Designing Purely Weather-Contingent Crop Insurance with Personalized Coverage to Improve Farmers’ Investments in their Crops for Higher Yields

Designing Purely Weather-Contingent Crop Insurance with Personalized Coverage to Improve Farmers’ Investments in their Crops for Higher Yields
Robert M. Townsend, Elizabeth and James Killian Professor of Economics, Department of Economics

Period of performance: 

September 2019 to August 2021
economics, agriculture, smallholder farmers, high-yield farming, high-yield cultivation, crop insurance, agriculture insurance, Thailand, climate change, weather risk

Abstract: 

Crop cultivation worldwide is highly vulnerable to unfavorable weather.  In developing countries, farmers bear the financial burden of their crops’ exposure to weather ravages, the extent of which will only increase due to the effects of climate change.   This causes farmers in these areas to minimize their financial risks by avoiding crop investments that do not have assured results.  As a result, they rely on low-risk, low-yield cultivation practices that do not allow for the food and financial gains that can be possible when favorable weather supports higher yields.  Crop insurance can shield farmers from some weather-related risk, and encourages investment in higher yielding cultivation practices.  Unfortunately, existing insurance products in developing countries are either prohibitively expensive or do not provide accurate compensation for farmers’ losses, and many farmers choose not to participate.

This research team seeks to make crop insurance more accessible and affordable for farmers in developing regions through by developing a new system of insurance pricing and payoff schedules that takes into account the widely varying ways through which weather affects crop’s development and yield throughout the growth cycle.   To do this, the research team will design an algorithm that can accommodate the multiplicity of cultivation choices and yields for a given weather history in order to provide personalizable and purely weather-contingent coverage.  They will begin by focusing on rice farmers in Thailand, using country-wide census data to estimate and test the algorithm.  They will also use this test case to evaluate the effectiveness of the tool to protect farmers from weather fluctuations, including projected weather conditions under future climate scenarios.   Their goal is to provide a new, personalized insurance tool that improves farmers’ ability to protect their yields, invest in their crops, and adapt to climate change in order to stabilize food supply worldwide.