Research at ETH Zurich in the field of agricultural economics has played a key role in developing insurance solutions for the agricultural sector. An example are new solutions for insurers including index-based weather insurance.
If a farmer takes out an index-based weather insurance policy, they will receive a payout as soon as certain weather events (e.g. too little precipitation, heat, frost, etc.) occur. The payment is solely dependent on an index that reflects particular weather conditions (such as the total amount of precipitation or overall temperature) and not the damage that has been incurred. As a result, these insurance solutions not only appeal to farmers of arable crops: they are also of interest to people farming feed crops, which were previously impossible to insure.
The benefits of weather index insurance policies
Index-based weather insurance offers an array of benefits for insurers and policyholders alike. Farmers receive a payout immediately after the weather event has occurred: there is no need to inspect the damage to the field as the payment is independent of the damage itself. This gives farmers an incentive to minimise the damage to the field, and they can use the payment to cover additional costs (e.g. through irrigation). Similarly, farmers are not able to trigger payouts by their own behaviour, and the premiums can reflect the company’s own weather risk, reducing costs. Compared to other insurance solutions, this can lead to a lower premium. The challenge posed by index-based weather insurance comes in the form of a potential discrepancy between the payout and the actual damage. This is precisely where ETH’s agricultural economics research comes in, looking at improving the design of insurance policies so the discrepancy between the payout and the damage is minimised.
Improvement through measurement
The first findings on this topic from agricultural economics research at ETH Zurich were published in 2016 and have been developed further on an ongoing basis since then. For example, ETH researchers have been able to better quantify the impact of weather on harvest yields and quality for insurers, and develop strategies that integrate the critical growth window into insurance solutions. Developing agricultural insurance policies against drought risks was particularly important. For example, researchers explored how droughts can be measured most effectively and how satellites can improve these measurements and the design of the policy.
All these findings contribute to improving index-based weather insurance policies, enabling better risk management. In turn, they make agricultural enterprises more resilient in the face of ongoing climate change and increases in extreme weather phenomena.