Weather index-based insurance for specific event risks in corporate management

Resumo

The increasing weather volatility derived from the climate change phenomenon emphasises that meteorological risk should not be left to chance anymore by the practitioners of nature-based activities. This fact, jointly to the recent appearance of weather index-based policies, has implied a relevant change in the previous risk management panorama, where loss-based insurance was the only available alternative to mitigate weather risk exposure. By insuring the cause or event instead of the effect, this instrument reduces management costs and avoids the important drawbacks of moral hazard and adverse selection. Given these benefits, the present work approaches different issues related to the valuation and application of this insurance modality, whose assessment may be insightful from both the supply- and demand-side point of view. Chapter 2 starts by reviewing the most relevant literature on weather modelling and pricing, as several techniques, such as Historical Burn Analysis, Index Value and Daily Simulation, are applied at different stages of this thesis. Next, Chapter 3, based on previous findings, analyses some of the current rainfall-geared products pricing and operational challenges. Chapter 4 addresses then a different research line, appraising the possibility of applying weather insurance in tourism. This industry application is followed by three sector studies in Chapter 5, Chapter 6 and Chapter 7, with a focus on fishing, winery and agriculture respectively. All of them use data retrieved from meteorological stations, except for Chapter 7, where satellite-based data are employed as a mean to reduce geographical basis risk. These empirical applications assess the hedging effectiveness that may be attained from the implementation of the insurance modality considered, using different criteria, such as semi-variance and expected shortfall, and methodologies, such as multiple linear regressions and the most novel approach of copulas. Monte Carlo simulations are generated in this part of the thesis to increase the accuracy of the results. Finally, Chapter 8 ends up by addressing a relevant issue for potential suppliers, which is the analysis of the risk that the trade of this modality would entail if offered at a country level. The conclusions of this evaluation are also derived from the copula approach. The overall outcomes of this thesis point at weather index-based insurance as a good and promising alternative that can be effectively priced and applied to mitigate the meteorological exposure of different activities.