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Universidad Politecnica de Madrid (2016)

Hydrological Drought Index Insurance for Irrigated Agriculture

Maestro Villarroya, Teresa

Titre : Hydrological Drought Index Insurance for Irrigated Agriculture

Auteur : Maestro Villarroya, Teresa

Université de soutenance : Universidad Politecnica de Madrid

Grade : Doctoral 2016

Water supply risks are significant in semi-arid countries and might become more severe due to climate change. From this stems the interest in offering farmers the possibility of insuring their farm incomes against water shortages. Insuring drought in irrigated agriculture is particularly difficult. This is the reason why the United States is the only country where hydrological drought coverage is offered, albeit under very restrictive conditions to avoid adverse selection and moral hazard problems. The main objective of this thesis is to carry out a study of a hydrological drought insurance for irrigated crops. Such a type of insurance should be effective in reducing risk exposure, easy to implement, complementary to water markets, and easy to adapt to crop insurance laws. The proposed insurance is a Hydrological Drought Index Insurance (HDII) which indemnifies the insured farmer based on the value of a selected drought index (DI). HDII protects water users from economic losses or increased costs due to water shortages and has been positively evaluated by an expert panel (Chapter 3). Beyond the HDII literature, this thesis delves into a few key aspects relative to its development and implementation, such as DI selection and validation, and unitary indemnity estimation. This thesis also deals with the fact that water supply interruptions might be forecasted in inertial systems (in which reservoir capacity is large relative to annual inflows and water demands) when purchasing the insurance contract. This could generate intertemporal adverse selection, which is important to be considered when designing the HDII. Chapter 3 provides the methodology to design an HDII in a non-inertial water supply system (in which water shortages might not be predicted before the crop season). Water value methods are used in this chapter to estimate the unitary indemnity, based on the added value of water of the region and linked to crop production. Unitary indemnity varies depending on the water allocated to irrigation, since the marginal value of water increases with its scarcity. Chapters 4 and 5 provide the methodology to design an HDII in an inertial system. Different schemes are proposed to deal with intertemporal adverse selection. Methodologies presented are applied to three case studies : Riegos de Bardenas in Spain (Chapter 3), El Viar Irrigation District in Spain (Chapter 4), and Central Valley in California in the United States (Chapter 5). DI is based on hydrological variables. As a novelty, it can be based on institutional rules that determine water distribution between users. DI validation is based on basis risk assessment. Basis risk is the major obstacle for the use of index-based insurance since it implies that the indemnity received may not necessarily correspond to the actual losses incurred by the insurance policy holder. To deal with intertemporal adverse selection, several alternative designs are proposed : variable premium design, variable deductible design, and early bird design. Variable premium is based on water availability forecasts when purchasing the insurance. Premium rates range from 8% to 24% over the liability in the case study presented in Chapter 5 and from 0% to 41% over the liability in the case study presented in Chapter 4. A multiyear contract is proposed to reduce the premium rate differences. In the highest risk scenario, premium rates decrease from 41% to 26% for a 3-year contract. A variable deductible design is proposed in Chapter 5 at a constant premium rate. Finally, early bird design could be sold before any water availability forecast is made. In the analyzed case studies, constant premiums equal 13% and 14% over the liability for 100% coverage. It appears as the most effective in reducing risk exposure and the most suitable for high-inertial water supply systems. Premium rates for the early bird design are high compared to those calculated for the Riegos de Bardenas case study (non-inertial system), which vary between 0.4% and 1.8% over the liability. This shows that inertial-systems, which are pose greater difficulties for developing drought insurance, are also those more exposed to drought risk. The hedging effectiveness of HDII is addressed in Chapters 3 and 5. Hedging effectiveness is analyzed comparing several loss scenarios with and without insurance. Different premium rate structures are compared : actuarially fair premium and different premium loads representing potential administrative and capital costs of the insurance company. Despite adding premium loads to the commercial premium, insurance schemes are seem to be effective in reducing risk exposure. The margin to load the premium rate reveals a market opportunity to insurance suppliers. Although the research had to overcome problems associated with insufficient data, results suggest that the proposed insurance scheme can be adapted to different irrigated regions and could provide an effective means of reducing farmer vulnerability to water shortages. Future research efforts could examine the potential demand of HDII and the interaction between HDII and water markets.


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Page publiée le 13 septembre 2017, mise à jour le 16 septembre 2017