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Natural Hazards and Earth System Sciences An interactive open-access journal of the European Geosciences Union
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Discussion papers
https://doi.org/10.5194/nhess-2019-183
© Author(s) 2019. This work is distributed under
the Creative Commons Attribution 4.0 License.
https://doi.org/10.5194/nhess-2019-183
© Author(s) 2019. This work is distributed under
the Creative Commons Attribution 4.0 License.

Submitted as: research article 18 Jul 2019

Submitted as: research article | 18 Jul 2019

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This discussion paper is a preprint. It is a manuscript under review for the journal Natural Hazards and Earth System Sciences (NHESS).

Remote sensing in an index-based insurance design for hedging economic impacts on rice cultivation

Omar Roberto Valverde-Arias1, Paloma Esteve1,2, Ana María Tarquis1,3, and Alberto Garrido1,2 Omar Roberto Valverde-Arias et al.
  • 1CEIGRAM, ETSIAAB, Universidad Politécnica de Madrid, Madrid, 28040, Spain
  • 2Dpto. de Economía Agraria, Estadística y Gestión de Empresas, ETSIAAB, Universidad Politécnica de Madrid, 28040 Madrid, Spain
  • 3Grupo de Sistemas Complejos, ETSIAAB, Universidad Politécnica de Madrid, 28040 Madrid, Spain

Abstract. Rice production in Ecuador is steadily affected by extreme climatic events that make it difficult for farmers to cope with production risk, threatening rural livelihoods and food security in the country. Developing agricultural insurance is a policy option that has gained traction in the last decade. Index-based agricultural insurance has become a promising alternative that allows insurance companies to ascertain and quantify losses without verifying a catastrophic event in situ, lowering operative costs and easing implementation. But its development can be hindered by basis risk, which occurs when real losses in farms do not fit accurately with the selected index. Avoiding basis risk requires assessing the variability within the insurance application area and considering it for representative index selection. In this context, we have designed an index-based insurance that uses a vegetation index (NDVI) as indicator of drought and flood impact on rice in Babahoyo canton (Ecuador). Babahoyo was divided in two Agro-ecological Homogeneous Zones to account for variability, and two NDVI threshold values were defined to consider, first, the event impact on crop (physiologic threshold), and, second, its impact on gross margin (economic threshold). This design allows us to set-up accurate insurance premiums and compensations that fit the particular conditions of each AHZ, reducing basis risk.

Omar Roberto Valverde-Arias et al.
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Omar Roberto Valverde-Arias et al.
Omar Roberto Valverde-Arias et al.
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Short summary
We designed an index-based insurance (IBI) for drought and flood in rice crop, in Babahoyo canton (Ecuador). We assessed Babahoyo's soil, climatic and topographic variability, finding two homogeneous zones inside this area. We set differentiated insurance premiums according to the particular risk status of each zone. Results demonstrate that this IBI is an efficient risk transfer tool for policy holders. This insurance design could contribute to stabilize farmers' incomes and rice production.
We designed an index-based insurance (IBI) for drought and flood in rice crop, in Babahoyo...
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