In the beginning of the 2007 crop year, the Federal Crop Insurance Corporation (FCIC) launched the Pasture, Rangeland, Forage Rainfall Index Pilot Program (PRF-RI) for six states. This insurance is an index and not individual insurance. Risk Management Agency officials claim that PRF-RI insurance mitigates the risk because index and forage production move in the same direction. Therefore when the index is low there is the expectation that production will also be low. PRF-RI is a pilot program and ranchers are skeptical as to whether or not it is viable to purchase the insurance. The objective of this research was to determine the economic benefits of rainfall insurance in selected counties in Texas and estimate the probability of indemnities under different types of coverage levels and index intervals. Historical rainfall indices were simulated for all index intervals and a multivariate empirical distribution of rainfall indices were used. The model was run for alternative scenarios on the available coverage levels (90%, 85%, 80%, 75%, 70%) and relevant premium rates. Each scenario resulted in an estimate of the insurance benefits variable probability density function for a particular coverage level. Stochastic Dominance with Respect to a Function (SDRF), Stochastic Efficiency with Respect to a Function (SERF), and StopLight chart were used to rank the benefits of alternative coverage levels. The results indicated that for all regions tested, the best alternative when purchasing PRF-RI was to buy the 90% coverage level. Probabilities of earning net indemnities decreased at lower coverage levels. December-January is a critical time period that should be taken into consideration by the ranchers. The results indicated also that insurance returns depend on the region where the policy is purchased. In southern and eastern parts of Texas net indemnities appeared to be significantly less and have lower probabilities of being positive than in West Texas. Ranchers from West Texas may be able to significantly benefit from the insurance.

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This study analyzes rainfall weather index insurance used for forage crops, in the Province of Ontario, Canada. The first objective of the study was to examine factors affecting the willingness of farmers to pay for forage rainfall index insurance, and a survey was undertaken. Some factors found to influence farmers' willingness to pay were knowledge and attitude regarding insurance, their risk profile, and socio-economic factors. A second objective of the study was to examine basis risk reduction approaches. Basis risk is the difference between the actual loss on a farm and the index measured loss payments that are determined by weather station data. The focus was to capture changing yield and weather relationships over crop growth stages. Using farm level forage yield and daily weather station data from Ontario, a multi-trigger index was designed using weighted crop cycle optimization, and results show that basis risk was substantially reduced. / May 2016

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This thesis uses laboratory experiments to develop a methodology to estimate the expected welfare benefits of insurance for individuals, conditional on their risk preferences. This methodology is then applied to study the welfare effects of issues that impact microinsurance, or insurance for the poor. The first result is that insurance take-up not a good proxy for the expected welfare gain of an individual’s choice to purchase or not to purchase insurance. The second result is that basis risk reduces the welfare obtained from index insurance. This welfare is significantly improved by having greater behavioral consistency with the Reduction of Compound Lotteries axiom. Finally, the risk of contract non-performance from the insurer significantly reduces the welfare obtained from insurance purchase decisions.

While new agricultural technologies may lead to substantial yield improvements, the take-up rates in developing countries have frequently been low. There are many possible reasons why a farmer might refrain from adopting a new technology, and literature has pointed to several possible reasons in different settings. A key area for research is to understand what policies could encourage higher adoption rates. This thesis studies the research question by using a case study of fertiliser adoption in cocoa farming in Ghana. Chapter I investigates whether returns to fertiliser in cocoa farming are high and whether farmers' adoption decisions can be explained by comparative advantage. Chapter I uses data from Ghana to measure the returns to fertiliser using a correlated random model and static and dynamic panel models of homogeneous returns to fertiliser. The estimated returns in different models are positive, high and strongly significant statistically. The chapter also presents a correlated random effects model of heterogeneous technology, which allows for farmer-specific comparative advantage. The effect of the comparative advantage is found not to be statistically significant. Chapter II explores the fertiliser investment decisions and risk preferences of Ghanaian cocoa farmers in a framed field experiment. The experimental subjects decided whether to invest in fertiliser, and the fertiliser return depended on a stochastic weather realisation. An inexpensive index insurance scheme with a positive level of basis risk was found to have a minor positive effect on the fertiliser take-up, but this effect was statistically insignificant. An expensive index insurance scheme with no basis risk was found to have a substantial positive effect, and this effect was strongly significant. The experimental findings suggest that farmers are willing to pay for an index insurance if it successfully shields them from income variability. Chapter III investigates the effect of trust and of an ambiguous environment on fertiliser investments under index insurance. These two behavioural factors were studied by means of a framed field experiment conducted with Ghanaian cocoa farmers. The subjects had an option to invest in a package of fertiliser bundled with index insurance with a positive level of basis risk. The returns depended both on the subjects ́ investment choices and a stochastic weather realization. The key ingredient of the study was that for different subjects, the nature of the basis risk was framed differently. Substantially fewer subjects adopted fertiliser when possible losses of fertiliser investment were framed as resulting from the insurer ́s failure to meet its contract obligations, compared with an alternative in which the losses were framed as resulting from a mismatch between their own weather realizations and those on which the index insurance was based. A large negative effect on fertiliser investments was also found in treatments with either a small or large ambiguity regarding the exact level of basis risk. Both negative treatment effects were strongly significant. This may suggest that technologies with which farmers are relatively more experienced are more likely to be adopted under index insurance schemes. The overall experimental findings provide evidence that trust and ambiguity may be significant factors other than basis risk, limiting the effectiveness of index insurance in promoting agricultural innovation.

This dissertation explores the use of an index based contingent claims mechanism against earthquake risk in Indonesia. It focuses on time critical financing needs of international humanitarian relief organizations, and on efforts to improve the resiliency of geographically constrained financial institutions whose clientele are exposed to disaster risk. The approach uses measures of ground motion intensity as the basis for the index. The humanitarian response mechanism provides a new way for private sector partners to participate and gain visibility in their support of principled humanitarian funding. Index based contingent claims for local banks are shown to enhance their ability to recover and continue lending to the community after an event. Financial risk management may also substitute for a portion of the lender's precautionary capital buffer, enabling greater financial inclusion. Wholesale lenders with local bank networks having earthquake exposure can enhance these effects by offering group policies.

Shandong Province, renowned as China’s greatest agricultural province, is dominated by smallholders growing rain-fed crops and vulnerable to severe weather shocks that can increase poverty rates. Weather index insurance, an innovative agricultural risk management product, may be an effective mechanism to address vulnerability to catastrophic weather risk in rural regions of China, including Shandong. This project evaluated current household livelihood and risk management strategies and farmer interest in weather index insurance. Data from 174 participants were collected using a methodology that included focus groups, questionnaires, and personal interviews. Despite limited access to formal financial services, Shandong farmers generally employ informal, well-diversified income strategies and rely on no-interest informal loans from community members to manage adverse impacts of natural disasters, such as drought. Households sometimes rely on reducing consumption as a risk coping strategy; however, unlike many regions of the world, Shandong farmers do not tend to sell livelihood assets to manage weather shocks. A majority of interviewed participants were interested in weather index insurance after they understood its basic concept; however, participants expressed concerns regarding basis risk and program implementation.

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