A Comparative Analysis of Weather Risk Management Instruments: Traditional Insurance, Parametric Insurance, and Weather Derivatives

This study provides a comparative analysis of three major risk management tools: traditional agricultural insurance, parametric insurance, and climate derivatives. Traditional insurance provides coverage for actual losses but suffers from potential moral hazard and slow claims payment. Parametric insurance and climate derivatives enable rapid and automatic payouts based on climate indices. However, these index-based solutions are constrained by basis risk, which can lead to mismatches between payouts and actual losses. The trade-offs suggest that no single instrument offers a universally optimal solution; instead, a complementary approach combining these mechanisms is essential to strengthen the resilience of agriculture against unpredictable climate risks.