Real Options and Reduction of Basic Risk of Index‐Based Climate Agricultural Insurance

Abstract

This article is a discussion of the concept of index-based agricultural insurance and the possible role of real options to reduce the basic risk. Indeed, to address the consequences of variability of weather within climate, experiments based on indexed agricultural insurance have been implemented in recent years. However, this locally defined insurance scheme has a weak point called the basic risk, i.e., the difference between the reality of climatic shocks and the payment of compensation. Real options allow this gap to be filled by offering alternatives to farmers. This article is the first to discuss the use of real options in the basic risk management of indexbased climate agricultural insurance. The implications for farmers in developing countries, insurers, and local and institutional organizations and communities are important: better management of operating conditions, optimized financial management, and consideration of real climatic conditions.

Designing Subsidy Scheme for Marine Disaster Index Insurance in China

“…Cummins and Mahul [20] systematically address approaches that developing countries should adopt to manage catastrophe risk. The insurance model they proposed was widely used in designing kinds of catastrophe insurance, which was the solid foundation for innovation in catastrophe insurance, including index-based insurance [21,22].…”