Beruflich Dokumente
Kultur Dokumente
ECONOMICS
Agricultural Economics 47 (2016) 319328
of Public Affairs, Zhejiang University, 866 Yuhangtang Rd, Hangzhou, Zhejiang 310058, China
b RSFAS, Australian National University, Australia
Received 21 September 2014; received in revised form 7 September 2015; accepted 22 December 2015
Abstract
As an economic and market-transparent program, weather index insurance is expected to mitigate asymmetric problem. Capturing the relationship
between yield and weather factor(s) is the basis of index insurance, but remains a challenge for weather index schemes. Meanwhile, composite
weather index insurance is needed by farmers when their agricultural activities involve several risks, but is rarely studied. We aim to design a
composite weather index insurance model and evaluate its efficiency in hedging yield risk by using the case of rice production in China. We divide
the whole growth cycle of rice into six stages on the basis of agronomic knowledge, and use the average value of each weather factor in each stage
to design a weather index. Then, the efficiency of composite weather index insurance is evaluated by mean-semivariance and value-at-risk methods.
First, we find that subdivision of the growth cycle helps to better capture the subtle relationship between rice yield and weather factors. Second,
composite weather index insurance evidently reduces yield risk. Our findings help further adoption of weather index insurance in agricultural fields.
JEL classifications: Q14, G22
Keywords: Composite Weather Index Insurance; Risk Hedging; Efficiency
1. Introduction
Crop insurance has been widely adopted across the world as
a risk management tool. However, traditional crop insurance
schemes have suffered severe moral hazard (Coble et al., 1997)
and heavy loss investigation expenses. The efficiency of traditional crop insurance has been questioned and it is deemed
necessary to reconsider the scope and use of such schemes
(Makki, 2002). Miranda and Glauber (1997) have argued that
systemic risk, not asymmetric problems, may pose more serious obstacles to the private crop insurance market. Alternative
agricultural insurance schemes have been suggested. Among
these, weather index insurance has received a great deal of attention. Since index contracts are designed to provide efficient
Corresponding author. Tel.: 86-571-88273130. E-mail address: shihong919@126.com (Hong Shi).
C
DOI: 10.1111/agec.12232
320
data for Morocco in designing insurance to evaluate the efficiency of weather derivatives in agricultural application. Deng
et al. (2007) designed the temperature humidity index (THI)
to hedge dairy losses by using long time series of dairy production statistics. Their empirical results showed that index
contracts had a considerable effect on reducing risks. On the
other hand, basis risk is problematic for both farmers and insurers. Van Asseldonk (2003) pointed out that the efficiency
of weather derivatives is largely determined by spatial basis
risk.
A variety of methods are used to evaluate the potential risk
reduction performance of weather index insurance. Vedenov
and Barnett (2004) used the mean root square loss, value-atrisk (VaR), and certainty-equivalent revenues to measure the
change in risk exposure experienced by producers if designed
contracts were purchased. Breustedt et al. (2008) confirmed
statistical reliability by means of bootstrapping when Mean
Variance (MV) and Second order Stochastic Dominance (SSD)
were used to evaluate the risk reduction effect of index insurance. On the basis of a small representative panel data set of
Indian smallholder pepper growers, Zant (2008) simulated the
impact of a joint price and yield index insurance model by
means of the square of the coefficient of variation, with and
without insurance.
These previous weather index insurance models cover one or
two weather factors. But single weather index insurance may
not satisfy the needs of farmers when their agricultural activities
involve several weather risks. Second, the above studies usually
processed weather data as average or accumulated values for
the whole growth duration. However, the timing is as important
as the accumulated or average value of weather factors for
crop yield. The neglect of weather factors distribution prevents
researchers from identifying the subtle relationship between
weather factors and yield.
We aim to design a composite weather index insurance
model and evaluate its risk-reducing effect by focusing on a
case study of Chinese rice production. This extends and improves understanding in two aspects. First, we design a composite weather index insurance model by including all the major
weather factors that significantly affect rice yield. Composite
index insurance will be of greater practical value than singleindex insurance. It is convenient and economic for farmers
who need to be covered against several weather risks. Second, we use subperiod weather data to design a weather index
by dividing the whole rice growth cycle into several phases.
Weather conditions during crops key phases determine grain
yield. Subdivision helps better capture the subtle relationship
between weather factors and yield, which is the basis of index
insurance.
This article is organized as follows. The data and the rice
growth cycle are introduced in Section 2. The weather index
model is discussed in Section 3, followed by the index insurance
design in Section 4. Section 5 evaluates the efficiency of index
insurance in risk hedging. Conclusions and implications are
presented in Section 6.
321
(1)
6
ij t Xij t + it ,
(2)
j =1
3 Though the exact growth duration of each stage may differ each year due
to local weather condition, agricultural experts believe that the difference is
minor. This simplification will not bias our results.
4 For example, in tropical ecosystems, high-temperature-induced grain sterility in rice is already a serious problem. The fertility of rice cultivars is affected by high-temperature stress at flowering. Dry air due to low humidity
promotes dehiscence of anthers and curbs extra elongation of filaments under
high-temperature conditions (Nishiyama and Satake, 1981).
322
Table 1
Division of growth cycle
Phase
Stage
Start
End
Duration
I: Vegetative
1. Seedling
2. Tillering
3. Stem Elongation
4. Panicle Initiation to Heading
5. Flowering
6. Ripening
May 15
June 15
July 5
July 25
August 27
September 4
June 14
July 4
July 24
August 26
September 3
October 30
31 days
20 days
20 days
33 days
8 days
57 days
II: Reproductive
III: Ripening
Jiangyin
Yixing
Liyang
Jintan
Kunshan
Wujiang
Taicang
Changshu
Zhangjiagang
Yield per mu
650
600
550
500
450
650
600
550
500
450
650
600
550
500
450
1990 1995 2000 2005 2010 1990 1995 2000 2005 2010 1990 1995 2000 2005 2010
Year
Fig. 1. Summary of annual average yield in each county.
0 +
0 + j Xj
j Xj
(%) .
100% =
600
6
(3)
323
Table 2
Summary of historical weather factors in each stage
Phases
Stages
Rainfall (mm)
Sunshine (hours)
Temperature (C)
I: Vegetative
1. Seedling
34.29
(20.16)
90.74
(49.28)
71.34
(49.45)
58.99
(40.31)
45.91
(53.91)
21.88
(9.93)
74.23
(4.69)
81.75
(5.02)
80.70
(4.71)
80.71
(4.18)
81.21
(5.15)
76.50
(3.56)
5.78
(1.09)
4.69
(1.75)
5.99
(2.15)
6.77
(1.95)
5.95
(1.91)
5.58
(0.75)
22.42
(0.88)
25.72
(1.66)
28.07
(1.43)
28.27
(1.15)
26.33
(1.63)
21.28
(4.34)
2. Tillering
3. Stem elongation
II: Reproductive
4. Panicle initiation
to Heading
5. Flowering
III: Ripening
6. Ripening
Note: Weather factors are presented in averages, with standard deviations in parentheses.
Table 3
Outcome of the two-step regression model
Variable
Coefficient
t 1991
2.57***
(0.455)
540***
(6.27)
259
(200)
0
0
Phases
I: Vegetative
Stages
1. Seedling
2. Tillering
3. Stem elongation
II: Reproductive
4. Panicle initiation
to Heading
5. Flowering
III: Ripening
6. Ripening
Rainfall
Relative humidity
2.609***
0.396
(0.244)
0.030
(0.034)
0.052*
(0.007)
0.060
(0.095)
0.012
(0.054)
1.549***
(0.235)
(0.752)
0.865*
(0.441)
1.351**
(0.517)
0.391**
(0.850)
0.074
(0.543)
3.494***
(0.753)
Sunshine
Temperature
3.193
(2.966)
7.944**
(2.799)
4.230
(2.453)
1.726
(2.401)
3.712
(3.316)
11.680*
(5.510)
16.480***
(4.771)
10.980***
(2.486)
0.232*
(5.098)
4.869
(6.455)
5.755**
(2.251)
0.063
(0.166)
Note: 1.* ,** , and *** denote p < 0.1, p < 0.05, and p < 0.01, respectively, with standard errors in parentheses.
2. The variable year explains 14.4% of the total change in yield. After detrending, all the weather variables account for 49.7% of the volatility of residual .
Therefore, the overall R2 = 56.9%.
3. Yield is measured in the unit of kg/mu, where 1 mu = 1/15 hectare. Rainfall is measured in mm, relative humidity in %, sunshine in hours, and temperature in C.
We assume that the influence of weather on rice yield complies with normal distribution and has a zero mean (so that
there is an equal probability of positive or negative effect on
crop yield in different years); therefore, constant 0 is added
to the index for adjustment. Furthermore, with the denominator 600, the proposed index intuitively measures the proportion
of weather yield to a standard level (close to mean value). In
this way, CI reflects the influence of weather conditions on the
harvest, presented as a percentage. In addition, we want the contract to fit all nine counties with a single premium rate, making
0
6p CIt
if CIt 0
if CIm CIt < 0,
(4)
6p CIi f (i) di .
.08
.02
Density
.04
.06
.1
(6)
324
15
10
10
CI
kernel = Gaussian, bandwidth = 1.2269
CIm
Next, we evaluate the efficiency of the proposed index insurance in hedging revenue risk. Suppose the investment portfolio
of a farmer consists only of rice production assets and that
he does not purchase the proposed index insurance contract.7
Then, the total revenue R0 can be easily derived by multiplying unit rice price (assumed constant) by annual yield. When
the portfolio includes index insurance, a farmers revenue R1
would be R0 plus the compensation received from the insurance
contract and less loaded premium paid.
6 The proportional load of traditional agricultural insurance is more than 20%
in China. We reduce the load in consideration of the lower expenditure of
weather index insurance in loss investigation and claim settlement.
7 Due to the lack of individual yield data, we regard each county as a decision
maker and evaluate the efficiency of weather index insurance in reducing risks
of each county. However, this county-based analysis may underestimate the
effect of the weather index because the pooling of individual yield risk to
county level lowers yield risk, which leads to less difference of revenue risk
with or without index insurance.
325
Table 4
Revenue with and without contract in each county
County
Change
Jiangyin
Yixing
Liyang
Jintan
Kunshan
Wujiang
Taicang
Changshu
Zhangjiagang
813.11 (46.27)
797.69 (54.74)
811.46 (73.47)
846.16 (73.25)
807.24 (45.74)
813.37 (37.80)
824.70 (55.90)
831.95 (54.78)
849.05 (46.66)
808.74 (34.77)
796.22 (38.64)
809.99 (61.81)
844.69 (62.53)
802.86 (36.67)
814.25 (32.06)
820.32 (37.87)
827.58 (40.50)
844.67 (28.79)
0.54% (24.8%)
0.18% (29.4%)
0.18% (15.9%)
0.17% (14.6%)
0.54% (19.8%)
+0.11% (15.2%)
0.53% (32.3%)
0.53% (26.1%)
0.52% (38.3%)
5.2. Value-at-risk
Finally, we investigate the difference of probable minimum
values of revenue with and without the proposed index insur8 So, investors care only about how they may suffer. If performance is above
average, greater deviation means better results, and thus should not be included
in the variance.
326
Table 5
Revenue risk with and without a contract at different levels of k
k = 0.1
k = 0.2
k = 0.3
County
V without
contract
V with
contract
V without
contract
V with
contract
V without
contract
V with
contract
Jiangyin
Yixing
Liyang
Jintan
Kunshan
Wujiang
Taicang
Changshu
Zhangjiagang
760.27
696.49
650.06
665.74
759.92
782.72
715.91
742.23
785.61
781.39
750.45
701.30
710.56
773.44
788.52
777.42
780.60
826.36
707.42
595.28
488.66
485.33
712.60
752.07
607.12
652.51
722.18
754.05
704.68
592.61
576.43
744.01
762.80
734.52
733.63
808.05
654.57
494.08
327.26
304.91
665.28
721.41
498.33
562.79
658.75
726.71
658.91
483.92
442.30
714.58
737.07
691.62
686.66
789.74
Note: Revenue risk V is measured by the mean-semivariance model, and k denotes the coefficient of relative risk aversion. Higher (or lower) V corresponds to lower
(or higher) risk exposure.
Table 6
VaR value before and after purchasing insurance given different levels of
= 0.95
County
Jiangyin
Yixing
Liyang
Jintan
Kunshan
Wujiang
Taicang
Changshu
Zhangjiagang
= 0.99
VaR without
contract
VaR with
contract
Change
VaR without
contract
VaR with
contract
Change
84.12
(728.99)
119.96
(677.73)
155.28
(656.18)
171.67
(674.49)
77.92
(729.32)
62.98
(750.39)
134.05
(690.65)
110.65
(721.30)
100.35
(748.70)
58.99
(749.75)
79.05
(717.17)
123.79
(686.20)
143.07
(701.62)
62.03
(740.83)
58.77
(755.48)
76.99
(743.33)
79.34
(748.24)
49.89
(794.78)
25.14
(+20.76)
40.91
(+39.44)
31.49
(+30.02)
28.60
(+27.13)
15.89
(+11.51)
4.21
(+5.09)
57.06
(+52.68)
31.32
(+26.94)
50.46
(+46.08)
108.85
(704.26)
193.91
(603.78)
214.20
(597.26)
221.61
(624.55)
99.34
(707.90)
80.67
(732.70)
195.75
(628.95)
146.33
(685.62)
132.69
(716.36)
70.72
(738.02)
115.12
(681.10)
158.56
(651.43)
193.56
(651.13)
80.01
(722.85)
77.16
(737.09)
123.95
(696.37)
112.82
(714.76)
64.89
(779.78)
38.14
(+33.76)
78.79
(+77.32)
55.64
(+54.17)
28.05
(+26.58)
19.33
(+14.95)
3.51
(+4.39)
71.80
(+67.42)
33.52
(+29.14)
67.80
(+63.42)
Note: A higher (or lower) VaR value corresponds to higher (or lower) risk exposure. denotes confidence level so that Pr(Loss > VaR ) = 1 . Minimum revenues
at certain confidence level are included in parentheses.
insurance policy, would be considerably lower than if purchasing separately. Therefore, composite weather index insurance
is a supplement to the existing single-index insurance.
Finally, composite index insurance is of great importance
to countries like China, which face inefficiency problems in
agricultural insurance practice. Because Chinese insurers have
few advanced and economic techniques to mitigate asymmetric
problems, the amount insured in traditional agricultural insurance is too low to cover farmers losses (Shi, 2012). However,
farmers are eager to obtain protection from contracts with sufficient liability. Composite weather index insurance contributes
to Chinese agricultural insurance by solving this dilemma, thus
increasing the efficiency of agricultural insurance in hedging
farmers production risks.
,
(A.1)
K
f (x) =
nh t=1
h
where Xt represents the historical value of CI in year t, n is the
amount of available CI data, K() is the kernel function, and
h is bandwidth (Silverman, 1986). Kernel function and bandwidth must be determined. There are various types of kernel
function such as Epanechikov kernel, Gaussian kernel, triangle kernel, cosine
kernel, etc. The Gaussian kernel, namely,
exp(u2 /2)/ 2 , is widely used in research but kernel selection is not a major concern.9 In order to estimate the probability
of a certain point, the probabilities of nearby points are taken
into consideration, and the weight assigned to each adjacent
point is determined by kernel function. Bandwidth is used as
an adjuster when smoothing samples. It can be easily deduced
that if (x Xt )/ h remains constant, (x Xt ) will have a wider
range when h increases, and this will make the curve smoother.
That is because in this case, not only more points will be involved in smoothing but also more points that are close to the
estimated point will cluster in high-weight area. So, small bandwidth will reflect more details about the sample, but the curve
may be rough with many bulges caused by random effects,
while oversized bandwidth may lead to oversmoothing, and
some substantial traits may thus be concealed because of the
oversmoothed curve. Therefore, it is pivotal to choose an appropriate bandwidth, which offers a balance between smoothness
and adherence.
The ideal value of h is determined by minimizing the approximate mean integrated standard error (Silverman, 1986)
hopt =
2
k2 5
2
K(t) dt
15
f (x) dx
15
15
(A.2)
where k2 = t 2 K(t)dt. Several methods are available for estimating optimal h such as Silvermans rule-of-thumb, maximum smoothness, cross validation, etc. The point is that
9
327
(A.3)
As the data deviate from normality (e.g., bimodal distributions, fatter tails, and asymmetry), Silverman (1986) found that
setting = min{standard deviation, (upper quartile lower
quartile)/1.34} and reducing the scaling factor from 1.06 to
0.9 lead to better result in general empirical analysis.10 After
modification by adopting these two principles, the value of hopt
is set as 1.2269.
Appendix B:The mean-semivariance model
The substance of semivariance is that only deviations of
observations below average are considered, where the denominator n is the sample volume including all the observations:
Ui =
Ri E (R)
0
if Ri < E (R)
if Ri E (R) ,
1 2
U ,
n i=1 i
(B.1)
2
=
semi
(B.2)
2
where E(R) and semi
denote expected revenue and semivariance of revenue, respectively.
Therefore, we use the mean-semivariance model to estimate
the efficiency of index insurance in hedging yield risk:
1 2
,
V = E (R) ksemi
2
(B.3)
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