Value of Incorporating ENSO Forecast in Crop Insurance Programs

Abstract

Agricultural production is substantially affected by the variations in global weather patterns, particularly by the El Niño–Southern Oscillation (ENSO). Thus, incorporating the forecast of imminent ENSO phases can enhance the effectiveness of crop insurance and mitigate the adverse impacts of weather on agriculture. Given the probabilistic nature of the ENSO phase forecast, we employ a Bayesian framework to estimate the value of ENSO information on various aspects of crop insurance. Our results indicate potential benefits of ENSO forecast to insurance rate setting and policy selection. At the same time, we caution against overoptimism in this assessment as economic benefits may diminish as the accuracy of ENSO forecast decreases. Simulations and numerical experiments demonstrate the practical usefulness of the proposed method for various stakeholders of the US crop insurance industry. Implications to various crop insurance policies are also discussed.