In less-developed countries, a single season of drought can lead to crop losses that threaten the livelihoods of tens of thousands of small farmers.
While agricultural insurance could help, most traditional policies are too expensive for farmers in these countries. Groups such as the International Fund for Agricultural Development have sought to create index-based insurance options that pay out for losses based on an independent, objective measure linked to crop yield.
But identifying that measure — finding the right trigger mechanism that recognizes the true level of risk while providing an affordable policy option — has been elusive.
Adolph Okine, a first-year Ph.D. actuarial science risk and insurance student, has developed such a model that uses data-based triggers to create index-based insurance options.
The model is designed to help farmers in Ghana and other developing countries cope with the effect of climate change and improve the stability of the agricultural industry that is subject to increasingly unstable weather patterns.
Innovative statistical appoach
The University of Wisconsin School of Business student has collaborated with Askar Choudhury, James Jones and Raquiba Choudhury of Illinois State University, using an innovative statistical approach to analyze data by finding a trigger point that would initiate payment for crop loss through a simplified, index-based insurance policy. The approach is designed to be less costly than traditional agricultural insurance policies.
“Index-based insurance policies can give farmers in developing countries the safety net they need to break the cycle of poverty that even just one year of drought and crop losses can cause,” says Okine. “Our goal was to bring stability to the practice of agriculture in the developing world by looking at rainfall data and finding a reasonable trigger that would signal payment for crop loss. We hope this model will lead to the creation of a fairly priced index insurance product to help farmers struggling to deal with climate change.”
Justin Sydnor, Okine’s adviser and an associate professor of risk and insurance at the Wisconsin School of Business said the potential for index-based insurance policies to help mitigate the risks farmers in developing countries face is creating “a great deal of excitement.”
“Adolph and his co-authors’ method of using data to identify a trigger point for index policies should be an important and practical step toward improving the quality of these plans,” Sydnor said. “He is using cutting-edge statistical techniques to answer important questions in insurance.”
Changing weather patterns
Farmers in the developing world who have been left vulnerable to crop losses as a result of changing weather patterns and reductions in rainfall could benefit from an affordable, index-based insurance product. The index-based tool was developed to promote agricultural and rural development by helping farmers manage the risk of drought and crop loss, while providing an alternative method of funding disaster recovery assistance programs in areas that rely on agriculture.
Okine said what makes his data-driven approach different from prior attempts to create index-based insurance products is that it sought to find the balance between recognizing the likelihood of risk and offering protection at an affordable price point.
In Ghana, farming represents 36% of the country’s gross domestic product and is the main source of income for 60% of the population. Providing a viable means of insuring crop losses in Ghana and other developing countries can have significant impacts.
Need for affordable crop-loss insurance
“There’s a great need for affordable crop-loss insurance because weather shocks can trap farmers and households in poverty, and the risks associated with agriculture limit the willingness of farmers to invest in measures that might increase their production and improve their economic status,” Okine said.
Okine and his co-authors were recently honored by the Journal of Insurance Issues and the Center for the Study of Insurance Regulation with the Best Paper Award for their “Drought Triggered Index Insurance Using Cluster Analysis of Rainfall Affected by Climate Change” paper.
Join us and give us a Like on Facebook