The Effectiveness of Area-Based Yield Crop Risk Insurance in China.

Area-based yield insurance (AYI) is a kind of index insurance that can eliminate asymmetric information problems (adverse selection and moral hazard) and reduce transaction cost. It is important in managing crop risk for developing countries such as China, which has many small farms. However, the biggest challenge in index insurance is basis risk. In this regard, can AYI be used in China? Is AYI competitive with traditional multi-peril crop insurance (MPCI)? What are the principal factors affecting the effectiveness of AYI? Following and extending the approaches suggested by Miranda in 1991, this article compares the effectiveness of AYI and MPCI in terms of risk reduction per premium. An empirical model was established, indicating the relationship between the efficiency of AYI and the explanatory variables, using data from a survey of 108 wheat farmers from two counties in Hebei Province, China. The results provide salutary suggestions to area-based index insurance design and development in China. [ABSTRACT FROM AUTHOR]