Addressing Basis Risk in Agricultural Index-Based Insurance
The objective of the proposed research is to design and implement an innovative IBI scheme capable of minimizing basis risk. Forage insurance will be used as an example to empirically examine the effective implementation of the IBI, through establishing an adequate relationship between the weather index and forage yield. Therefore, a second objective of the proposed research is to help increase producer demand for forage insurance. Using long term data on forage yield and insurance coverage, panel data econometrics and statistical methods will be used to assess the relationship between the index and the loss exposure. The research will consider alternative contract structures, such as multiple variable indices that are capable of incorporating extended dry periods during the critical growth phase, in addition to excess rainfall, for example. Further, other contract structure considerations will include analysis on spatial basis risk and the corresponding allocation of coverage to multiple rainfall stations. The feasibility of selective forage insurance schemes will be tested, through field experiments, group discussions and key informant interviews. This problem is of significant importance to the partner organization, Guy Carpenter & Company, as well as to producers, provincial crop insurance companies, federal and provincial governments, and reinsurers.