contract options in the grazing lands of the Araucanía region. A vegetation index database is used to develop an actuarial insurance model and estimate risk premiums for moderate and severe drought coverage. Risk premium sharply increases with risk coverage. In contrast with previous findings in the literature, our results are not conclusive and show that lowering the coverage level does not necessarily imply a reduction in basis risk. Further analyses of the relation between contract design and basis risk is a promising area of research that may render an important social utility for most vulnerable farming systems.
Xlllth Congress of the European Association of Agricultural Economist EAAE 2011
Zurich, Suiza
Start Date
End Date
From page
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XIIIth EAAE Congress 2011. Abstracts http://ageconsearch.umn.edu/handle/114232
  • Autor: Karen Alejandra Baez Barraza (UPM)
  • Autor: Eva Iglesias Martinez (UPM)
Research Group, Departaments and Institutes related
  • Creador: Centro o Instituto I+D+i: Centro de Estudios e Investigación para la Gestión de Riesgos Agrarios Medioambientales (CEIGRAM)
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