Systemic Weather Risk and Crop Insurance: The Case of China

Abstract

A bstract This article explores the possibility of spatial diversification of weather risk for 17 agricultural production regions in China. We investigate the relation between the size of the buffer load and the size of the trading area of a hypothetical temperature‐based insurance. The analysis adopts the hierarchical Archimedean copula approach that allows for flexible modeling of the dependence structure of insured losses. We find that the spatial diversification effect depends on the type of the weather index and the strike level of the insurance. Our findings are relevant for the current discussion on the viability of private crop insurance in China.