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Title: Basis Risk and Low Demand for Weather Index Insurance
Authors: Kodama, Wataru
Miura, Ken  kyouindb  KAKEN_id  orcid (unconfirmed)
Sakurai, Takeshi
Keywords: climate risk
basis risk
index insurance
insurance demand
Issue Date: 10-Nov-2021
Publisher: Division of Natural Resource Economics, Graduate School of Agriculture, Kyoto University
Journal title: NRE-DP: Natural Resource Economics Discussion Papers
Volume: 2021-02
Start page: 1
End page: 49
Abstract: Basis risk --an imperfect correlation between an aggregate index and idiosyncratic damage-- is a major impediment to index insurance take-up in developing countries. However, empirical evidence is scarce because of the difficulty in its direct measurement. This study uses household panel data from rural Zambia to estimate the impact of spatial basis risk on demand for a rainfall index insurance contract. First, we develop a simple insurance demand model to motivate our econometric specifications. Then, we quantify the spatial basis risk for each household using past rainfall data at the plot level. Exploiting changes in insurance design across years, we use within-household variations in basis risk to identify its impact. The empirical results show that spatial basis risk suppresses insurance demand. Despite its statistical significance, our results also suggest that minimizing the spatial basis risk would not yield sufficient economic benefits to offset the associated costs. Overall, this study offers a general analysis framework for spatial basis risk, product basis risk, and index insurance demand.
Description: Natural Resource Economics Discussion Papers are preliminary research reports by members of the GSA-NRE Kyoto University circulated for comments and suggestions. They have not been externally peer-reviewed or been subject to the review by the editorial board.
Revised in August 2022
Rights: All rights are reserved by the authors.
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Appears in Collections:NRE-DP: Natural Resource Economics Discussion Papers

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