The Market Equilibrium Model of Weather Index Insurance

Changes in weather patterns, an increase in the frequency of extreme weather events, and other effects of climate change pose significant threats to farmers' ability to sustain their livelihoods in the agricultural sector. Crop insurance has emerged as an efficient and valuable tool for farmers, with Weather Index Insurance (WII) schemes gaining popularity in rural areas as a cost-effective means of managing risks such as production losses due to adverse weather conditions. WII facilitates quicker recovery from crop losses and reduces the risk of loan de faults by providing timely and accurate payouts in response to weather events. Despite the numerous advantages of WII, access remains inadequate due to unaffordable premiums and the non-receipt of expected compensation, leading to lower insurance uptake among farmers. This study proposes a utility-based equilibrium model for WII, analyzing the supply, demand, and risk preferences of farmers and insurers. Additionally, the study explores the effects of premium subsidies on market dynamics.