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Sequenced Crop Evapotranspiration and Water Requirement in Developing a Multitrigger Rainfall Index Insurance and Risk-Contingent Credit

Michael K. Ndegwa aDepartment of Food and Markets, Natural Resources Institute, University of Greenwich, London, United Kingdom

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Apurba Shee aDepartment of Food and Markets, Natural Resources Institute, University of Greenwich, London, United Kingdom

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Calum Turvey bDepartment of Applied Economics and Management, Cornell University, Ithaca, New York

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Liangzhi You cEnvironment and Production Technology Division, International Food Policy Research Institute, Washington, D.C.
dMacro Agriculture Research Institute, College of Economics and Management, Huazhong Agricultural University, Wuhan, Hubei, China

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Abstract

Weather index insurance (WII) has been a promising innovation that protects smallholder farmers against drought risks and provides resilience against adverse rainfall conditions. However, the uptake of WII has been hampered by high spatial and intraseasonal basis risk. To minimize intraseasonal basis risk, the standard approaches to designing WII based on seasonal cumulative rainfall have been shown to be ineffective in some cases because they do not incorporate different water requirements across each phenological stage of crop growth. One of the challenges in incorporating crop phenology in insurance design is to determine the water requirement in crop growth stages. Borrowing from agronomy, crop science, and agrometeorology, we adopt evapotranspiration methods in determining water requirements for a crop to survive in each stage that can be used as a trigger level for a WII product. Using daily rainfall and evapotranspiration data, we illustrate the use of Monte Carlo risk modeling to price an operational WII and WII-linked credit product. The risk modeling approach that we develop includes incorporation of correlation between rainfall and evapotranspiration indices that can minimize significant intertemporal basis risk in WII.

Publisher's Note: This article was revised on 7 January 2021 to correct a typographical error in the fourth paragraph of the introduction.

© 2021 American Meteorological Society. For information regarding reuse of this content and general copyright information, consult the AMS Copyright Policy (www.ametsoc.org/PUBSReuseLicenses).

Corresponding author: Michael K. Ndegwa, m.k.ndegwa@greenwich.ac.uk

Abstract

Weather index insurance (WII) has been a promising innovation that protects smallholder farmers against drought risks and provides resilience against adverse rainfall conditions. However, the uptake of WII has been hampered by high spatial and intraseasonal basis risk. To minimize intraseasonal basis risk, the standard approaches to designing WII based on seasonal cumulative rainfall have been shown to be ineffective in some cases because they do not incorporate different water requirements across each phenological stage of crop growth. One of the challenges in incorporating crop phenology in insurance design is to determine the water requirement in crop growth stages. Borrowing from agronomy, crop science, and agrometeorology, we adopt evapotranspiration methods in determining water requirements for a crop to survive in each stage that can be used as a trigger level for a WII product. Using daily rainfall and evapotranspiration data, we illustrate the use of Monte Carlo risk modeling to price an operational WII and WII-linked credit product. The risk modeling approach that we develop includes incorporation of correlation between rainfall and evapotranspiration indices that can minimize significant intertemporal basis risk in WII.

Publisher's Note: This article was revised on 7 January 2021 to correct a typographical error in the fourth paragraph of the introduction.

© 2021 American Meteorological Society. For information regarding reuse of this content and general copyright information, consult the AMS Copyright Policy (www.ametsoc.org/PUBSReuseLicenses).

Corresponding author: Michael K. Ndegwa, m.k.ndegwa@greenwich.ac.uk
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