An Integrated Risk Assessment Model for the Implementation of Drought Insurance Markets in Spain

40 Pages Posted: 8 Jul 2014

See all articles by Carlos Pérez-Blanco

Carlos Pérez-Blanco

Fondazione Eni Enrico Mattei (FEEM), Venice

Carlos Gomez

Universidad de Alcalá

Date Written: July 7, 2014

Abstract

Water is a key input in the production of many goods and services and under certain conditions can become a critical limiting factor with significant impacts on regional development. This is the case of many agricultural European Mediterranean basins, where water deficit during drought events is partially covered by illegal abstractions, mostly from aquifers, which are tolerated by the authorities. Groundwater overexploitation for irrigation has created in these areas an unprecedented environmental catastrophe that threatens ecosystems sustainability, urban water supply and the current model of development. Market-based drought insurance systems have the potential to introduce the necessary incentives to reduce overexploitation during drought events and remove the high costs of the drought indemnity paid by the government. This paper develops a methodology to obtain the optimum risk premium based on concatenated stochastic models. The methodology is applied to the agricultural district of Campo de Cartagena (Segura River Basin, Spain). Results show that the prices in a hypothetic competitive private drought insurance market would be reasonable and the expected environmental outcomes significant.

Keywords: Drought Insurance, Stochastic Models, Groundwater, Agriculture, Drought Contingency Plan

JEL Classification: Q5, Q25

Suggested Citation

Pérez-Blanco, Carlos and Gomez, Carlos, An Integrated Risk Assessment Model for the Implementation of Drought Insurance Markets in Spain (July 7, 2014). FEEM Working Paper No. 062.2014, Available at SSRN: https://ssrn.com/abstract=2463140 or http://dx.doi.org/10.2139/ssrn.2463140

Carlos Pérez-Blanco (Contact Author)

Fondazione Eni Enrico Mattei (FEEM), Venice ( email )

Campo S. M. Formosa, Castello 5252
Venezia, 30122
Italy

Carlos Gomez

Universidad de Alcalá ( email )

Madrid, Alcala de Henares 28801
Spain
+ 34 91 885 42 84 (Phone)
+ 34 91 885 42 39 (Fax)

HOME PAGE: http://www2.uah.es/econ

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