Experience across many countries shows that, without large premium subsidies, crop insurance uptake rates are generally low. In this article, we propose to use the cumulative prospect theory to design weather insurance products for situations in which farmers frame insurance narrowly as a stand-alone investment. To this end, we introduce what we call “behavioral weather insurance” whereby insurance contract parameters are adjusted to correspond more closely with farmers’ preferences. Depending on farmers’ preferences, we find that a stochastic multiyear premium increases the prospect value of weather insurance, while a zero deductible design does not. We suggest that insurance contracts should be tailored precisely to serve farmers’ needs. This offers potential benefits for both the insurer and the insured.
|State||Published - May 2020|
Bibliographical noteFunding Information:
We are grateful to gvf VersicherungsMakler AG for providing the farm-level yield data. Further, we thank the German Meteorological Office (Deutscher Wetterdienst) for providing weather grid and phenology data. We further thank the Editor Ismael Rodriguez Lara and two anonymous reviewers for helpful comments on an earlier version of the manuscript.
© 2020 Dalhaus et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
ASJC Scopus subject areas
- Biochemistry, Genetics and Molecular Biology (all)
- Agricultural and Biological Sciences (all)