The increase in the frequency and severity of extreme weather events urge for more powerful early warning systems and ex-post risk transfer mechanisms. Index-based insurance is an efficient risk management tool reducing the impacts of drought in agricultural insurance. The most feasible policy is the one that is directly based on the quantification of relation between index measure and the yield loss. Regardless of its efficiency, as an important caution, the insurer must be aware of the basis risk. In this study, nonlinear optimization approach is considered for quantifying the indemnity and basis risk of index-based insurance contracts. A real life case is implemented to verify the efficiency of the proposed approach. The results of the study are expected to indicate the needs for more sophisticated contract designs to handle the drought risk.
Key words: Drought; index-based agricultural insurance; nonlinear optimization; indemnity; basis risk. JEL Codes: Q14, D81, C61. Article Language: EnglishTurkish
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