Optimum insurance contract of flood damage index insurance for rice farmers in Myanmar

Abstract

Climate change is an underlying cause of many extreme events such as enormous cyclones and erratic torrential rains. These phenomena threaten farmers in coastal regions of Myanmar. Self-insurance through means such as crop diversification is insufficient for sustainable farm management. Weather index insurance (WII) is receiving much attention because of its low management costs. An optimum WII contract for flood damage using rainfall as the index has been proposed for rice farmers in coastal regions. According to the model, an insurance payment demand function is derived by solving the expected utility maximization problem. The utility function of the contract is specified as constant relative risk aversion type. The production function is specified as Cobb–Douglas type. By substituting real average data of rice production of farmers into this function, the optimum insurance payment and premium are obtained. Changes in insurance compensation by payments according to an increase in the price of rice, rainfall, and degree of risk aversion are investigated. Results suggest that if an average farmer pays around 41.5 US dollars per year, then farm management will be optimally stabilized under the flood risk.