On the Advantages and Feasibility of Weather Index-Based Crop Insurance Schemes in Bolivia

ABSTRACT

Weather index-based insurance schemes are gaining attention as instruments for agricultural risk management. A key difference between these insurance schemes and more traditional ones is that the former can cope more effectively with adverse selection and moral hazard issues, yielding less expensive insurance contracts. In this article, we argue that index-based crop insurance schemes can be particularly promising in Bolivia and discuss the essential technical requirements and methodological steps for igniting supply of these policies. Using daily rainfall data between 1967 and 2017, pilot insurance schemes for wheat and potato crops are developed for Anzaldo, one of Bolivia’s poorest agricultural-dependent rural municipalities. These policies are compared with the country’s current public fully subsidized crop-insurance program, which builds on traditional schemes. We prove that index-based schemes that offer variable reimbursing according to climate-induced crop damage allow to manage similar climate risks with significantly lower policy prices.

KEY WORDS:

• Agricultural risk
• Bolivia
• weather Index insurance
• potato
• wheat

JEL:

• G22
• O13
• N26

Competing interests

The authors declare that they have no competing interests.

Notes

1. This project is managed by the Bolivian State Vice-presidency Office and offers publicly available geographic information.

2. These studies were specifically carried on for the study of wheat and potato in Anzaldo by Proinpa Foundation in 2010.

3. This means that there is only 10% of probability that producer will not receive the reimbursement, having had yields lower than those associated to the trigger. In other terms, the policies that we propose imply a 10% basis risk for the producers.

4. This value was calculated for cumulated disposable rainwater of 35 mm in the vegetative stage (1–36 days after sowing), which corresponds to the historical mean value of rainwater in this period (77 mm) minus one standard deviation (42 mm), depicting a pessimistic scenario for the producers.