Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions

Jarrod Kath; Shahbaz Mushtaq; Ross Henry; Adewuyi Ayodele Adeyinka; Roger Stone; Torben Marcussen; Louis Kouadio

doi:10.1016/j.crm.2019.04.002

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Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions

Journal article

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Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions

Jarrod Kath, Shahbaz Mushtaq, Ross Henry, Adewuyi Ayodele Adeyinka, Roger Stone, Torben Marcussen and Louis Kouadio

Climate risk management, Vol.24, pp.13-29

2019

DOI: https://doi.org/10.1016/j.crm.2019.04.002

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Abstract

Climate adaptation

Climate variability

Drought

Risk transfer

Wheat

Wheat is key global food crop that is heavily influenced by climatic variability. There has been extensive research on improving forecasts and management practices to minimise climate related yield losses, but less on how to handle yield losses caused by climate variability. We investigated whether index insurance could be used to manage climate related losses, specifically from winter rainfall drought for wheat crops in Australia. We utilised 31 years of yield data from 15 of Australia’s key wheat producing regions. The winter rainfall index was developed and tested using generalised additive regression models, allowing for non-linear effects. Models with the winter rainfall index explained significant variation in wheat yields in each of the regions assessed. Wheat yield models had cross-validated R2 values > 0.5 for two-thirds of the 15 regions modelled and best explained wheat yields in the Mallee, Western Australia (cross-validated R2 of 0.70). Calculated fair premiums ranged from $8.62 to $77.1 AUD/ha, while maximum liability was $59.25 to $212.12 AUD/ha. Throughout the eastern most wheat growing regions the winter rainfall index was consistently inefficient (i.e. not beneficial). In contrast, the winter rainfall index was financially efficient (i.e. beneficial) in the western wheat regions of eastern Australia and parts of Western Australia, with benefits of up to $97 AUD/ha and loss reductions of $9 AUD/ha. The spatial variability in insurance efficiency was explained by rainfall variance. As rainfall variance increased the efficiency of the winter rainfall index insurance for wheat decreased. Our findings have two important policy implications; (1) in areas where climate change is anticipated to increase rainfall variability risk-transfer options, such as index insurance, may become less viable and as such policies that support the development of index insurance without acknowledging or adjusting for variability in its benefit could lead to inefficient outcomes for both government and agricultural producers; and (2) where index rainfall insurance is not efficient then greater emphasise may need to be placed on developing alternate types of index insurance (e.g. using satellites) and/or on risk-management and climate adaptation strategies that minimise losses.

Details

Title: Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions
Creators: Jarrod Kath - University of Southern Queensland
Shahbaz Mushtaq - University of Southern Queensland
Ross Henry - Queensland Farmers Federation, North Quay, Brisbane, Queensland, Australia
Adewuyi Ayodele Adeyinka - University of Southern Queensland
Roger Stone - University of Southern Queensland
Torben Marcussen - University of Southern Queensland
Louis Kouadio - University of Southern Queensland
Publication Details: Climate risk management, Vol.24, pp.13-29
Publisher: Elsevier B.V
Identifiers: 991013150003102368
Academic Unit: Office of Deputy Vice Chancellor, Research
Language: English
Resource Type: Journal article

Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions

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UN Sustainable Development Goals (SDGs)

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