Optimal Crop Insurance Under Climate Variability: Contrasting Insurer and Farmer Interests

Abstract

This study illustrates the potential synergies and conflicts of interest between farmers and insurers in the selection of an optimal crop insurance contract. Special attention is given to how climate information influences this decision‐making process. To do so, we consider a representative 40 ha, rainfed, cotton‐peanut farm located in Jackson County, Florida. Our results show that year‐to‐year El Niño Southern Oscillation (ENSO) based climate variability affects farmers' and insurers' net returns according to crop insurance contracts. Introduction of ENSO‐based climate forecasts presents a significant impact on the selection of a particular contract to both the farmer and the insurer. We conclude that insurers and farmers can bridge their divergent interests by improving their understanding of the effect of climate conditions on the development of sustainable business plans.

Keywords: Crop insurance, ENSO, Optimization analysis, Risk management