Advantages of weather insurance index

Due to the introduction of premium subsidy mechanism, China's current policy-based agricultural insurance has solved the actuarial problems of high risk and high premium in agriculture and stimulated the insurance demand to a certain extent, but it cannot eliminate the problems of financial service shortage, moral hazard and adverse selection under the small-scale peasant economy structure in developing countries. Compared with traditional agricultural insurance, weather index insurance has outstanding advantages. Foreign researchers agree that weather index insurance is based on actual weather events (such as the deviation of rainfall index below the agreed index). Because policy benefits are based on objective and independent meteorological indicators and agreed underwriting indicators, the standardization of insurance rights and interests is very high.

First of all, weather index insurance overcomes the problem of information asymmetry, which is conducive to reducing adverse selection and preventing moral hazard. The root of adverse selection and moral hazard is often information asymmetry. Although the insured knows his crops better than the insurer, the weather index insurance does not take the output realized by a single producer as the standard of insurance compensation, but pays the compensation uniformly according to the deviation between the actual weather index and the agreed weather index. Therefore, in the same agricultural insurance risk zoning, all policyholders buy insurance at the same rate, and get the same compensation when disasters occur, and the additional losses are borne by the policyholders themselves. This strict and standardized compensation standard has greatly solved the problem of information asymmetry, and then solved the problems of adverse selection and moral hazard.

Secondly, the management cost of weather index insurance is low. The management cost of weather index insurance is much lower than that of traditional agricultural insurance. There are three main reasons: First, the weather index insurance contract is a standardized contract, and there is no need to adjust the contract content according to the changes of the insured. Second, weather index insurance does not need to supervise individual agricultural products. Third, once the loss of insurance liability occurs, the insurance company does not need complicated claims technology and process, but only needs to obtain statistical meteorological data from the meteorological department, and the insured can directly get compensation according to the published index.

Thirdly, the standardization of weather index insurance contract makes it easy to circulate in the secondary market, which not only facilitates people to obtain insurance policies, but also makes its pricing process more follow the law of market supply and demand. In addition, strong liquidity is conducive to introducing it into the capital market when conditions are ripe, and using a strong capital market to disperse agricultural risks.