Agriculture: Risks and Insurance

Scientific project

Objectives of the Research initiative

• To develop scientific research on the evolution of insurance methodologies and products and the financial coverage of economic risks in agriculture-related activities, in particular in the context of meteorological and climatic effects, of increased volatility in commodities and energy markets, and of the evolution of public-private insurance schemes and risk guarantees (insurance and mutual funds).
• To generate scientific research on index-based insurance and on the satellite technologies that feed them, including their applications in the field of agricultural micro-insurance.
• To contribute to research and training at the highest level of young specialists in these subjects, in particular through training through research.
• To disseminate knowledge and understanding of these topics to stakeholders in France and Europe.

Current research topics

• Meteorological and climate risk management from two angles:
  • Damage estimation: study of models for estimating local agricultural production based on meteorological data and satellite data.
  • Long-term forecasting: study of models for measuring the impact of climate risk on production and in particular on forage production.

These two aspects have major consequences not only in terms of pricing but also in terms of claims management. For example, an efficient model for estimating damage using meteorological data or satellite imagery would open the way to index-based loss management (see next point). In both cases, it is a matter of exploring existing growth models, as well as improving tools for processing and analysing meteorological data and satellite images.

• Index-based claims management and its application in micro-insurance.
  Index-based management gives rise to the problem of the acceptability of this method of settlement of damages for potential insured parties. Not only must the index be sufficiently correlated with actual local claims, but the (less well-informed) insured parties must also perceive it as such and accept it at the proposed rate. This problem can be modelled as the optimal definition of a contract for the exchange of risks under constraint (on its form), with asymmetry of information or prejudice between agents.
• Income risk management (mixed insurance/finance risks).
• The volatility of commodity prices has been very high in recent years, along with the prices of a number of other materials that are included in production costs (e.g. oil in the form of fuel). Net income therefore depends, in a non-linear way, on insurable contingencies (e.g. climate hazards) and non-insurable contingencies (e.g. selling prices), but which  can be hedged in the financial markets. This involves understanding how such risks can be managed through hybrid insurance/finance coverage. The search for simple solutions that are acceptable to policyholders still remains an academic challenge. In addition, depending on the definition of “net income” used, there may be problems of moral hazard. In particular, the insurability of “hard-hit” products, which may affect the bottom line of the operating account, will be examined from this standpoint.