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The optimal drought index for designing weather index insurance

Published by:
Online Location
Publication date
Number of Pages
Type of Publication:
Articles & Journals
Focus Region:
Focus Topic:
Rural Finance / Insurance
Climate / Weather / Environment
Type of Risk:
Weather & Climate related
Type of Risk Managment Option:
Risk transfer
Janic Bucheli; Tobias Dalhaus; Robert Finger


Climate change increases the need for better insurance solutions that enable farmers to cope with drought risks. We design weather index insurance using drought indices based on precipitation, soil moisture and evapotranspiration as underlying drought index and compare their risk-reducing potential for winter wheat producers in Eastern Germany. In general, we find that all drought indices can reduce financial risk exposure. However, the largest risk reduction can be achieved if the underlying drought index is tailored individually for each farm. This implies that insurers should offer insurance with farm-specific underlying drought index.