Application of Index Insurance in Iran's Agriculture: case of wheat growers

Drought-induced risk endangers farmers in arid and semi-arid regions. Insurance is recognized as an appropriate policy alternative to support farmers facing with financial losses associated with production reduction. In this context, present study developed an ex ante index-based insurance program to deal with drought-induced risk of production losses. We applied this model to wheat growers in Iran. After the calibration of the contract parameters, an insurance scheme was optimized and tested. We showed that optimal insurance contracts generate low gain of certain equivalent income, high compensation, and a high basis risk. The best contract was not proportional to the complexity of the proposed index. The insurance program studied is recommended as a proper alternative for currently applying yield insurance.