Do high-resolution satellite indices at field level reduce basis risk of satellite-based weather index insurance?

Abstract

PurposeSatellite-based weather index insurance has recently been considered in order to reduce the high basis risk of station-based weather index insurance. However, the use of satellite data with a relatively low spatial resolution has not yet made it possible to determine the satellite indices free of disturbing landscape elements such as mountains, forests and lakes.Design/methodology/approachIn this context, the Normalized Difference Vegetation Index (NDVI) was used based on both Moderate Resolution Imaging Spectroradiometer (MODIS) (250 × 250 m) and high-resolution Landsat 5/8 (30 × 30 m) images to investigate the effect of a higher spatial resolution of satellite-based weather index contracts for hedging winter wheat yields. For three farms in north-east Germany, insurance contracts both at field and farm level were designed.FindingsThe results indicate that with an increasing spatial resolution of satellite data, the basis risk of satellite-based weather index insurance contracts can be reduced. However, the results also show that the design of NDVI-based insurance contracts at farm level also reduces the basis risk compared to field level. The study shows that higher-resolution satellite data are advantageous, whereas satellite indices at field level do not reduce the basis risk.Originality/valueTo the best of the author’s knowledge, the effect of increasing spatial resolution of satellite images for satellite-based weather index insurance is investigated for the first time at the field level compared to the farm level.