Application of weather index-based insurance for paddy yield: The case of Malaysia

Abstract

Agriculture is primarily vulnerable to vagaries of the weather. The impact of climate change is always intertwined with agricultural production. Therefore, in order to manage these losses, agricultural insurance should be initiated in Malaysia to the farmers to handle the financial risks associated with the impact of weather conditions on the crop yield. This study presents the results of a pilot scale investigation on weather index-based paddy insurance in five selected states in Malaysia. The aim of this study is to determine the appropriateness of this insurance model for each selected paddy cropping zone in Malaysia. Suitable weather indexes were chosen based on the relationship of these indexes and the paddy yield in each zone by employing the method of Ordinary Least Square regression and robust regression. The weather index-based insurance contract is designed based on the natural phenomenon and the time trend had been removed in order to reduce the basis risk. By investigating the relationship, a paddy insurance contract was then designed. However, the results showed that three paddy cropping zones are not suitable to uptake this index insurance as the regression models reported that the vagaries of weather did not cause a significant impact on the paddy yield of these states. This study reveals diversified insurance product design of each zone based on different weather indexes, which suggests that more weather variables should have to be taken into account in order to design a more robust weather-index insurance.