The viability of weather index insurance in managing drought risk by Australian wheat farmers

PhD Thesis


Adeyinka, Adewuyi Ayodele. 2015. The viability of weather index insurance in managing drought risk by Australian wheat farmers. PhD Thesis Doctor of Philosophy. University of Southern Queensland.
Title

The viability of weather index insurance in managing drought risk by Australian wheat farmers

TypePhD Thesis
Authors
AuthorAdeyinka, Adewuyi Ayodele
SupervisorKrishnamurti, Chandrasekhar
Maraseni, Tek Narayan
Institution of OriginUniversity of Southern Queensland
Qualification NameDoctor of Philosophy
Number of Pages258
Year2015
Abstract

In this study, the viability of weather index insurance in managing drought risk for Australian wheat farmers is considered. The relationship between wheat yield and
rainfall index is examined as a prerequisite for the analysis of hedging efficiency of the insurance contracts. Also, the prospects of diversifying a pool of insurance
contracts was analysed and opinions were sought from stakeholders on policy issues.

The relationship between wheat yield and Cumulative Standardized Precipitation Index was estimated for 23 shires (counties) in Queensland and 40 in Western
Australia over the period 1971 to 2010. The relationship was found to differ across locations but overall, it was sufficiently high to permit the use of the index as a proxy
for calculating insurance payouts. It was also found that the hedging efficiency of the insurance varies by locations and was higher in locations with higher rainfall
variability.

The major contribution of this study is that when prices were allowed to vary over the period considered, hedging efficiency reduces relative to the constant price
assumption. This result suggests that previous studies did not capture the cost of price stabilization or it could be said that the natural hedge between yield and price
reduces the willingness of farmers to pay for weather insurance. Although, the efficiency was not sufficiently high to permit the use of the model in this study in
that improvements will be required to make it marketable, some important policy recommendations are evident from the results. Also, the loss ratio analysis indicated
that risk pooling would reduce the burden to the insurer over the long term. However, it was noted that insurers will be able to diversify moderate drought risks than intense droughts while farmers may be willing to hedge intense drought risks. Policy recommendations made in this study therefore aim at bridging this chasm. Also, there was no significant correlation between hedging efficiency and the measures of the relationship even when the yield-index relationship was disaggregated at the corresponding quantiles to the efficiency levels.

Furthermore, the results from farmers’ interview show that; ‘it is against the DNA of farmers to pay taxes and they spend one dollar to save 30 cents’. This attitude of
suboptimal choices reduces the tax delivered to the government coffers and farmers who were probably capable of being profitable avoid declaring profits because they
were avoiding taxes. It was clear from the interviews that farmers detest welfare approach to risk management but would prefer the market options because it facilitates self-reliance and mutual obligation which the government of Australia aims to promote.

However, demands for such market options like weather index insurance have been known to be low and the hail and fire insurance that has been in the market for a long
time is not meeting the needs of the farmers. The poor uptake of weather insurance was traced to systemic risk, basis risk, lack of incentives and low awareness of the
option among farmers. Although, there have been attempts to offer the product, the problem of moral hazard it is purported to resolve is the bane of its uptake because
farmers are morally hazardous investors who use insurance as a financial option when production outlook is bleak.

It was recommended that the government should give tax incentives on insurance premium in addition to the recent welfare provision for farmers to encourage them to
make optimal decisions to become profitable. Doing otherwise could unnecessarily inflate the value of assets used to earn the welfare supports. It was noted that state
stamp duties on insurance should be abolished otherwise; insured farmers will be paying the cost of assisting their uninsured counterparts. Should this policy be implemented, it is expected that the rural debt trend recently put at $66 billion will be alleviated as the cost of capital to the rural sector decreases. Finally, the history and future of agro-risk management was documented, the legal and regulatory requirements for the smooth running of this policy recommendation and the necessary theories are also explored and related to the analyses.

Keywordsweather index insurance; drought risk; Australia; wheat farmers
ANZSRC Field of Research 2020350206. Insurance studies
Byline AffiliationsSchool of Commerce
Permalink -

https://research.usq.edu.au/item/q3207/the-viability-of-weather-index-insurance-in-managing-drought-risk-by-australian-wheat-farmers

Download files


Published Version
Adeyinka_2014_whole.pdf
File access level: Anyone

  • 1835
    total views
  • 569
    total downloads
  • 5
    views this month
  • 1
    downloads this month

Export as

Related outputs

Student Performance Predictions for Advanced Engineering Mathematics Course With New Multivariate Copula Models
Nguyen-Huy, Thong, Deo, Ravinesh C., Khan, Shahjahan, Devi, Aruna, Adeyinka, Adewuyi Ayodele, Apan, Armando A. and Yaseen, Zaher Mundher. 2022. "Student Performance Predictions for Advanced Engineering Mathematics Course With New Multivariate Copula Models." IEEE Access. 10, pp. 45112 -45136. https://doi.org/10.1109/ACCESS.2022.3168322
Global disparities in agricultural climate index-based insurance research
Adeyinka, Adewuyi Ayodele, Kath, Jarrod, Nguyen-Huy, Thong, Mushtaq, Shahbaz, Souvignet, Maxime, Range, Matthias and Barratt, Jonathan. 2022. "Global disparities in agricultural climate index-based insurance research." Climate Risk Management. 35, pp. 1-15. https://doi.org/10.1016/j.crm.2022.100394
Does innovation stimulate performance? The case of small and medium enterprises in regional Australia
Alam, Khorshed and Adeyinka, Adewuyi A.. 2021. "Does innovation stimulate performance? The case of small and medium enterprises in regional Australia." Australian Economic Papers. 60 (3), pp. 496-519. https://doi.org/10.1111/1467-8454.12216
Application of FAIR and CARE Principles in Research Data Management Practice
Gacenga, Francis, Chesters, Racheal, Nguyen-Huy, Thong, Adeyinka, Adewuyi Ayodele and Rose, Samantha. 2021. "Application of FAIR and CARE Principles in Research Data Management Practice." 2021 Australasian Research Management Society VirtualConference (2021 ARMS Virtual Conference Conference): Disrupting the Status Quo: Challenging the Research and Innovation Culture. Online 03 - 05 Nov 2021 Australia.
Smaller businesses and e-innovation: a winning combination in Australia
Alam, Khorshed, Adeyinka, Adewuyi Ayodele and Wiesner, Retha. 2020. "Smaller businesses and e-innovation: a winning combination in Australia." Journal of Business Strategy. 41 (2), pp. 39-48. https://doi.org/10.1108/JBS-11-2018-0186
Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions
Kath, Jarrod, Mushtaq, Shahbaz, Henry, Ross, Adeyinka, Adewuyi Ayodele, Stone, Roger, Marcussen, Torben and Kouadio, Louis. 2019. "Spatial variability in regional scale drought index insurance viability across Australia’s wheat growing regions." Climate Risk Management. 24, pp. 13-29. https://doi.org/10.1016/j.crm.2019.04.002
Index insurance benefits agricultural producers exposed to excessive rainfall risk
Kath, Jarrod, Mushtaq, Shahbaz, Henry, Ross, Adeyinka, Adewuyi and Stone, Roger. 2018. "Index insurance benefits agricultural producers exposed to excessive rainfall risk." Weather and Climate Extremes. 22, pp. 1-9. https://doi.org/10.1016/j.wace.2018.10.003
Viability of weather index insurance in managing drought risk in Australia
Adeyinka, A. A., Krishnamurti, C., Maraseni, T. and Chantarat, S.. 2013. "Viability of weather index insurance in managing drought risk in Australia." Actuaries Summit 2013. Sydney, Australia 20 - 21 May 2013
Rainfall index insurance as an approach to manage climate change induced drought
Adeyinka, A., Krishnamurti, C., Maraseni, T. N. and Chantarat, S.. 2012. "Rainfall index insurance as an approach to manage climate change induced drought." Climate Adaptation in Action 2012: Sharing Knowledge to Adapt (NCCARF 2012). Melbourne, Australia 26 - 28 Jun 2012 Brisbane, Australia.
Quantile analysis of the mathematics achievement - attitude relationship by gender
Adeyinka, Adewuyi Ayodele and Kaino, Luckson Muganyizi. 2012. "Quantile analysis of the mathematics achievement - attitude relationship by gender." The European Journal of Social Sciences. 34 (3), pp. 452-460.
Analysis of students' opinions on January 2009 campus strike at the University of Botswana
Adeyinka, A. A. and Rao, K. S. M.. 2011. "Analysis of students' opinions on January 2009 campus strike at the University of Botswana." International Journal of Educational Administration. 3 (2), pp. 171-188.