Hydrological Drought-Indexed Insurance for Irrigated Agriculture in a Highly Regulated System

Abstract

Water scarcity is an increasingly recurring problem for irrigated agriculture in Mediterranean regions. It is, therefore, necessary to establish technical and financial measures to enable irrigators to deal with this problem. This study presents a new index-based drought insurance scheme in an irrigation district in the Jucar river basin in Spain, a highly regulated water system. Three insurance scheme options were evaluated and, the values of the fair risk premiums, the maximum compensation, and the deductible franchise were established. These insurance schemes were designed in agreement with the preexisting drought system operating rules to reduce moral hazard and adverse selection. Risk-reducing and effective evaluation methods were used to determine the insurance coverage’s viability for irrigators: standard deviation gross margin, minimum gross margin, and RMSL. The proposed insurances were also evaluated using synthetic hydrological time series generated with a stochastic ARMA model through a basin-wide water resource simulation model developed in the DSS Shell AQUATOOL. Financial indicators, such as the basis risk and claim ratio were applied to analyze the economic feasibility for insurance companies. The results show that a suitable and efficient option is an early-bird contract combined with a trigger of emergency or alert state in a multi-year contract. This type of specialized insurance helps to fill the existing gap in traditional insurance schemes for irrigated crops and offered additional coverage to farmers under drought and water scarcity conditions.

CERNAS—Current Evolution and Research Novelty in Agricultural Sustainability

“…Water is a more and more valuable resource, becoming scarce in many regions of the globe, so that its application in agriculture sometimes has to be highly regulated. In the Mediterranean, this problem is assuming particular relevance, so Valenzuela-Mahecha et al [4] alert us to the need to establish measures of both a technical as well as a financial nature to enable farmers who deal with irrigation problems cope with this reality. They presented a new index-based drought insurance scheme that will help farmers to deal with the negative economic impacts of the more and more frequent water scarcity events.…”