Agricultural Risk Management Through Weather-Based Insurance in Iran

Agricultural production is inherently a risky business. Farmers face a variety of risks and natural disasters such as weather risks, pests, and plant diseases. Risks are inevitable but are also controllable. One effective risk management tool is agricultural insurance. However, traditional insurance plans have some problems such as high transaction costs and asymmetric information challenges such as moral hazard and adverse selection. Therefore, in this study weather-based crop insurance (WBCI) is presented for rainfed wheat as an efficient approach for risk management as it does not have the problems of traditional insurance. We collected details of weather variables (e.g., temperature and precipitation) and yields of rainfed wheat (‘Sardari variety’) during the period 1987–2013. Of late, the vine copula functions have been very successful in the dependence structure for measuring and expressing joint distribution functions. We measured the dependence structure between weather indices and wheat yields using the vine copula functions; we also calculated the indemnity function and premium amounts. Our results show that the D-vine model is better than the C-vine model for describing joint distribution. Hence, we used this model to compute the premium for rainfed wheat. The premium was calculated in four levels of coverage (50, 80, 90, and 100%). Our results show that its amount at the 80% coverage level was 588,320 Rial. The computing premium in WBCI is less than current insurance premium which is reasonable.