Optimal insurance against climatic experience

Optimal insurance against climatic experience

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Article ID: iaor20023633
Country: United States
Volume: 83
Issue: 3
Start Page Number: 593
End Page Number: 604
Publication Date: Aug 2001
Journal: American Journal of Agricultural Economics
Authors:
Keywords: financial
Abstract:

An optimal insurance contract against a climatic risk is derived in the presence of an uninsurable and dependent aggregate production risk. The optimal design depends on the stochastic dependency between both sources of uncertainty and on the producer's attitude towards risk, especially on his prudent behavior. Rational weather insurance purchasing decisions are also derived. The prudent producer responds to actuarially fair weather insurance by increasing his exposure towards risk.

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