Insurance as a risk management tool in agriculture - About public support and remotely-sensed index insurance

Increasing price and production risks in agriculture require an effective on-farm risk man-agement. Against this background, this dissertation focusses on agricultural insurance. There-fore, the first part of this dissertation, firstly, examines the risk exposure and the risk man-agement tools used by German farmers. Secondly, the acceptance of subsidized income insur-ance tools that are associated with a reduction of direct payments is analyzed. The results of a survey show, that price risks and the risks due to drought are classified as the most relevant causes of income fluctuations. Since only a few farmers used commodity future contracts to hedge prices or insurance against drought damage, agricultural policy could promote the un-derstanding of these risk management tools. The acceptance of the Income Stabilization Tool as proposed by the European Commission was low. However, due to a high level of ac-ceptance for public support for environmental services, the acceptance of linking a part of the direct payments to the implementation of environmental measures could be conceivable. Ad-ditionally, farmers’ acceptance of subsidized whole farm income insurance (WFI) and single-crop, multi-peril revenue insurance (RI) that are associated with a reduction of direct pay-ments were analyzed in a discrete choice experiment. The results show a positive willingness to pay (WTP) for WFI and RI. The average farmer has a higher WTP for WFI than for RI. By increasing the coverage level, the negative influence of a reduction of direct payments on the WTP for insurance can be compensated. Individual risk attitude and assessed importance of direct payments for the farm business show a statistically significant influence on the WTP. The results suggest that, even if direct payments were abolished in order to subsidize WFI or RI, German farmers’ WTP for both insurance products would remain positive. However, to finally assess whether subsidizing insurance is the right means of providing public support, it is necessary to assess whether farmers’ WTP meets the costs for such an insurance scheme. The second part of this dissertation examines the use of remotely-sensed vegetation health indices for weather index insurance. Therefore, three available remotely-sensed vegetation health indices, namely the Vegetation Condition Index (VCI), the Temperature Condition Index (TCI) and the Vegetation Health Index (VHI), are considered. In a German case study, it is analyzed whether the use of remotely-sensed vegetation health indices for weather index insurance can reduce basis risk and thus improve the performance of weather index insurance. The two commonly-used meteorological indices, precipitation and temperature sums, were employed as benchmarks. It is found that VHI- and VCI-based weather index insurance led to statistically significant reductions of basis risk compared to the benchmarks. Thus, our results indicate that vegetation health indices can be useful alternatives to meteorological indices. Moreover, it is analyzed whether these remotely-sensed vegetation health indices can explain credit risk of a microfinance institute’s (MFI) agricultural loan portfolio. The results show that the credit risk of the MFI is explained, to a large extent, by the vegetation health indices. Thus, utilizing remotely-sensed vegetation health indices for index insurance designs might be particularly valuable for MFIs to hedge the credit risk of their agricultural loan portfolio. Facing lower default rates, MFIs could reduce interest rates