Pricing of Rainfall Index Insurance for Rainfed Wheat and Barley in Hashtroud County of Iran

Agricultural insurance is a good alternative of stabilizing producers'' incomes, but problems such as asymmetric information have made insurance an expensive tool. Recent studies have shown that weather index insurance manage these problems. Rainfall values have the greatest impact on agricultural production, compared to other climatic factors. On the other hand, Hashtroud County has a central position in wheat and barley production in in East Azerbaijan province of Iran. Therefore, in this study, the pricing of rainfall index insurance for wheat and barley in this county was investigated. In this regard, the required data of wheat and barley yield and rainfall during 1991-2015 were collected. The results of indemnity function showed that in the cropping years of 1999-2000 and 2007-08 with the annual rainfall of less than 225 mm, the indemnity was fully paid, equal to the maximum level of the insurer''s liability. Then, using the lost- cost function and log-logistic theoretical distribution, the premium rate was calculated to be 18 percent. Actual premiums were calculated at four levels of coverage and for each product, the calculated amount for wheat for the cropping year 2014-15 at the coverage level of 80 percent was 2568641 IR Rials and for the barley, equal to 2410948.1 IR Rials. The results showed that the premiums calculated in this study for both products were higher than current premiums. Therefore, it might be suggested that the concerned premiums calculated to reduce the inefficiency of the Agricultural Insurance Fund should be taken into consideration by policy makers and managers of agricultural sector.